Understanding the Importance of Differentiating Utilization Rates of Preferential Trade Arrangements for LDCs

submission of CAMBODIA

The following submission, dated 25 February 2025, is being circulated at the request of the delegation of Cambodia as a follow up to the presentation made by the delegation of Cambodia at the formal meeting of the Committee on Rules of Origin held on 12 October 2023 (_RD/RO/108).

 

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1  Sharing LDC Experiences on Utilization Rates

1.1.  Utilization Rates (URs) are a useful and powerful tool to draw trade policy conclusions for LDC Governments and Preference-Granting Members (PGMs). It is therefore of capital importance that URs are made available to LDCs and PGMs in a neutral and transparent manner at detailed HS tariff line level according to the agreed methodology by the Committee on Rules of Origin[1] (CRO).

1.2.  A consistent, updated, and differentiated data set on URs should be provided to LDCs by PGMs to effectively monitor the functioning of trade preferences granted to LDCs. Differentiated data set means that PGMs should notify not only utilization rates granted under unilateral trade preferences but also the trade preferences granted under reciprocal free trade area or other preferential arrangements.

1.3.  Lumping together utilization rates of different frameworks into a single underutilization umbrella may not provide clear findings, which could lead to incorrect or inconclusive findings.

1.4.  As we are already aware, URs are a powerful tool and useful for examining the effectiveness of existing rules of origin and trade policy for LDC countries and PGMs. This submission stems from the initial sharing of lessons learned by the Delegation of Cambodia at the CRO Meeting on 12 October 2023, Geneva, Switzerland.

1.5.  First Cambodia has observed that when the origin criteria become more lenient, manufacturers based in LDCs find it easier to comply with RoO leading to higher utilization of the available preferential schemes and higher trade volumes. For instance, in the case of Cambodia in the garment sector, after the EU reformed its scheme in 2011, the increase in Cambodia's exports of garments to the world (30% of which was exported to the EU) reached USD 4.2 billion compared to the 2010 value of USD 3.2 billion. Similarly, the export of bicycles from Cambodia to the EU increased from USD 60 million to USD 325 million. In this regard, the relaxation of rules of origin contributed a lot to Cambodia and to LDCs as a whole attracting foreign direct investment and enhancing their participation in regional and global value chains.

1.6.  The relaxation of origin criteria on garments from a double transformation (i.e. yarn to fabric and fabric to garment) to a single transformation requirement also triggered production in African countries like Ethiopia where, in the same period, the exports of garments of HS Chapter 61 and 62 increased from USD 4.5 million to USD 81 million in 2011 and still remain high in 2023 with the utilization rates of almost 90%.

1.7.  Cambodia will be monitoring the URs and trade volume flows of the new trade policies and rules of origin that has been object of an earlier submission.

2  Agreed CRO Formula to Calculate Utilization Rates

2.1.  Cambodia would like to underscore that WTO Members have agreed to modalities of calculating URs in 2016-2017 (see item 3.3 in _G/RO/M/67 and item 4.4 in _G/RO/M/68).

2.2.  Accordingly, the agreed formula to calculate URs in the CRO (hereinafter "CRO agreed formula") is as follows:

DFQF-received Imports: the value of imports that received DFQF treatment.

DFQF-covered Imports: the value of imports that are classified in tariff lines that are MFN dutiable and covered by the DFQF schemes of PGC.

 

2.3.  Cambodia would like to reaffirm that the calculation of the URs pursuant to the agreed formula disregard MFN duty free imports or tariff suspension or similar arrangements as these imports apply erga omnes i.e. are not preferential concessions reserved to LDCs. This formula is very simple and straightforward, easy to understand by firms, and policy makers.

3  Utilization Rates vs Under Utilization Rates Formulas listed in _G/RO/W/161/Rev.1 of 29 September 2023 of WTO Secretariat

3.1.  Cambodia took note of the above-mentioned secretariat note where it provides additional option for the calculation method to base Preference Utilization Rates (pur^value) on the sum of "reported value" of imports under both PTA and other preferential schemes (either Regional Trade Agreements (RTAs) or other temporary or special tariff concessions). However, the WTO Secretariat itself admits that such formula "…could lead to wrong assumptions about the utilization of individual preference programs" (_G/RO/W/161/Rev.1):

	PREFERENCE UTILIZATION RATE (%) based on import value (or quantity) by Preference Granting Member.
where:	i	= Preference Granting Member
	j	= Preference Receiving Member
	p	= product
	PTAreported	= imports reported to have taken place under the PTA preferential duty scheme.
	Othersreported	= imports reported to have taken place under other preferential duty scheme.
	Preferenceeligible	= imports under any eligible tariff line, i.e. preferential duty < MFN duty rate.

 

3.2.  An additional option contained in the Secretariat paper was to base Preference Under Utilization Rates (puur^value) on the sum of "reported value" of imports under both PTA and other preferential schemes.

 

PREFERENCE UNDER UTILIZATION RATE (%) based on import value by Preference Granting Member.

where:	i	= Preference Granting Member
	j	= Preference Receiving Member
	p	= product
	PTAreported	= imports reported to have taken place under the PTA preferential duty scheme.
	Othersreported	= imports reported to have taken place under other preferential duty scheme.
	MFNpref eligible	= imports under any eligible tariff line, i.e., preferential duty < MFN duty rate that are reported to have taken place under the Most Favored Nation (MFN) status.
	Preferenceeligible	= imports under any eligible tariff line, i.e. preferential duty < MFN duty rate.

 

3.3.  With reference to the above-mentioned calculation methodologies options contained in the note of the secretariat _G/RO/W/161/Rev.1, Cambodia is of the view that the agreed formula of the CRO must be used to calculate the URs of each single PTA and each of other preferential schemes (either RTAs or other temporary or special tariff concessions).

3.4.  As example and, as further discussed in section 5,

(a)_      Japan is providing trade preferences to Cambodia according to:

(i)_        GSP LDC;

(ii)_       ASEAN-Japan Comprehensive Economic Partnership Agreement (AJCEP);

(iii)_      Regional Comprehensive Economic Partnership agreement (RCEP).

(b)_      The CRO agreed formula should be used to report the separate utilization rates (SURs) of each preferential arrangement separately as follows:  

(i)_        URs of GSP LDC;

(ii)_       URs of ASEAN-Japan Comprehensive Economic Partnership Agreement (AJCEP);

(iii)_      URs of Regional Comprehensive Economic Partnership agreement (RCEP).

3.5.  Reporting SURs of the different preferential arrangements available to LDC is a primordial transparency requirement to provide a transparent and unbiased assessment of the URs of trade preferences available to LDCs.

(a)_      In relation to the first option (pur^value) discussed in the secretariat paper, it is necessary to point out that as admitted by the Secretariat itself "it could lead to wrong assumptions about the utilization of individual preference programs". Cambodia would like to add the second option (puur^value) meaning "underutilization" discussed in the secretariat note would also lead to wrong assumptions or misreading such as: 

(i)_        Misunderstandings of the different legal nature of trade preferences and their trade related conditionalities.

(ii)_       Impediment to the appreciation of the impact of different product specific rules of origin (PSRO).

(iii)_      Impediment to the appreciation of different cumulation possibilities.

(iv)_      Impediment to the appreciation of different administrative procedures i.e. Proof of origin, evidence of direct consignment etc.

(b)_      The following section provides examples of the limitations of using "underutilization" based on lessons learned and best practices in this regard.

4  Cambodia position: calculating UTILIZATION RATES OF DIFFERENT PTA according to Separate Utilization rate calculation (SUR)

4.1.  It is generally known that over time other preferences besides Duty-Free and Quota Free (DFQF) have been granted to LDCs. Such preferences may be of a unilateral regional nature (such as AGOA) or of a contractual nature (FTAs, such as EPAs, RCEP, ACFTA, AJCEP…). Cambodia understands that in order to provide a complete picture of preferential trade arrangements granted to LDC, it is crucial to report in the CRO the URs of these additional or overlapping trade preferences. The lack of reporting URs of additional/overlapping trade preferences may result in an underestimation of trade preferences granted to LDCs, albeit it is crucial to recall that market access granted under FTAs is of reciprocal nature and should not be counted as fulfilment of the engagement of the Hong Kong decision on Duty Free Quota Free.  

4.2.  However, Cambodia is of the view that underutilization rates (UURs) could lead to wrong assumptions and should be considered as the only sign of fulfilment of DFQF commitments including simple and transparent rules of origin according to the Nairobi decision. As shown in section 5 below UURs lead to lack of transparency of the URs of each PTA available to LDCs concealing important trade policy findings and conclusions. Therefore, Cambodia maintains that URs of different PTAs available to LDCs should be reported separately (SURs) to reflect in a transparent and unbiased manner their distinct legal nature: unilateral, regional, and reciprocal trade preferences as each PTA has its own RoO, administrative procedures, and eligibility criteria.

5  Cambodia speficic Experience: Overlapping Trade Preference Regimes: Different Utilization Rates, Rules of Origin and Graduation

5.1.  LDCs, including Cambodia, are beneficiaries of various overlapping trade preferences with different coverages, rules of origin, and eligibility requirements. The critical issue is to analyse the URs data of each separate trade preference and in the specific case of Cambodia or other LDCs that are graduating what could the implications of losing LDC preferences upon graduation or because of non-trade related conditionalities. This will effectively identify what works best for LDCs firms and further promote greater integration of LDCs into regional and global value chains. Cambodia shares its experience with Japan's trade under the GSP LDC scheme and the ASEAN-Japan FTA clearly showing how important this differentiation is. The following graphs and URs calculations are drawn from an ongoing ADB-UNCTAD study on the trade strategy for Cambodia during and after LDC graduation.

5.2.  We compare, as example, what could be drawn from reporting (puur^value) lumped together and SURs for each trade preference.

Example 5.1 Japan and Cambodia: (PUUR^value) UnderUtilization Graph

Graph 1:  a "PUUR" Underutilization Graph[2]

5.3.  What can we observe from the underutilization Graph 1:

(i)_        From an extremely high rate of over 99% in the years 2004 and 2005, the underutilization decreased significantly and oscillated between 9% and 26% in the period 2006-2017 and stabilized at a rate of around 5% in 2018-2023.

(ii)_       As under a PUUR calculation all preferences are lumped together to come out with a single figure it is not possible to detect in Graph 1 low/high utilization rates under a particular scheme.

(iii)_      As preferences granted to LDCs differ in terms of opportunities for firms (preference margin, duty saving, documentary requirements, etc.), the sole UUR is not sufficient to depict the use made by firms of the different preferential schemes and orient trade policy makers towards business-friendly decision and the orientations for strategic trade policy considerations.

5.4.  As mentioned, the PUURs does not distinguish between GSP and FTAs. So, the user, being a policy maker or a firm is not able to identify which preference shows lower/higher utilization rates.

Example 5.2 Japan and Cambodia: SURs Comparison: UnderstAnding trade policy implications emErging from graduation

Graph 2: SURs of Cambodia-Japan GSP, AJCEP, RCEP Comparison[3]

 

5.5.  Graph 2 shows the different UR of each single PTA available to Cambodia at present in the Japanese market. It shows the huge difference between the URs under Japan LDC GSP scheme, AJCEP and RCEP.

5.6.  The blue line in Graph 2 shows that the utilization rate under the GSP almost reached 90% and remained constant over the years especially from 2017 to 2023. In contrast, the URs (black line) under AJCEP remained constant fluctuating around 10%-15% for almost a decade till 2023. The utilization rate of RCEP is, for the time being, close to zero. This latter finding may be understandable since RCEP is a new megaregional FTA and its tariff phase out implementation may take time to become more advantageous than the existing schemes (Japan GSP for LDC scheme or AJCEP). In addition, firms may not yet be completely aware of the trading opportunities under RCEP.

5.7.  Be this as it may, the comparison of low URs under FTA and high URs under the Japan LDC scheme (Graph 2) presents a series of findings and indication for Cambodia firms and policy makers of the challenges to Cambodia after LDC graduation in the Japanese market.

5.8.  After graduation from LDC status Cambodia and the transition phase Cambodia will lose LDC status under GSP's Japan. The fallback position for Cambodia would be the standard GSP or AJCEP. However, the standard Japan GSP does not cover, nor provide duty-free entry for the most important exports of Cambodia to Japan i.e. garments and shoes. AJCEP provides preferential tariff rates for ASEAN, including Cambodia, but not as extensive as under Japan's LDC scheme and has stringent rules of origin for such products. RCEP still provides some preferential tariff rates for Cambodian exports but not duty-free access for the totality of products of export interest to Cambodia.  

5.9.  The policy conclusions that may be drawn from the comparison of the SURs contained in Graph 2 is that Cambodia may suffer significant loss of market access in the Japanese market upon graduation from LDC status at the end of the transition phase. Cambodia may need to take remedial action as it may face increased competition from other developing countries exporters like Viet Nam who has entered other FTA with Japan or Bangladesh that is currently negotiating an FTA with Japan. In this context Cambodia needs to evaluate possible options such as:

(i)_        Assessing whether RCEP may provide a valid alternative market;

(ii)_       Negotiating better market access and product-specific rules of origin under a new FTA with Japan; or

(iii)_      Improving product-specific rules under AJCEP.

5.10.  As discussed above the wealth of the information and policy analysis that can be drawn from the comparison of SURs against PUUR is the glaring reason why Cambodia is of the view that the notification of SURs according to CRO agreed method is the best, most transparent and neutral manner.

Example 5.3 Further findings resulting from the application of SURs: Differences on the PSRO restrictiveness are the reason for different URs comparing RoO of GSP Scheme and EPAs RoO applicable for most exported HS subheading from Cambodia to Japan

5.11.  Another important finding from SURs is guidance and indications on the reasons why there are significant URs differences and also draw further implications. Annex 1 shows the most exported products of Cambodia's to Japan by HS six digits and corresponding applicable tariff rates and PSRO.

5.12.  HS 620462, women's and girls' trousers is the most exported HS six-digit product with an amount of USD 135 million with an utilization rate of 99.6% under the GSP and 0.1% under AJCEP.

5.13.  Once again this detailed finding shows that Cambodia uses mostly the GSP of Japan instead of AJCEP. A comparison of the rules shows that under the GSP, Cambodia can use third country fabric to manufacture garments for export to Japan. However, under AJCEP the fabric must be originating in Japan or ASEAN. This limitation is most likely the reason why AJCEP is not used by firms since Cambodia is mostly using fabrics originating in China and would not therefore be able to comply with AJCEP product specific rules of origin.

5.14.  What is the most important to understand and appreciate is the policy implication deriving from the comparative reading of SURs of GSP, AJCEP and RCEP. When Cambodia graduates from LDC status one option is to use the AJCEP with stringent rules of origin as shown column on the right or will have to pay the MFN rate of 9.1% since the standard Japanese GSP does not cover this specific subheading.

6  Cambodia experience: Using SUR allows for the identification of the impact of changes in Product specific rules of origin   

6.1.  Cambodia wishes to point out that by using SURs, it is possible to detect the trade effects of a change of products of specific rules of origin in a specific preferential trade arrangement by comparing URs and trade volume. We observe from the underutilization Graph 3, a significant drop in underutilization starting from 2013 and going towards full utilization in the following years but we are unable to identify the reasons for such a change.

Graph 3: Underutilization Graph, of HS 61 Art of Apparel & Clothing Access, Knitted or Crocheted[4]

Example 6.1 Preferential Granting Countries imports from LDCs and Utilization Rates

Graph 4: SURs of LDCs-Japan GSP and AJCEP Comparison for HS 61: Art of Apparel & Clothing Access, Knitted/Crocheted[5]

 

6.2.  Graph 4 above shows a comparison among UR and trade volumes under Japan GSP and AJCEP/RCEP comparison.

6.3.  The blue line representing the UR of Japan GSP shows that the GSP utilisation rates for HS 61 experienced two major periods of increase, from 2008 to 2011 and from 2014 to 2016. From 2018 onwards, the rate stabilized at around 95%. The dark green bar shows that starting from 2015 there has been a sharp increase of the trade volume of GSP received trade i.e. from USD 464 million in 2015 to USD 832 million in 2016. The black line showing the UR of other preferences (AJCEP, and RCEP after 2022) shows a dramatic rise in AJCEP utilization rates in 2013, followed by a sharp drop in 2015. The rate continued to decrease, reaching around zero by 2020. From 2020 onwards, the UR of other preferences slightly increased but remained close to 0%.

6.4.  The Japan RoO reform of 2015 introducing single transformation for HS61 is the cause of such difference in utilization rates, as the RoO under Japan GSP got more lenient firms switched to GSP rather than AJCEP, the latter having more stringent RoO.

6.5.  The combined reading of volume of exports and URs across the years suggest that a change of RoO stringency has dramatically helped LDC to take advantage of Japan GSP for LDC both in terms of URs and trade volumes.

7  Conclusions and Lessons Learned

7.1.  As has been stated in section 4 Cambodia maintains that URs of different schemes available to LDCs should be reported separately (SURs) to reflect in a transparent and unbiased manner their distinct legal nature: unilateral, regional, and reciprocal trade preferences, as each of these schemes has its own RoO, administrative procedures, and eligibility criteria. The URs analysis of the different trade preferences granted to LDC has to be carried out using the agreed CRO formula for each individual trade preference.

7.2.  The analysis of SURs as shown in the above-mentioned examples has permitted the identification of critical trade policy findings that would have been not possible using other criteria such as underutilization. Thus, Cambodia is of the view that the use of underutilization is not effective in genuinely reporting the utilization rates under DFQF and other preferential trade schemes as well as to identify the trade effects of changes in rules of origin to adhere to the Nairobi Decision best practices and lessons learned.

7.3.  As LDCs like Cambodia are increasingly partners of different trade arrangements; and accurate analysis of each individual arrangement is key to drawing trade policy conclusions and future directions and invite again PGMs to promptly notify URs of preferential trade arrangement available to LDC using the SURs. 

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