Trade Negotiations Insights • Volume 7 • Number 10 • December 2008

Preferential Rules of Origin in Economic Partnership Agreements: Key features and changes

by Eckart Naumann

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Preferential Rules of Origin (RoO) set administrative and local processing requirements that enable goods and materials to obtain preferential access to the market of a given trade partner. In the following article, a brief overview of changes to the RoO that have been negotiated in the context of EPAs is provided.

The EU Rules of Origin regime

The European Union previously offered ACP countries, excluding South Africa, duty-free and quota-free access to its market under the Cotonou Agreement. With Cotonou’s trade regime having expired at the end of 2007, some ACP countries chose to sign an interim Economic Partnership Agreement (IEPA) while others continue to access the EU market under the Generalized System of Preferences (GSP). Only least developed countries (LDCs) qualify for the GSP’s Everything-But-Arms (EBA) initiative, which have the same RoO as the GSP but without quotas or import duties.

Historically, the EU has developed an elaborate and complex RoO regime for setting the conditions under which origin status is allocated to products. This has been guided not only by its own strategic and protectionist prerogatives, but also the fact that no single RoO methodology provides a universally simple and equitable solution to the task of determining origin. The absence of any binding WTO standard on preferential RoO does not help to alleviate the inevitable negotiating trade-offs that take place in RoO negotiations.

Currently, EU agreements employ various methodologies in the determination of origin, which are either based on a technical or specific processing requirement; value-added thresholds; or a change in tariff heading, where origin is conferred when materials are transformed into products that can be classified under a different tariff heading. While a discussion on the merits of each methodology is beyond this article, it should be noted that each is likely to impose a completely different obligation on producers, depending on the dynamics prevailing in the sector and dependence on foreign inputs. The RoO negotiated in the context of the IEPA are based on the EU model protocol and are largely structured around the provisions previously encountered under Cotonou. However, various sector-specific changes have been implemented, some with potentially significant implications for producers and exporters in participating countries.

New rules for the ACP: what is different?

The overall architecture of the IEPA RoO remains essentially the same as under Cotonou although changes have been made mainly to requirements related to the treatment of textiles and clothing, fish, and certain agricultural products.

In order to ensure a continuation of preferential market access for ACP countries, the European Commission passed a Council Regulation (2) on 20 December 2007 giving effect to revised RoO and duty and quota preferences. These provisions apply only to IEPA signatories; non-signatories qualify only for GSP or EBA preferences, without the changes agreed in the EPA negotiations and no cumulation. Cumulation allows countries that are party to a preferential trade agreement to share production and jointly comply with the relevant RoO.

But for many ACP countries (and IEPA signatories), the revised RoO represent little improvement to their EU market access. In fact, cumulation possibilities are now limited to other IEPA signatories, representing a step backward from the Cotonou provisions that included all ACP countries. Already some producers, for example in East Africa, are severely disadvantaged by no longer being able to procure materials from other ACP countries in the region that have not initialled an IEPA.

For some, however, the sector-specific changes represent a significant departure from the earlier status quo. This applies in particular to the textile and clothing sector, where revised EU-ACP RoO are now compatible with the realities prevailing in the sector, namely that access to competitively priced materials is essential to be competitive in the (EU) export market. Under Cotonou (and the present-day GSP/ EBA RoO), clothing producers were required to only use fabric made locally or in ACP countries, which represented a significant disadvantage considering the lack of availability of competitively priced inputs in most ACP states. These RoO changes now also align EU RoO more closely with other regimes, such as the United States African Growth and Opportunity Act (AGOA), which has played a key role in reviving Africa’s garment export sector in recent years.

For fish, the benefit of the revised RoO provisions is less clear cut. Changes have been made to the definition of “wholly obtained” fish, which is based mainly on the ownership of the fishing fleet conducting this activity rather than the location of the fish. But current rules continue to discriminate between fish caught within a country’s territorial waters and its exclusive economic zone (EEZ): the 200-mile area that is, in any case, an exclusive economic area of the adjoining country. In the EU-ACP RoO, fish caught within the EEZ and beyond are allocated their nationality based on requirements evolving around vessel ownership, vessel flag, and other considerations.

Some countries, notably Namibia, continue to push for a full recognition in the RoO of the economic rights associated with the EEZ. For countries without a domestic commercial fleet, vessel chartering options remain highly restricted in practice, requiring de facto approval by EU authorities in accordance to a set of qualifying criteria. The Pacific ACP configuration has nevertheless been granted special privileges relating to the use of non-originating fish, though this too remains conditional upon a number of onerous requirements, such as where the fish is landed and processed, and other measures.

Moreover, a 15% value tolerance is applicable to products not subject to a specific value-added threshold, with the exception of some textiles and clothing chapters. A specific 15% tolerance also applies to certain processed fish (for example, filleted fish), but the benefit of this provision to exporters is questionable considering that the general tolerance has never excluded fish previously and therefore was available to exporters under Cotonou.

When it comes to some agricultural products, special derogations – in the form of optional alternative rules – apply. These products are listed in a dedicated Appendix (2A) and go some way in reducing the local processing burden required under the primary rules. However, in many instances, the derogation is very specific in providing alternatives rules to only a small range of product sub-categories, such as those containing low levels of non-originating sugar.

Where to from here?

While the changes to the EU-ACP RoO are somewhat effective in alleviating the restrictiveness of the previous regime, particularly for textiles and clothing, they do not represent a major regime change. This is attributed to various factors, not least the inherent challenges associated with renegotiating a RoO Protocol given the limited technical resources available in the ACP. A further complicating factor is the EU’s stated intention to revise its preferential RoO regime, with provisions referring to an overhaul of the EPA RoO contained in various IEPAs. This may have led to some EU resistance to make further concessions at this stage, considering its desire to maintain a level of uniformity between its various preferential RoO Protocols.

It must therefore be emphasized that the ‘issue’ of preferential EU-ACP RoO has not been fully resolved. The European Commission has indicated a preference for a VA test in the future that with some possible exceptions, would encompassing all sectors. But this methodology is associated with considerable administrative burden and subject to an unpredictable impact on exporters. A prudent approach for both the ACP and EU will be to carefully consider the impacts of such a development by undertaking rigorous analysis of the associated costs and benefits. This should be guided by the fact that declining tariff-related preference margins globally provide scope for significant further relaxation of the RoO requirements currently in place.

Sources
1. European Commission 2007. Council Regulation (EC) No. 1528/2007 of 20 December 2007
2. European Commission. 2008. Protocol 1 concerning the definition of “originating products” and methods of administrative cooperation. COM(2008) 562 final – volume 3
3. Rules of Origin and EPAs: What has been agreed? What does it mean? What next?

Notes
1. Eckart Naumann is Associate, Trade Law Centre for Southern Africa (tralac), email: eckart@naumann.co.za
2. No. 1528/2007