Toward Free Trade in the Americas
Liberalization, Access and Trade Regulations
Section II of the compendium examines the range of rules governing market access and
trade liberalization, as well as rules concerning safeguards, technical standards,
sanitary and phyto-sanitary related measures, and rules of origin.(36)
All agreements provide for the liberalization of tariffs and most non-tariff barriers.
There are, however, a number of variations written into each agreement with regard to the
general rule. Some of the earlier integration attempts (i.e., Andean Group, Central
America and Caricom) were less successful in achieving the trade liberalization objectives
in the original timeframes that were established. Nevertheless, adjustments have been made
as these agreements have evolved and new timetables have been established and generally
adhered to. Some agreements have encountered difficulties in establishing common external
tariffs in all products and therefore have required provisions allowing for limited and
specified exceptions, as was the case in the Andean Group and Mercosur. Similarly, each of
the free trade agreements have found it necessary to provide for a limited number of
exceptions or to address their obligations in light of other agreements (i.e., Uruguay
Round). Exceptions are generally found in the areas of agricultural goods, textiles and
auto related products.
Nevertheless, the agreements have clearly contributed to the liberalization of trade
among the members. Three out of four customs unions (Caricom is the exception) contain, at
least formally, MFN obligations with respect to tariffs as do the set of Chilean bilateral
FTAs. When necessary, derogations from this obligation have been fairly easily obtained so
as to allow countries to enter into trade liberalization negotiations.(37)
Interestingly enough, while non-industrialized countries have generally been somewhat
reluctant to "bind" tariffs at the multilateral level, all the subregional
agreements contain provisions that have essentially the same effect within the context of
such agreements. Countries are prepared to accept lower levels of flexibility, and hence
higher disciplines, at the subregional level than they are at the multilateral level.
A number of agreements, in particular the customs unions, contain special provisions
designed to address the needs of participating countries that are at lower stages of
development. Such provisions can take the form of different levels of obligations and/or
differences in the number of exceptions or phasing requirements. Some agreements contain
both forms. The free trade agreements, on the other hand, tend to address the issue in the
context of negotiated timetables for liberalization, but with obligations that tend to
apply equally to all members. As almost all countries in the Hemisphere are participants
in one arrangement or another, it would appear that differing stages of development does
not, itself, preclude participation in trade liberalization efforts.
î One area of significant difference among the agreements is found in how each
addresses the issue of emergency measures. In Mercosur and Caricom bilateral safeguards
actions do not effectively exist.(38) In NAFTA and the Group of Three,
bilateral safeguard mechanisms essentially have sunset provisions, while they are
essentially open ended in the case of the Andean Group and Central America. In the case of
the latter two agreements, however, resort to such actions is disciplined by requirements
to notify and receive the approval of executive administering authorities of the
agreements. The Andean Group countries have only rarely resorted to safeguard measures.
Thus, in one form or another, countries tend to view emergency measures as either
transitory in nature or being legitimately subject to disciplined oversight.
The subject of unfair trade practices has been one of the most difficult to address at
all levels, be it multilateral, plurilateral or bilateral. Some useful progress has been
made at the multilateral level, especially in the area of definitions and dispute
settlement, but little real progress is evident with respect to the fundamental
disciplining of either unfair trade actions or the practices that give rise to such
actions. Various arrangements have wrestled with the issue, suggesting alternative models
(i.e., application of competition based legislation or regulation) that might be explored,
but none could be said to have effectively resolved the matter. The Andean Group, for
example, obligates that Agreement's Commission to develop a common policy with respect to
practices that distort competition in the market place.
Some of the agreements in question contain obligations that attempt to discipline the
subsidy practices of their participating members, but not all. NAFTA itself, for example,
contains no disciplines with respect to subsidies, but the Group of Three (which was
modelled on the NAFTA) does contain explicit prohibitions, for industrial goods, based for
the most part on multilateral obligations. Nevertheless, NAFTA Chapter 19 contains a
unique, binding dispute settlement mechanism focused on the application of trade remedy
legislation.
There exists a broad-based understanding that technical and other standards-related
measures can, and often do, work in ways that are protectionist and exist as barriers to
trade. Within the region, a number of efforts aimed at subregional harmonization in the
area of technical and related measures have been attempted with some modest success, as in
the case of the Central American countries or the Caribbean Common Market Standards
Council. The Andean Group recently adopted some standards in this area. Nearly all
agreements have created working groups of one sort or another, designed to enhance
harmonization or compatibility efforts.(39) Such efforts are built upon
the foundations of national and most favored nation treatment that apply in nearly all
cases. Of benefit to future hemispheric liberalization efforts is the existence of a solid
network of working groups that contain significant technical expertise.
The Inter-American Development Bank (IDB) has completed a major quantitative analysis
of rules of origin in existing agreements. The compendium sought to describe the basic
attributes of the various regimes. The need for detailed rules of origin is minimized in
the context of customs unions, although agreements that have exceptions to common external
tariffs have generally established measures of a transitional nature. The most detailed
rules are contained in the NAFTA, followed by the Group of Three agreement. Both
agreements basically follow a change to tariff heading approach, although there are some
exceptions where specified percentages of subregional content are required. Some of the
"older" agreements contain mechanisms that allow the adjustment of specific
rules of origin to take into account input availability, price or quality considerations.
That trade within subregional arrangements has increased in all cases underscores the fact
that any set of rules in themselves has not appeared to be a disincentive to increased
commercial contact. Nevertheless, while existing rules could continue to govern trade
within subregional arrangements, there does not appear to be an inherent reason why a
hemispheric agreement in this area could not be negotiated. Further, a well developed set
of hemispheric rules could in certain instances, with the agreement of the parties, be
applied to trade within specific arrangements.
36. In the case of rules of origin, the Inter-American Development Bank (IDB) has
conducted a more extensive quantitative analysis (see Chapter IV). This section in the
compendium is a brief descriptive comparison only.
37. A number of examples exist: Colombia and Venezuela vis-a-vis their
Andean Group obligations and the Group of Three, Costa-Rica vis-a-vis its Central American
Common Market obligations and its bilateral FTA with Mexico, and more recently, Bolivia
and its negotiation of a FTA also with Mexico. The exception to this easy authorization is
LAIA Article 44, as was shown to be the case vis-a-vis Mexico and the NAFTA.
38. In the case of Chile's bilateral FTAs, safeguards are covered under
the LAIA agreement.
39. There are no provisions relating to technical standards in the Chilean
bilateral agreements.
Services, Procurement,
Investment and Intellectual Property
Section III of the compendium examines the obligations contained in various agreements
with respect to what had previously come to be known as "new" issues, although
that particular appellation is clearly in need of updating. The comparison covers trade in
services, with subsections devoted to financial services, transportation services,
telecommunications services and provisions respecting the temporary entry of persons. The
section also examines investment, government procurement, state and monopoly providers of
goods and services and intellectual property provisions. As a general proposition, these
areas have received thorough coverage in those agreements that have been negotiated more
recently. Nevertheless, some of the "older" agreements have been modified to
take into account international progress in these areas, such as the adoption by the
Andean Group of highly disciplined provisions in the area of intellectual property.
Neither the Chilean bilateral FTAs nor the Mercosur agreement cover services in a
formal manner, although in the case of Mercosur future negotiations are envisaged and
certain limited liberalization has occurred in the area of maritime transportation
services. In the case of the Group of Three Agreement, the core disciplines have been
negotiated, but governments are still negotiating their investment and services
reservations. In the other cases, the fundamental difference appears to be between those
agreements that have adopted a negative list approach (list only exceptions) and a
positive list approach (list only areas covered by the disciplines). Treatment in other
areas, such as national or most favored nation treatment or rights of establishment, are
broadly similar and differ only in the sense that they tend to reflect subregional
interests and sensitivities that might pertain to individual circumstances. Also,
agreements will tend to reflect the theoretical stage of development of the "trade in
services" debate that was operative at the time the agreements were concluded.
Nevertheless, the Caricom agreement, which significantly pre-dates much of the
international discussion of this issue, contains a well developed set of trade in services
disciplines. Further study in this area could usefully focus on an examination of
commitments offered in the context of the Uruguay Round.
Regarding financial services, NAFTA is the only agreement (the WTO included) in which
specific market access commitments, trade principles and dispute settlement provisions
have been negotiated and implemented as negotiations are ongoing in the Group of Three and
the WTO. In the case of Caricom, formal obligations appear to be limited, but the region
is one of the most open with respect to the provision of financial services.
Transportation is one area that is critical to infrastructure development, and the
handling of this sector in the various agreements tends to reflect different needs in this
area. The Andean Group and the Central American agreement are the most comprehensive, with
provisions covering the air, maritime and land modes, while NAFTA provides extensive
coverage of land transportation services (as well as investment). Other regions, such as
the Caribbean, have other arrangements outside the strict framework of their trade
agreements to deal with air and maritime services. Similarly, NAFTA and the Group of Three
have the most extensive coverage of telecommunications issues, with both the Andean Group
and the Central American agreements containing provisions related to value-added services.
This sector is not covered in Mercosur, Caricom or the bilateral FTAs with Chile.
Effectively, government procurement is only covered in the NAFTA and Group of Three
agreements (procurement is a voluntary plurilateral agreement in the WTO, and Canada and the United States are the only signatories in the Hemisphere). Mercosur has set up a working group on procurement which is to report its findings on June 30, 1995. Similarly, the Caricom countries are studying various options for a coordinated subregional approach. Between NAFTA and the Group of Three, the former is the most highly developed. While both agreements have similar thresholds, the latter imposes much lower levels of obligations on
Colombia and Venezuela than it does on Mexico. For example, neither Colombia nor Venezuela carry any obligations with respect to establishment of bid challenge mechanisms.
A number of agreements contain measures relating to the treatment of foreign
investment, with most of those being ahead of similar provisions in the Uruguay Round. In the case of Mercosur, investment issues were not included in the original negotiation, but have been included through the incorporation of the Colonia Protocol. The same situation
pertains to the Andean Group which brought forward investment and intellectual property
provisions since the inception of the original agreement. Caricom has a work program in
this area as well as certain provisions dealing with establishment of foreign investment.
The bilateral FTAs with Chile are governed largely by domestic legislation, while the
Group of Three generally tracks the provisions of NAFTA.(40) NAFTA
contains the most comprehensive set of investment-related disciplines of any agreement.
This suggests that there is both interest in and receptivity towards addressing investment
issues in the context of a hemispheric agreement.
Four of the agreements reviewed (plus the WTO) contain provisions relating to
intellectual property rights. Those that do not are Mercosur, Caricom and the Chilean
bilateral FTAs. The Andean Group adopted a common set of new intellectual property
regulations in 1993. In the case of Central America, first attempts to include
intellectual property rights date to 1968, which did not, however, include patent rights.
The agreement has since been amended in 1994 and is in the process of ratification. Both
NAFTA and the Group of Three agreements contain well developed intellectual property
provisions,(41) on a par with or better than the Uruguay Round outcome,
which nevertheless has established a "floor" for the countries in the
Hemisphere.
40. However, in the case of the Group of Three, negotiations in respect of reservations
are still ongoing, and Colombia has taken an exception with respect to provision relating
to protection against expropriation.
41. To each other, Colombia and Venezuela are bound by the Andean Group
provision rather than the Group of Three.
Special Areas
(Energy, Autos, Textiles and Agriculture)
Section IV examines four sectors where various agreements contain special provisions.
In this area there are significant differences between the agreements. For example, only
four of the agreements in the region contain the sorts of special provisions that were
under examination, and are therefore included in this section of the compendium. The
agreements covered are: the WTO, Mercosur, NAFTA, the Group of Three and the Chilean
bilateral FTAs. The four sectoral areas examined are: energy, autos, textiles and
apparels, and agriculture. Naturally, the four sectors are not applicable to each
agreement.
- Energy:
- Both NAFTA and the Group of Three contain special provisions with respect to energy.
NAFTA's provisions grow out of two essential factors: the first being special provisons
exchanged by Canada and the U.S. in their bilateral FTA which they wished to carry forward
into NAFTA, and Mexico's requirement to exempt itself from a number of provisions due to
the constraints of its constitution. In the case of the first factor, Canada and the U.S.
exchanged obligations related to security of supply, production incentives necessary to
maintain the resource base, and disciplines on regulatory measures enacted by subfederal
levels of government. Mexico, due to its Constitution, was required to lodge exemptions
for these and other provisions relating to investment and the provision of services.
- Autos:
- Mercosur, NAFTA, the Group of Three, the Andean Group and some of the Chilean bilateral
FTAs all contain special provisions relating to trade in the automotive sector. In the
case of Mercosur, for example, negotiations are ongoing with a view to bringing the sector
fully into the agreement, until which national legislation will continue to operate. There
are also differing local content requirements in the four Mercosur countries. NAFTA's
provisions in this area, taking into account the Canada-U.S. AutoPact of 1965 and the
FTA's provisions, focus mostly on the phased elimination of Mexico's automotive decree.
NAFTA does, however, establish a more strict rule of origin (phased in over time) that
increases regional content from 50% to 62.5%, albeit with different methodology for the
calculation itself. In the Group of Three, such measures as import permits, performance
requirements and investment prohibitions regarding certain manufacturing companies are all
maintained. Tariff elimination is also much slower than the average.
- Textiles and apparel:
- For the first time, this sector is brought into the disciplines of the GATT with a
phased integration of GATT-based textile trade over a period of 10 years. In Mercosur,
efforts are underway to forge a common import policy beyond the implementation of the
common external tariff with respect to this sector. The provisions in NAFTA include:
fairly strict rules of origin (balanced by tariff rate quotas for non-originating goods)
and special bilateral safeguard regimes for the sector. The Group of Three shares similar
provisions regarding bilateral safeguards; however, the biggest difference (and hence the
requirement for special provisions) was the inability of Venezuela and Mexico to reach
agreement on this sector. Therefore, the entire sector is excluded from coverage - between
these two countries - in the agreement. The gradual reintegration of this sector into the
scope of GATT/WTO disciplines could reduce the need for negotiating special provisions in
regional or subregional agreement in the future.
- Agriculture:
- Trade in agricultural products has proven one of the most difficult areas to deal with
in the context of international negotiations, and therefore the sector generally becomes
subject to a host of special provisions that include: quotas, slower than average tariff
elimination, exclusion of entire subsectors, special safeguards provisions. Nevertheless,
the progress with respect to production and export subsidies to this sector could, over
time, lessen the need for other special provisions. Comparisons of how existing
hemispheric agreements handle the agricultural sector is difficult in that each is largely
custom designed to fit particular circumstances. In NAFTA, for example, the outcome
represents essentially three sets of bilateral negotiations, each attuned to their own
particular sensitivities. The same thing is true with respect to the Group of Three and
Mercosur agreements, and in the Andean Group there are large numbers of special
stabilization programs. In the category of commonalities, the best thing that can be said
is that all three agreements have found it necessary to design special provisions relating
to trade in sugar and sugar-containing products.
Chapter IV:
Protection, Preferential Tariffs and Rules of Origin
As part of a collaboration with the OAS on the topic of Free Trade in the Americas, the
Integration, Trade and Hemispheric Issues Division of the Inter-American Development
Bank(IDB) prepared a study on tariffs and rules of origin in the Hemisphere for the
Special Committee on Trade. Herein is a summary of the topics addressed and their conclusions.
Protection Policies in the Americas
Despite the depth and speed of the import liberalization process in Latin America,
there still remain significant differences among national tariff structures. These
differences must be analyzed as a first step toward identifying priorities for a common
scheme of preferential tariff elimination for intraregional trade.(43)
Among the principal advances in the liberalization process in Latin America since the
mid-eighties, the following stand out:
- Import quotas have been almost eliminated. While in 1985 almost one half of the value of
Central American and one third of the value of South American imports were subject to some
type of quantitative restrictions, by the end of 1994 quotas were applied to less than 1
percent of tariff items in seven of eleven countries, and there were no cases above 5
percent.
- Applied tariff levels have been significantly reduced, so much so that in 1994 the
unweighted average tariff was less than 18 percent in all the countries of the region, and
in only 5 of the 14 Central and South American countries was it above 12 percent. The
impressive nature of the tariff reduction process is illustrated by the fact that in 10
out of 12 Latin American countries where data is available, the average tariff in effect
before liberalization was over 35 percent, and in four of those the average was over 50
percent. It should be noted, however, that in many cases bound tariffs are higher than
applied tariffs.
- At the same time, tariff structures have been substantially simplified, not only through
a reduction in the number of tariff rates, but also by reducing the maximum tariff level.
As a result the highest tariff rate at the end of 1994 did not exceed 40 percent, while
less than a decade ago it reached levels as high as 150 percent in almost all countries.
Despite significant progress, there are still important differences in the tariff
structures among the countries of the Hemisphere. The degree of differentiation can be
illustrated in the following examples:(44)
- In 1994 only two countries in Latin America applied an almost uniform tariff (on at
least 96 percent of all items). The other countries showed a substantial dispersion in
their tariff structures.(45)
- The average tariff level of the United States was significantly lower than that of the
other countries; excluding Canada, it was less than 70 percent of the average applied
tariff in other countries of the Hemisphere.(46)
- Substantial variations remain when a sectoral analysis of the tariff structure is
carried out. This variation is reflected in the significant tariff differences at the
disaggregated level, especially in the case of those goods and sectors considered
sensitive or strategic in some of the countries of the region.
- With respect to the common external tariffs(CET) that are being implemented in the
region, there are important lists of exceptions not only in terms of the number and
relevance of the items, but also in terms of the different tariff rates applied to those
excepted items. For example, the list of products exempt from the CET in the CACM includes
about 19 percent of the tariff schedule, and the average of the differences between
national tariff levels exceeds 7 percentage points in Guatemala and El Salvador and 17
percentage points in El Salvador and Honduras. In the case of the CET in MERCOSUR, the
excluded products comprise 12 percent of the tariff schedule and make up 23 percent of
intraregional commerce.
The presence of diverse approaches to trade policy will strongly influence the type of
integration that the countries of the Americas can achieve in the foreseeable future. For
instance, the requirements for national policy harmonization are much more demanding for
the creation of an advanced integration arrangement such as a customs union than they are
for the development of a free trade area. Not only is it necessary for the member
countries of a customs union to agree on a policy of preferential tariff elimination on
intraregional trade, they must also define a common protective trade policy vis-a-vis
third parties. The creation of a customs union, therefore, requires a very high degree of
political commitment among the contracting parties. This cooperation implies the
acceptance of a certain loss of national autonomy in the management of areas such as
tariffs and nontariff barriers.
In addition to the problems related to the loss of sovereignty in the implementation of
the tariff policy, a minimum level of coherence among countries in the application of
macroeconomic policy (especially fiscal and exchange rate matters) must be achieved.
Beyond that there also exist other problems related to the presence of fiscal and
institutional constraints among member countries and divergent domestic policies in areas
of industrial promotion and competition.
Unfortunately, because of the different levels of development among the countries, the
demands for compatibility regarding policies of protection and the need for the observance
of a minimum level of coherence at the macroeconomic policy level, do not augur well for
the achievement, in the near future, of an advanced integration scheme in the Americas,
such as a customs union.
Nevertheless, this should not be an obstacle to pursuing a deepening of economic
integration among the countries of the Hemisphere, particularly in view of the importance
of integration in today's increasingly globalized markets. In this context, the creation
of a free-trade area can be viewed as a vital first step toward the goal of economic
integration in the Americas.
It should be noted that, in the Hemisphere, the process of preferential tariff
elimination has advanced at a varied pace, but with a distinct trend toward widening
regional markets. The most recent advances are:
- The "new generation" agreements (NAFTA, the Group of Three, and the bilateral
agreements of Mexico with Costa Rica and Bolivia) encompass 86 percent of
intra-hemispheric exports (based on 1994 data); they will eliminate virtually all tariffs
on trade among member countries for about 95 percent of the items by the year 2004 and the
rest will be eliminated shortly thereafter. This will occur under the new generation of
rules of origin.
- The "first generation" agreements (bilateral accords signed by Chile with
Colombia, Ecuador, Mexico and Venezuela) promote full tariff removal --with relatively
standardized, simple, yet often ambiguous, rules of origin-- for practically all
intrazonal trade before the end of the 1990s.
- Customs unions in different stages of development ( CACM, Caricom, Andean Group, and
Mercosur) are promoting the formalization of a preferential market among some groups of
countries in the region over the next five years with a reduced number of goods being
excepted from the CET. The potential for some of these arrangements seems considerable
given the recent high growth rates for intrazonal trade flows and their important
participation in trade among countries of the Hemisphere.(47)
43. For much more detailed statistical information, see Garay and Estevadeordal(1995),
op. cit.
44. For more detailed information, see Garay and Estevadeordal (1995),
ibid.
45. For example in 1994, the coefficient of variation of the tariffs was
greater than 70 percent in 5 Latin American countries. The variation coefficient is an
indicator of the dispersion of the individual tariffs at the item level around its
corresponding average tariff(of the item universe).
46. It should be noted that the United States still applies specific
tariffs for a significant number of items, especially in agriculture. A similar situation
exists in Canada
47. Customs union trade represents about 12 percent of the commercial
trade flows were made up of intra-hemispheric exports (based on 1994 data).
Rules of Origin and Preferential Markets
- General Considerations
- The establishment of a hemispheric free trade area is not without serious challenges and
difficulties as one tries to guarantee the greatest effectiveness and transparency in the
process of expanding the preferential market. Its success depends fundamentally on the
establishment of a system of rules and disciplines, like those that govern origin, which
reflect relatively precise objectives, coherent criteria, and clear administrative
procedures.
The purpose of a rule of origin is to regulate the conditions of access to
the preferential market area due to the lack of a common external tariff among the
parties. In effect, rules of origin are used to avoid what is called "trade
deflection": the preferential importation of goods from non-member countries through
the member country with the lowest tariff.
The success in expanding preferential markets depends heavily on the way rules are
established in terms of rigor, transparency, selectivity and administrative simplicity
because they can alter the level and structure of preferences established in the tariff
elimination program itself.
The application of rules of origin suffers from various problems. One of these problems
stems from the fact that their impact on the degree of protection can be variable due to,
among other things, technological change; in the case of value content rules, a degree of
unpredictability emerges because of movements of exogenous factors like exchange rates and
interest rates. Other problems relate to the possible creation of distortions in
competition, inefficiencies in resource allocation, biases in the selection of production
techniques, and inequalities in the distribution of benefits among countries and among
types of producers.(48)
Furthermore, the significance of the operational and administrative costs incurred in
the certification and verification of at least some rules of origin, at both the producer
level and national customs level, must be stressed. Regarding these costs, the
regional-content rules of origin are particularly noteworthy, since the companies need to
gather sufficiently substantiated data on costs, distribution, and sales. In addition,
there are costs associated with processing the corresponding certifications before the
customs authorities.(49) Only a few empirical studies on these issues
exist, perhaps because of the difficulties inherent in making even a rough estimate of the
administrative costs associated with mechanisms such as rules of origin.(50)
When evaluating the different options for adopting rules of origin, consideration
should be given not only to their potential problems, but also to their undeniable ability
to fulfill certain policy objectives such as the expansion of preferential markets.
- Rules of Origin in the Americas
- At present, the Western Hemisphere has two main generic regimes for qualifying origin--
namely a "first generation" scheme instituted within the framework of LAIA and a
"second generation" scheme that emerged within NAFTA. The rules of origin under
the LAIA are characterized by their simplicity and their uniformity across the entire
tariff schedule. This is in contrast to the origin systems established in the "new
generation" agreements such as NAFTA, with their considerable number of rules of
origin.
The LAIA regime applies a generic requirement for the determination of origin:
a change in the tariff heading between the good and the third party inputs used in
fabrication, or alternatively, an extraregional content of no more than 50 percent of
value (FOB), although in practice there is a degree of ambiguity in this latter
requirement. This rule applies to almost all items of the tariff schedule, except for a
few cases where a specific rule of origin exists.
Apart from the general principle of determining origin based on the concept of wholly
produced goods, the second generation regime establishes specific rules using three
criteria: i) change of tariff classification, which could be a chapter to chapter change,
heading to heading change, subheading to subheading change or tariff item to tariff item
change, with the possibility of exceptions; ii) regional content requirement, which can be
higher than 50 percent, and iii) technical requirements for manufacturing processes. The
different possible requirements associated with each one of the three criteria in practice
give rise to families of rules of origin; for example, a good could comply by change in
chapter classification, or by a change in heading classification with a value added
content, or by a value added requirement plus a technical test. Another basic difference,
which is related to the one just described, is the administrative cost of the new
generation of rules of origin.
The new generation of rules clearly contrasts with the simplicity of LAIA's system.
However, it also must be said that the vagueness of the LAIA's regime in terms of its
criteria and methodology for certification of origin have been decisive factors in that
system's relative lack of effectiveness in practice.
The principal characteristics of the system of rules of origin applied in the "new
generation" of agreements can be summarized as follows:(51)
- A multiplicity of combinations of rules of origin, due not only to the diversity and
specificity of the basic criteria for classification of origin, but also the presence of
diverse alternative rules for determining that origin.
- The relative importance of the criterion for regional content cannot be overemphasized,
as it is incorporated into a relatively high percentage of the families of rules of
origin.(52)
- In general terms, the evidence suggests a clear trend in the ordering of the relative
stringency of the rules of origin between the new generation accords and the LAIA regime.
In effect, the general rule of origin of LAIA would be more restrictive than those rules
in the three "new generation" agreements for at least one-sixth of the tariff
items, which account for about 22 percent of the value of goods imported by Mexico from
its partner countries in 1993. It can be seen that rules of origin applied in the Group of
Three and the agreement between Mexico and Costa Rica (AMCR) would imply a more stringent
regime than its complement in LAIA for one-third of the tariff items. In the case of
NAFTA, this percentage could be as great as 50 percent.
- Regarding NAFTA, the most stringent rules of origin are not necessarily associated with
the most accelerated process of tariff elimination, at least with respect to the general
average. In this way, comparing items subject to the more stringent rules of origin with
those items subject to rules similar to LAIA, one notices no substantial differences
regarding the proportion subject to immediate tariff elimination.
48. The effects of rules of origin in NAFTA and the Group of Three on industrial
sectors in Canada and Colombia, respectively, are being studied in an ongoing project of
the Integration, Trade and Hemispheric Issues Division of the IDB cited in the first
footnote of this chapter
49. Notwithstanding these requirements, in certain circumstances and for
certain goods NAFTA does provide for streamlined procedures with respect to complying with
regional content and corresponding certification.
50. One case study on West Germany in the early 1980s, regarding its
participation in the European Community and the European Free-Trade Association, estimated
the cost of the determination of origin to be between 2 and 3 percent of the value of the
good examined. See Taylor, R., W. Werner and O. Horowitz, EC and EFTA in the 1980's
(Brussels: European Research Associates, 1984).
51. For a more complete analysis and statistical presentation, see Garay
and Estevadeordal(1995), ibid.
52. For example, in reference to Mexico, families of rules of origin with
the regional content criteria are applied to 42 percent of tariff items in the case of
NAFTA, and 38 percent in the Group of Three and the agreement with Costa Rica.
Towards a Common Policy
on Rules of Origin
Flawed implementation of rules of origin can constitute a serious obstacle for the
effective creation of a Free Trade Area of the Americas, especially regarding their
administrative complexity as well as the incoherences and distortions that can be derived
from the simultaneous existence of different generic regimes in the Hemisphere.
Given the experience observed in the Hemisphere with regard to the application of rules
of origin; the disparate perceptions in the countries with respect to the virtues of
alternative regimes, and in view of the decisive role that rules of origin can play in the
creation of an expanded preferential market, great emphasis should be given to the need to
adopt common principles determining origin of goods.
It must be considered that despite some advantages, a general regime characterized by
uniformity is not the ideal one for regulating the market when the objectives of trade
policy have a strategic nature. In this case, the determination of origin should
incorporate criteria which reflect selectivity. The challenge lies in specifying desirable
rules that, while conserving as much as possible the virtues of simplicity and clarity,
can still rigorously reflect the objectives of policy.
Due to the impossibility of counting on a single criterion to determine the regional
origin of each and every existing good, it is desirable to select the minimum number of
criteria that will guarantee the maximum effectiveness and clarity possible for a
particular rule.
Given the distinctive characteristics of the basic criteria utilized until now, and
based on the experiences observed with the rigorous application of the value-added
criteria, it would be clearly justifiable to concentrate efforts on perfecting a system of
origin based fundamentally on change of tariff classification. In this way, by employing
the latter criterion as the basic tool for determining origin, one could use complementary
criteria such as the regional content or technical requirements, only for those
exceptional cases that clearly merit it.
A requirement for advancing in said direction is the definition of a relatively
coherent system relating the changes of tariff classification to the degree of
transformation in the production of goods. In other words, a coherent pattern of
equivalencies must be established between the levels of change in the tariff
classification (e.g., a change at the level of chapter, heading or subheading) and the
requirement of the degree of transformation during production.
While admitting the difficulty of such a task, it should be emphasized that the
specification of a coherent definition as suggested above would i) substantially facilitate the administration of the rules of origin; ii) contribute decisively so that the rules of origin are less sensitive to the evolution of variables exogenous to the processes of production; and, iii) provide a proper balance between the transparency and simplicity of the regime. Moreover, a definition of this type would allow governments to
select and apply different rules of origin, not uniform among types of goods, as would correspond to a commercial trade policy with strategic components.
Precisely for reasons such as these it would seem that there is growing support for
proposals along the lines suggested here to define a methodology for non-preferential
rules of origin. Indeed, there is a technical committee in the World Trade Organization
(WTO) dedicated to the study of non-preferential rules of origin.
In any event, one can perceive benefits from choosing a system that incorporates principles similar to the following:
- Clearly define the objective assigned to rules of origin in their role as a policy
instrument of preferential tariff elimination schemes;
- minimize the number of criteria to be applied in determining a product's origin, giving preference to a change in the tariff classification;
- where a choice between origin criteria exists, ensure that the alternatives require an equivalent degree of transformation;
- guarantee to the greatest extent possible simplicity and transparency in the accounting procedures required for the application of the origin criteria and for the verification of their observance;
- in the face of the option of using a complex rule of origin to protect sensitive
products, more transparent alternative policy instruments might be explored, such as providing especially protracted time periods for tariff elimination, or the reduction of differences among parties on third country tariffs;
- seek a consensus about a methodology for qualifying for origin in the Hemisphere that could be applied in trade agreements; and
- promote a multilateral agreement within the framework of the WTO that creates the basis for a common methodology in the specification of rules of origin in preferential trade agreements.
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