Rules Of Origin Governing Market Access In Textiles And Apparel Under Various Types Of Reciprocal And Non Reciprocal Preferential Trade Agreements Have Often Been Designed To Be Particularly Restrictive

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  • 1. Weaving the Fabric of Regional Cooperation for a Competitive Garment Sector 1-2 June 2005 Beijing, China Session 4 Market Access for Asian and Pacific Exports and Rules of Origin William James Trade Economist Growth through Investment and Trade Indonesia
  • 2. Preferential Rules of Origin
  • 3. Preferential Trade Agreements
    • Non-Reciprocal Preference Agreements (i.e., GSP, AGOA, EBA)
    • Limited Preferential Agreements (e.g., European Iron and Coal Community, US-Canada Auto Pact)
    • Free Trade Agreements
    • Customs Unions
    • Common Markets
  • 4. Preferential rules of origin
    • Rules of origin are essential in preferential trading
      • Establish criteria for determining the country or customs territory from which a product originates
      • Allow customs authorities to distinguish between goods that are and are not eligible for preferential treatment
  • 5. Rules of origin are to prevent trade deflection in FTAs
    • A FTA differs fundamentally from a customs union in that member countries independently set external tariffs against imports from non-members.
    • If an FTA were to be established without rules of origin, all imports from non-members would enter through the customs territory with the lowest tariff, effectively making the FTA a customs union with the common external tariff being that of the member with the lowest tariff.
    • If AFTA were not enforced by rules of origin, it would mean ASEAN had become a customs union with Singapore's external tariff.
  • 6. No binding WTO disciplines on preferential rules of origin
    • WTO has yet to establish clear guidelines or disciplines over rules of origin in preferential trade agreements
    • Rules of origin governing market access in textiles and apparel under various types of reciprocal and non-reciprocal preferential trade agreements have often been designed to be particularly restrictive
    • For example, NAFTA applies a “yarn-forward” rule that requires that all inputs used in weaving, knitting, dyeing, and finishing fabric as well as forming, cutting and sewing apparel items be done within the member states; in some cases, even the fibers used to spin the yarn must originate within the member states
  • 7. Preferential rules of origin
    • Rules of origin determine the eligibility of products for tariff preferences under various types of trade agreements
      • Under the NAFTA, Mexico won quota-free access to the United States market for textiles and apparel in exchange for acceptance of the “yarn-forward” rule
      • Canada was granted a generous increase in tariff rate quotas for woolen suits (i.e., duty-free access up to a cap)
      • The European Communities (EC) rules of origin are slightly less restrictive than the “yarn-forward” rule, but still benefit producers using fabrics originating in the member states
  • 8. Preferential rules of origin (continued)
    • Preferential trade agreements could alter global trade patterns in textiles and apparel significantly, to the advantage of members and to the disadvantage of non-members
    • This can be seen by comparing
      • Markets employing preferences with those that do not
      • Performance of products that have highly restrictive rules of origin (textiles and apparel) with those that do not (footwear, electronics)
      • Performance of quota-markets with quota-free markets
  • 9. Improving preferential rules of origin
    • New preferential trade agreements entered into by the United States and European Communities allow for some flexibility.
    • Under the African Growth and Opportunity Act (AGOA) “least developed members” are entitled to produce apparel for export to the United States from non-originating fabric, subject to a cap.
    • The “yarn-forward” rule of origin applies to U.S. Free Trade Agreements with Singapore, Chile and Morocco. However, for Jordan, only a single transformation rule is used.
    • Some new FTAs between the United States and Central American countries and between the EC and Mediterranean countries allow for “cumulation.”
  • 10. Economic costs of rules of origin
    • Administering rules of origin imposes costs on firms and governments. Meeting EC requirements for preferential duties was estimated to cost EFTA-based firms 3-5% of the value of the goods involved; similar calculations have been made for CER.
    • Too-restrictive rules of origin may lead to non-compliance and defeat the purpose of preferential agreements—trade expansion.
    • Rules of origin may themselves lead to trade diversion, particularly when combined with high margins of preference.
    • Lobbying over rules may divert firms from productive economic activities into unproductive rent-seeking.
    • Proliferation of overlapping systems of rules may distort trade.
    • Hence, simplification and harmonization of preferential rules of origin is part of the future program of work for the WTO.
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