The Nairobi Decision on Preferential Rules of Origin for LDCs builds upon the earlier 2013 Bali Decision by setting out, for the first time, a set of multilaterally agreed guidelines to help make it easier for LDC exports to qualify for preferential market access granted by WTO members in favour of LDCs. When a product is manufactured in two or more countries, it qualifies as “made in” an LDC — and thus for preferential access — when it undergoes substantial transformation in the LDC.

The Bali Decision cites three main types of criteria that can be used to determine substantial transformation, one of which is change of tariff classification (CTC) between the inputs and final product. The subsequent Nairobi Decision requires WTO members to allow for a simple change of tariff heading or sub-heading to meet substantial transformation, avoid exclusions and restrictions wherever possible, and allow appropriate tolerance for inputs that do not fulfil the requirements.

A background note prepared by the WTO Secretariat for the committee meeting noted that some preference-granting members (China, India, Japan, Norway and Switzerland) apply the CTC as a general or main rule, or in product-specific rules of origin (the European Union) for determining substantial transformation, while other members that have notified their rules of origin to the WTO do not apply this criterion at all (Australia, Canada, Republic of Korea, New Zealand, Russia, Chinese Taipei, Thailand and the United States).

Moreover, most preference-granting members applying the CTC criterion still maintain various exclusions or restrictions, primarily in the form of excluding materials of specific tariff chapter headings, or provisions setting additional requirements to the change in tariff classification, the Secretariat report found.

Tanzania, on behalf of the LDC Group of WTO members, made a presentation which outlined the latest developments regarding the use of CTC by preference-granting members. Tanzania highlighted the matter of exceptions from CTC rules, noting that some preference-granting members granted exceptions for whole chapter headings or key sectors, making the rules extremely stringent. It also noted that many preference-granting members use the CTC rule in their free trade agreements (FTAs) but not in their application of duty-free/quota-free commitments, meaning that rules for the latter may sometimes be more stringent than those under FTAs.

In regard to the way forward, Tanzania said the LDC Group is urging preference-granting members to reform these stringent rules, which were hindering the fuller utilization of trade preferences, such as abolishing “double requirements” (applying both CTC and ad valorem percentage rules to qualify for substantial transformation). The ultimate objective, Tanzania noted, is to make preferential rules of origin as simple and transparent as possible in order for LDCs to use trade to help lift them out of poverty.

Preference utilization

Members also reviewed a separate WTO Secretariat note on preference utilization rates, based on a methodology calculating the value of imports that reportedly benefitted from preferences with the value of total imports eligible for such trade preferences. 

The note underlined that preference under-utilization can be very significant for some product categories. For example, close to 50% of all LDC exports of “fruits, vegetables, plants” and “chemicals” do not receive preferential treatment despite being eligible for preferences. This proportion reaches close to 80% in the case of “sugar and confectionary products”.  

All in all, the Secretariat noted, LDCs paid tariffs on more than $7 billion of trade in 2016 that should have benefitted from tariff preferences.

Low preference utilization could indicate that rules of origin requirements are too demanding and cannot be met in a number of cases, the Secretariat said.  However, other factors not related to rules of origin may also explain low rates of preference utilization. One very significant factor is the existence of several competing preferential schemes; in fact, sometimes exporters have the choice between different preferential schemes: one or more non-reciprocal schemes (such as a Generalized System of Preferences for LDCs) and one or more reciprocal schemes (regional trade agreements). For this reason, it is important to interpret utilization rates considering other such factors.

Several members then took the floor to comment on the Secretariat note. Some said WTO members needed to consider further steps to simplify origin rules and improve utilization in light of the findings, while others said that more studies were needed before drawing any conclusions.  All agreed that more work needed to be done on the issue.

Tanzania, on behalf of the LDC Group, also provided members with a detailed rundown of utilization rates by preference-granting country as well as LDC recipient country. Tanzania said it was clear some preference-granting countries have low utilization rates across all product sectors, and that even for countries with high utilization rates, there were large pockets of under-utilization, with a significant share of LDC imports subject to most-favoured nation (MFN) tariffs even though these imports were eligible for lower preferential rates. Tanzania said utilization rates were critical in assessing the stringency of rules of origin, and that the LDC Group would be circulating a paper analysing the link between low utilization rates and rules of origin in advance of the next committee meeting.

Several members called for further work to better understand the causes behind under-utilization of tariff preferences. 

Implementation of the Nairobi and Bali ministerial decisions

China updated members on progress to implement the two ministerial decisions on preferential rules of origin for LDCs; more than 8,200 tariff lines for imports from 43 LDCs now enjoy preferential access, with 97% receiving duty-free treatment, thus reducing the overall tariff bill for LDC exporters by $7 billion. Top beneficiaries of these preferences were Bangladesh, Ethiopia, Sudan, Tanzania and Senegal, China noted. Speaking for the LDC Group, Tanzania asked China to notify tariff and trade data to the Secretariat so that members could better assess preference utilization for China-bound exports; China said it would forward the data shortly.

The European Union also updated members on implementation of its Registered Exporters (REX) scheme, which will replace the current system of certifications of origin issued by governments with self-certification by exporters. The EU (together with Norway and Switzerland) started applying the new system at the start of 2017 and will completely phase in self-certification for registered firms by mid-2020.

Non-preferential rules of origin

The Secretariat made a presentation before the committee on the transparency and notification aspects of the non-preferential rules of origin. The presentation provided a brief overview of the existing notification obligations in the WTO's Agreement on Rules of Origin (ARO), focusing on “non-preferential” rules of origin, a summary of the status of notifications, and an assessment of existing information gaps.

According to the Secretariat's data, 35.8% of members have notified that they apply non-preferential rules of origin, while 41.6% of members have notified that they do not apply them, and 22.6% have not submitted a notification under Article 5 of the ARO. Article 5 states that members must notify the Secretariat its judicial decisions and administrative rulings of general application relating to rules of origin, including those that do not apply non-preferential rules. (See presentation here.)

The committee also heard a presentation by the World Customs Organization (WCO) on the availability of information regarding non-preferential origin requirements. The lack of information translates into lack of predictability and transparency, undermining the ability of customs to collect revenue and subsequently putting at risk economic prosperity and social development in many countries, the WCO said. In addition, the lack of harmonized rules of origin and reliable data when dealing with cross-border trade, as well as procedures and standards that are enforceable and binding, represent significant obstacles in modernizing, streamlining and simplifying customs procedures. (See presentation here.)

The International Trade Centre (ITC) presented members with its new “Rules of origin facilitator”, a useful gateway to rules of origin that was launched in June this year. The gateway — https://findrulesoforigin.org — aims at increasing the quality and transparency of origin-related information, translating it into trade intelligence. It provides tariff and origin information at the most detailed tariff-line product level, including: tariffs applied by 201 countries (MFN and preferential); rules of origin and origin procedures in 87 trade agreements and preferential schemes of more than 100 countries; and non-preferential rules of origin for the EU, the United States and Switzerland. The gateway is the result of a collaboration between the ITC, the WCO and the WTO. (See presentation here.)

Further information on the WTO's work regarding rules of origin can be found at www.wto.org/origin