Review of reforms on EU GSP scheme’s rules of origin

Wednesday, 26 January 2011 00:01 -     - {{hitsCtrl.values.hits}}

The European Union (EU) recently published a proposal to revise the current rules of origin (ROO) applicable to the EU-GSP scheme. The revised scheme will be applicable, if approved by the European Council* to all its three GSP schemes, namely: EU GSP+ scheme, EBA scheme and the standard GSP scheme simultaneously with effect from January 2011.

Rules of Origins (ROO) are criteria which determine the national source of a product or its economic nationality. There are wide variations in the practice by different governments and trading blocs with regard to rules of origins.

The rules of origins are an integral part of any preferential trading arrangement. The rules of origin on preferential trading arrangements attempt to ensure that preferential treatments are accorded only to the products originating from the trading partners of such arrangement.

In other words, the ROO is designed and implemented to confine the trade benefit of a preferential arrangement only to its partners without diverting the trade benefit to the third parties.

The EU GSP scheme is a nonreciprocal and unilateral preferential arrangement aimed at assisting developing countries to improve market access for their products to the markets of the European Union. Therefore, the EU decides on its own ROO pertaining to its GSP scheme.

Trade economists and exporters of developing countries have expressed dissatisfaction about the EU GSP/ROO since its inception as those rules are complex, inflexible and outdated and cost of compliance is high.

Small and vulnerable economies like Sri Lanka have always felt that the current EU rules of origins inheritably favours developing countries which have large economies, broad based industrial capacities, technical advancement and consequent benefits of economics of scale.

The current rules are concentrated heavily for qualifying products to be originated largely in the beneficiary countries, disregarding the recent trend of globalising of international trade and production.

With regard to apparel products, the current rule of so-called “double transformation” particularly acts as a non-tariff barrier for countries that are dependent on developing their apparel industry on imported raw material and inputs.

With regard to fisheries products, the current rules are so complex by applying criteria such as flag, registration, ownership and officer and crew requirements and conditions on territorial seas. It is also believed that stringent rules for GSP regional cumulation result in limited use of the trade benefit and reduced incentive to economic cooperation among the developing countries.

Having realised the trade restrictive nature of the current rules and its application, the EU has engaged protracted consultations with many stakeholders to revise the scheme since 2003, following a wide ranging consultations initiated by its green paper followed by the 2005 communication on ROO by the commission.

The commission also conducted impact assessment studies on important sectors (textile, agriculture and other products) affected by the proposed revisions embodied in the communication. At the end of 2008, the commission made a proposal for a single method of determining origin based on Domestic Value Addition (DVA) but it failed to find favour with member states and other stakeholders. The present proposal is the latest attempt by the EU to revise the current ROO.

Sri Lanka, being a beneficiary of the standard EU-GSP scheme, is naturally affected by the proposed revisions. The level and the degree of the utilisation of GSP tariff benefits are largely dependent on the rules of origin. It is in this context that this review on proposed revision is compiled.

The major positive development observed in the proposed reform is the changes suggested to amend the current rules pertaining to regional cumulation. Regional cumulation means a product manufactured/processed in a member country of a regional group which is recognised by the EU with material, inputs and parts from other members of the regional group subject to certain conditions, is eligible to receive tariff references in the EU.

This system allows resources deficient, small and less diversified member countries to import material and input from other members of the same group and enhance its industrial development via the tariff concession.

The current scheme has certain limitations of minimum value addition criteria to fulfil by the member country that last processed the product and exported to the EU. Furthermore, cross-regional cumulation between the three regional cumulation arrangements recognised by the EU is also not allowed under the current regulations.

According to proposed regulations, the EU has removed both restrictive practices relaxing the current restrictions on regional cumulation. Under the proposed system, regional cumulation between countries shall apply only under the condition where the materials are further processed or incorporated goes beyond the minimum operations (Article 78 (1) of the proposed legislation) and in the case of textile products also beyond the working excluded from GSP regional cumulation (Annexure 16).

Both limitations are rational, not excessively trade restrictive and can easily be met by most of the developing countries, including Sri Lanka. This will certainly benefit countries like Sri Lanka to source material from the members of the SAARC regional group with more relaxed rules.

Furthermore, the proposed legislation allowed cumulating between regional cumulation groups (i) and (iii). In other words, a country in the regional group (iii) – SAARC countries – can import material, inputs and parts from a country from regional group (i) – ASEAN – and incorporated in a product and export to the EU to benefit from tariff concession.

This revision will enable countries like Sri Lanka to source material for its industry, particularly for the apparel industry, from countries in the ASEAN region and export to the EU after processing to benefit from the tariff concession. However, the final product should go beyond the minimum processing requirements.

Bilateral cumulation will continue to be allowed, whereby products originating in the EU will be considered as material originating in a beneficiary country when incorporated into a product manufactured/process in that country provided the product undergoes beyond the minimum processing requirements. The same requirement will continue to be applied in respect of material imported from Norway, Switzerland and Turkey.

Provision for extended cumulation, which is a new element to the proposed legislation, has also been introduced. Under the extended cumulation, the benefit of cumulation is to be allowed between beneficiary country and a country with which EU has a free trade agreement in accordance with the Article XXIV of the GAAT.

A new regional group of comprising member countries of MERCOSUR (Argentina, Brazil, Paraguay and Uruguay-Group IV) has also been created under the proposed legislation.

With the new amendments proposed by the commission, the current regional cumulation facilities have been relaxed to a larger extent by allowing developing countries to source material from an enhanced supply base and consequently to integrate more effectively to the regional economic arrangements.

With regard to fisheries products, the current rules of origin are complex and are consequently difficult for beneficiary countries to comply with and also to implement and control by the EU. The proposed legislation has removed current conditions on officer and crew requirements and retains only the requirement pertaining to flag, registration and ownership.

Furthermore, requirements pertaining to fish caught outside of the territorial waters of a beneficiary country have also been relaxed. Explicit provision has been made permitting regional cumulation in respect of fisheries products. These amendments would have a positive impact on exporters of fisheries products to EU under the GSP scheme.

With regard to textile and apparel products, the proposed amendment in respect of the regional cumulation will have a direct benefit, particularly for the beneficiary countries that are dependent on imported material inputs and parts for their textile industry. However, with regard to textile products, the proposed legislation continues to apply specific processing criteria or ‘list requirements’ with certain relaxation.

‘The double transformation requirement,’ which is hitherto applied, has been removed in respect of Least Developing Countries (LDCs). In other words, countries such as Bangladesh will be eligible for tariff concession (zero duty) on apparel products manufactured there by incorporating imported fabric.

LDCs are required only to fulfil single transformation requirements in respect of apparel products. This is a major achievement for the LDCs. All non-LDC countries like Sri Lanka are expected to continue to fulfil the requirement of double transformation with certain relaxations.

In this regard, the main relaxation is proposed in respect of products coming under Chapter 62 of the HS Code, except for few items which have specific processing criteria. Instead of the previous requirement of ‘manufactured from yarn,’ the new legislation proposed ‘making-up preceded by printing accompanied by at least two preparatory or finishing operations’. This relaxation is a positive development.

Certain relaxations in respect of specific tariff lines pertaining to apparel products are also observed in the proposed list requirements on use of non-originating material. In the case of most of the industrial products, except apparel and textile, covered under the scheme, if originated from LDCs, they are eligible for tariff preferences provided the value of all the non-originating materials used does not exceed 70% of the ex-work price of the product.

This is a major advantage accrued to the LDCs (e.g. Bangladesh and Nepal) under the proposed scheme. In respect of non-LDC the requirement is that the value of non-originating material used should not exceed 50% of the ex-work price (e.g. Sri Lanka and India). Under this proposal, ceramic products which have an export interest for Sri Lanka would be eligible to benefit from tariff concessions if the non-originating materials in value do not exceed 50% of the ex-work price of the product.

With regard to tobacco and tobacco products such as cigars, the proposed amendment suggests that the non-originating materials used do not exceed 50% of the total weight of materials of heading 2401 (unmanufactured tobacco).

With regard to eligible criteria for export of bicycles, the proposed regulation has made certain relaxations by increasing the value of non-originating materials used from 30% to 50% in respect of non-LDCs.

Another major reform proposed in the new regulation is relating to the administration of the scheme. At present, authorities of the beneficiary countries certify the origin of product and process the certificate of origin. Under the new scheme, it is proposed that the exporters of the beneficiary countries themselves directly provide their customers with statement of origin.

This arrangement would be more appealing to exporters in developing countries as it would reduce the time and resources spent by exporters to obtain certificates of origin from government authorities.

With the relaxed procedure of processing of certificate of origin, the new proposals suggest that the competent authorities of the beneficiary countries should register the exporters electronically and maintain record of registered exporters.

This registry has to be shared with the commission by the competent authorities of the beneficiary countries, in order to ensure targeted post export control. However, the implementation of the new administrative system has been deferred until 1 January 2017.

In view of the above analysis, it is clear that the EU is generously relaxing its rules of origin requirement in respect of the products originating from LDCs. In this context, it should be also pertinent to view these relaxations of rules of origins in the background that all LDCs are also enjoying Duty Free and Quota Free (DFQF) access to EU under the Everything But Arms (EBA) scheme.

The rest of all developing countries other than LDCs have been put together and accorded the same treatment irrespective of the different trade, financial and development needs and different levels of development prevalent in many middle income countries such as Sri Lanka.

In other words, LDCs are enjoying higher levels of market access opportunities in respect of their export products to the EU vis-à-vis countries like Sri Lanka both in respect of level of tariff concessions and relaxed rules of origins.

Under the circumstances, Sri Lanka should continue to enhance vigorously the competitiveness of its export products to EU by offering competitive prices, timely delivery and improved quality. It is also noteworthy to observe that Sri Lankan exporters should continue to attempt to diversify its markets and the products.

The cross regional cumulation is not accorded to beneficiary countries automatically. The facilities of cross regional cumulation between cumulation Groups I and III are subject to fulfilling certain conditions by the beneficiary countries.

One of the important conditions is “to provide the administrative corporation necessary to ensure the correct implementation” of the scheme. In this connection, the countries to be involved in such cumulation should jointly notify to the commission of their intention under cross regional cumulation, for acceptance by the EU.

It may be that from the EU’s point of view the most preferred option is a joint communiqué from SAARC and ASEAN Secretariat. There may be practical difficulties to build consensus for joint communication.

The new EU legislation also provides some space for cumulation on bilateral basis between a country of Group I and Group III. In order to fulfil this condition, bilateral negotiations between the interested countries and on interested products have to be initiated by the trade policy practitioners in full and close consultations with the exporters of Sri Lanka.

(*Note: Proposed revision has now been approved by the EU Council on 18 November 2010.)

(Research and Policy Advocacy Unit, Federation of Chambers of Commerce and Industry. Please email comments to [email protected].)