For Simple Rules of Origin: Improving the Utilization Rate of FTAs

Rules of origin determine when a product can be traded under the preferential conditions of a Free Trade Agreement (FTA). They are intended to prevent trade diversions. However, they significantly increase the complexity of trade agreements. Small and medium-sized enterprises (SMEs), in particular, suffer from the additional bureaucratic costs. Rules of origin should therefore be simplified and harmonised.

The number of bilateral and plurilateral trade agreements is rising steadily. As of June 2021, 349 such agreements were registered with the World Trade Organization (WTO) and in force. The majority of these are Free Trade Agreements (FTAs). The EU is the world’s most eager negotiator of such agreements. In July 2018, it signed its largest ever FTA (JEFTA) with Japan. The EU estimated the savings for EU exporters through the agreement at around one billion euros per year.

The success of an FTA, however, is measured by its implementation. FTAs liberalise trade between the contracting parties. External tariffs, on the other hand, are not harmonised. To date, it has been customary in FTAs to use preferential rules of origin (PRoO) to ensure that preferential tariffs are available only to FTA partners and not to third countries. Accordingly, rules of origin are defined in countless lists. The respective rules determine the conditions under which a product can benefit from the lower tariff rate on a product-specific basis.

Managing Rules of Origin is Cost-Intensive 

PRoO are renegotiated in each FTA. The corresponding original protocols are highly individualized and often very extensive. The origin protocol of the free trade agreement between the EU and Singapore, for example, comprises 101 pages. The experience of German industry shows that the bureaucratic costs of proving the origin of goods average between two to six percent of the value of the goods. The business community therefore takes a critical view of PRoO. For SMEs in particular, the cost often exceed potential savings from preferential tariffs, so they continue to trade under the WTO’s most-favoured-nation tariff. The tediously negotiated and actually more favourable preferential tariffs are then not used by companies.

Ever more integrated and global value chains exacerbate this problem: the more frequently individual components of a product cross customs borders, the more diverse and numerous are the rules that entitle them to preferential treatment. This hurdle can only be removed by simpler and harmoised rules of origin.

Simple Rules of Origin Create Trade Potential

The benefits of simple rules are quantifiable. In January 2018, the United Nations Conference on Trade and Development (UNCTAD) published a joint report with the Swedish trade association Kammerskollegium: Between 2009 and 2013, the EU lost 72 billion euros simply because exporters from the EU did not use the negotiated preferential tariffs. The FTAs with Switzerland and South Korea, in particular, stand out with an unfulfilled trade potential of 47 percent. This means that almost half of all exports did not use the negotiated preferential tariffs.

In November 2017, the EU published a report in which it addressed the problem of the low utilisation rate of FTAs. The Commission suspects that this is due, among other things, to a lack of information and the complex process of proving origin. To remedy the situation, information must be better prepared and digital tools created to help companies use FTAs. In a 2019 report on the implementation of free trade agreements, the Commission addresses the problems SMEs face when using FTAs. The publication of guidelines on various topics and creation of theonline portal Access2Market are intended to remedy this situation and enable small and medium-sized enterprises in particular to overcome obstacles and enable them to take advantage of FTAs.

FTA usage rates could be significantly improved by including simple rules of origin in FTAs in the future. For this reason, the BDI calls for a simplification of the rules of origin – ideally an additional industry-wide rule that applies to all products. In addition, the customs authorities of the country of origin should issue a goods certificate which could be presented if the importing country doubts the origin of the goods. Instead of passing on sensitive data on production processes and places of manufacture, the origin could simply be verified this way. Customs clearance could be further simplified through digitalised processes, such as the use of online portals to prepare export and import declarations. German industry is also in favour of a harmonised calculation of customs value. Although the same rules apply in nominal terms, they are interpreted very differently internationally.