De facto convergence in product specific rules of origin and Administration of rules of origin - sharing experiences at multilateral level

The following submission, dated 4 November 2024, is being circulated at the request of UNCTAD.

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1  The Meaning of "de facto" Convergence

1.1.  This initial contribution aims at stimulating a reflection on the need to devise innovative ways to discuss rules of origin at multilateral level i.e. Not limited to issues of LDCs RoO.

1.2.  The proliferation of FTAs has produced, as by-product, a parallel spaghetti bowl of Rules of Origin (RoO) and related administrative procedures that has been amply discussed in literature as an additional cost to firms' operations. Yet a closer look reveals that administrations have also learned from practice, especially when driven by firm's inputs[1].

1.3.  In parallel, recent CRO meetings discussed various options to update the notification of non‑preferential rules of origin since many of such notifications refers to early nineties when the Agreement on Rules of Origin (ARO) came into force.

1.4.  The developments in preferential RoO in FTAs have led to simplification and streamlining of the RoO, informed by lessons learned over more 20 years of operation of major FTAs. Progressively, the EU and the US, as well as counterpart OECD nations (e.g., Australia; Japan; Republic of Korea; and New Zealand) and their partners in developing countries have "de facto" converged while drafting product specific rules of origin (PSROs). This development is recognizable to the eye of the practitioner. Innovations have been introduced and convergence has been achieved, especially in some sectors.

1.5.  There are, of course, differences in sensitive sectors such as processed foodstuffs, textiles and garments. Convergence can also be detected in the determination of ad valorem percentages based on a value of materials calculation, although differences in the arithmetical calculations and definitions of what goes into the numerator and denominator remains and, in the automotive sector, some WTO members opt to use a net cost approach.

1.6.  Thus, developments regarding preferential RoO in the PTAs including the major trading countries as well as developing countries and LDCs are pointing towards simplification and streamlining. This has supported greater trade growth in FTAs as shown by the relatively high utilisation rate of major PTAs, which range from 80% to 90%[2] in the case of the EU. In the case of US FTAs similar figures have been reported as high as 82% for USMCA, 90% for CAFTA and US‑Korea FTA in 2023.

1.7.  In a nutshell, there has been progress on RoO that has had a pay-off. This is complemented by reforms of RoO that apply to unilateral tariff preferences offered to LDCs. Such reforms were implemented by Canada in 2003 and by the EU for its "Everything but Arms" (EBA) duty-free, quota-free access program for LDCs, with the EBA rules of origin redefined in 2011. Utilization rates of Duty- Free Quota Free initiatives for LDCs granted by QUAD countries have arisen significantly from a low of 46% in 2011 to as high as 88% in 2023 and the volume of DFQF trade that has effectively received preferential rates has grown from an average of US$17 billion in 2009-2011 to an average of US$39 billion in 2020-2023.

1.8.  Japan also took the initiative to liberalize the RoO for LDCs for knitted and crocheted garments of HS chapter 61. Most recently the UK substantially revised the RoO applicable under the Developing Countries Trading Scheme (DCTS) substantially liberalizing PSRO for LDCs and taking on board suggestions and requests made by LDCs.

1.9.  These initiatives have contributed to the overall debate on RoO including adoption of trade facilitating practices in preferential RoO, brought new life to the discussions in the CRO and helped underpin two WTO Ministerial Decisions on preferential RoO for LDCs, illustrating that progress can be made at the multilateral level.

1.10.  The challenge now is to build on this overall progress, within and outside the CRO, acknowledging the progress achieved beyond the discussion focused on LDCs and initiate discussions at the multilateral level on how convergence and related achievements can be further shared among WTO member and to the wider trading community.