This article shades light on a major instrument in international trade and customs management, which has been used by states to achieve multiple trade objectives. The concept of RoO has become controversial in the current interconnected global trading system where the point of production and sale across have become quite seamless and yet international trading rules requires that the definite origin of goods are identified for preferential treatment, statistical and tax purposes. The article argues that despite the implicit functions they play RoO should never be used a tool for negative trade pursuit rather a conduit for trade facilitation. The paper defines rules of origin and trade policy, outlining the objectives of trade policy, explaining the linkages between the two and discusses other instruments which can be used to achieve trade policy objectives
By Moses Kulaba; Governance and Economic Policy Analysis Center
Rules of origin (RoO) are common defined as laws, regulations and administrative criteria applied by a country to determine the country of origin of goods, for tariff preference purposes, subject to specific conditions as defined in WTO agreements and Regional Trade Agreements (RTAs)[i]. The East African Customs Union has summarized the rules of origin as ‘the vital link between the goods and country where they are produced’[ii] RoO are categorized as Preferential and non preferential depending on their characteristics and objectives.
Preferential RoO aim at determining whether goods qualify for preferential treatment and while Non Preferential RoO used to determine goods for trade statistical purposes. Rules of origin have significant relation and influence on a country’s trade policy or member countries which are contractually related or mutually obliged under a given contractual or non contractual trade arrangement. Rules of origin also may determine or assist the countries in understanding their comparative and competitive advantage. They are commonly used as a trade policy tool to protect local markets, give preferential treatment and a measure against unfair trade.
Trade policy can be defined as a collection or law, rules and practices aimed at achieving a country’s trade objectives. Tanzania’s trade policy aims to contribute to raising per capital income to levels targeted in National Development Vision 2025, trade development measures to stimulate and expand domestic demand through product and market diversification and limited interim safe guard of domestic economic activity threatened by liberalization, while building economic competitiveness[iii] It seek to achieved sustainable growth rate in trae of not less than 14% and long-term share of exports to GDP of about 25%, double fold increase in manufacturing and raised value of merchandise export earnings in absolute terms to USD1,700 in the next five years[iv]
The Tanzania government recognizes the importance or Rules of origin as a tool for implementing trade policy objectives and has committed towards using the RoO in a manner that can strengthen the country’s industrial and trade potential. The Tanzanian clearly articulates this position in its trade policy where it states:
The Government of Tanzania will undertake measures to observe RoO preferences requirements prevailing in the different trading arrangements with a view to maximizing benefits accruing in the cause of implementation…with priority focus on building national capacity for effective utilization of this instruments[v]”
While RoO are a common factor in Trade policy, because of the challenges that RoO have in relation to international trade, they are considered as not the tools of most preference in achieving trade policy objectives. Indeed, increasingly governments are being advised that RoO should not be used to achieve trade policy objectives for the following reasons.
Firstly, they can be distortionary and work contrary to trade policy objectives especially where there is no harmonization of trade policy objectives. “If Clear, predictable, transparent and fair, rules of origin and their application facilitate the flow of international trade. Nevertheless, RoO can create unnecessary obstacles to trade and nullify or impair the rights of members in regional and multilateral trading arrangements including the EAC, SADC and WTO. Consequently, RoO have to be applied in a transparent, predictable, consistent and neutral manner so as to avoid their negative effects[vi].
Secondly, rules of origin is also important in facilitating international trade where the objective is free flow of goods, irrespective of trade policies or various countries
It can be sometimes difficult for countries to achieve trade targets in situations where it is a member to multiple contractual obligations which may conflict with its own national trade objectives. This is a common challenge for countries like Tanzania which belongs both to the EAC and SADC and has therefore a challenge in determining or applying RoO for goods originating from both economic blockings
Implementation of rules of origin is sometimes cumbersome and sometimes can be distortionary especially where there is need to determine various technical dimensions to the items for preferential purposes.
Rules of Origin are also not the only instruments for achieving trade policy objectives. They are just one instrument and other instruments could be effectives. These instruments include a combination of other trade policies, which can be elaborated as below:
Trade policy instruments are described as measures taken by governments to influence the direction and pattern of trade development. The application of these instruments in Tanzania is guided by the need to stimulate domestic production, promotion of exports, safeguard domestic industry against dumping practices and protection of consumers. Tanzania exercises these trade policy options in line with its international obligations. These instruments include: Tariff Based (Advalorem) Instruments, NTBs: Trade defense mechanisms; trade development instruments; and international trade policy instruments.
Tariffs, which are major trade instruments for trade policy implementation which are used to achieve duo objectives of revenue generation and protection of domestic industry. Heavy import substitution protection regimes can harm unprotected industry and ultimately reduce consumer welfare. It is for this purpose that Tanzania has been reforming its tariff band structure to a current four band structure (0,10,15 and 25)
Duty Draw Back Schemes (DDB) which are tools for export promotion through refund of import taxes on imported inputs that go towards production for exports. Tanzania has implemented a DDB scheme, although the scheme faces multiple challenges, including difficulties in technical verification. This also includes the mechanisms for VAT refund
Taxation, which comprises of tax regime characterized by different taxes and levies imposed by the central and local government to achieve a duo purpose of revenue collection and protection used for administration of quota restrictions
Export Taxes which are levied as instruments to discourage export of raw materials in favour of value added products. In Tanzania the use of export taxes has been gradually reduced, with restrictions currently imposed on export of geological or mining products and raw hides and skins.
Non Tarrif Barriers/Measures these are measures aimed the protection of industry that work on the basis of restriction of imports. These instruments include;
Import licenses which is aimed at both controlling and regulation of the volume of imports and also taking track of importers, automatic licences issued automatically without discretionary powers and non-automatic licenses
Reshipment Inspection requirements (PSI) which are sets of activities aimed at the verification of quality, quantity, price, exchange rates, financial terms and customs classification of goods undertaken in the exporting countries
Trade Related Investments Measures (TRIMS)-Local Content Requirements, falling within the WTO TRIMS agreements, which cover a number of restrictive issues on foreign investments in view of their restricting impact. These include conditionalities on local content, local equity, foreign exchange balancing, import obligations and others that are specifically prohibited. This is aimed at enabling local industry to gain the necessary capacity and competence in developing its competitiveness.
Customs Valuation; which involves determination and ascription of value to items based on WTO customs compatible valuation procedures, guided with principles of fairness, uniformity and certainty
Standards-Technical Barriers to trade (TBTs) such as sanitary and phytosanitary (SPS) measures and other standards, used as instruments of trade policy to authenticate the quality and specification of imports and exports in conformity with the international safety requirements and regulations aimed at consumer protection.
State Trading Operations which are undertaken by both Government and Non Government enterprises, including marketing boards, which are granted exclusive special rights or privileges including statutory or constitutional powers in the exercise of which they influence through their purchases or sale the level or direction of imports or exports. State Trading is clearly different from government procurement.
Government Procurement: This refers to a system which governs or regulates government procurement, requiring it to procure goods and services through a centralized international and national procurements process. It requires this process to be fair, transparent and allow competitiveness amongst suppliers and thus lowering costs. In pursuing trade objectives, the policy of transparence and open competitiveness has to be balanced with considerations for protection or stimulation of local industry.
Administrative procedures. These are other instruments that can be used to achieve trade policy objectives. Administrative procedures prevail in developing economies as a response to difficult situations at times of natural disasters such as the need to ensure food security when grain shortages are envisaged due to shortfalls in production yields. These may applied from one region to another as a way of balancing out the shortages. In Tanzania, this instrument has been used from time to time, especially in the control and regulation of export of maize and coffee to neighboring countries.
Trade policy objectives are also achieved through other trade defence instruments which are allowed by the WTO for safeguarding specific economic activities within a limited time-frame through application of a set of instruments. These include:
Safeguard Measures aimed at protecting a sector or subsector of the economy or domestic industry from suffering from certain consequences. These normally take the form of raised tariffs and temporary relief measures
Antidumping aimed at protecting a country’s economy or industry from being flooded by cheap goods, which have no significant economic value. The WTO prescribes action against dumping
Subsidies and Countervailing duties: These include measures that confer benefits to producers and exporters and exist where a public body or government provides financial contribution to producers in the form of grants, soft loans or equity etc. These subsidies can be categorized into permissible and non specific subsidies that are non-actionable, permissible but actionable subsidies and prohibited subsidies. Currently Tanzania has not developed an export subsidy regime although it is permissible under the WTO arrangement.
Rules of origin are a combination of laws, regulations and administrative criteria used by a country to determine the origin of goods and determines how specific goods should be treated for tax purposes.
Trade Development instruments include:
Export Process Zones–This refers to trade development instruments used to stimulate export oriented economic activities through inculcation of a value addition and import culture, acquisition of appropriate technology
Investment Codes and rules which work through compensation for distortions which impede the flow of foreign investments largely due to market imperfections
Export promotion and market linkages which entails provision of support services to exporters with the objective of expanding trade for existing product lines
Export Facilitation which is pursued through the simplification of trade procedures and reduction of high costs involved through measures such as provision of export credit
International Policy Instruments can also be achieved to achieve trade policy objectives and these include
- Bilateral Cooperation initiatives amongst willing countries depending on the variant agreements between contracting partner’s states
- Regional Trade Agreements (RTAs) which have evolved through the growth and expansion of Economic Integration arrangements like the EAC
- WTO agreements and Multilateral trading system which aims at stimulation of sustainable economic growth through trade expansion, encouraging specialization and opening up of national economies through elimination and reduction of Non Tarrif Barriers (NTBs)
Conclusively, despite the limitations, rules of origin still play an important role in driving trade policy objectives. However, for them to be effective, they need to be applied in a transparent, fair and predictable manner to avoid causing distortionary effects to international trade.
[i] URT: National Trade Policy for a Competitive economy and export led growth, Ministry of Industries and Trade, February, 2003
[ii] East African Community Customs Union Rules of Origin, September 2005