Report: Do Rules of Origin Rule Free Trade?

There is no specific type of rules of origin that is easier or more difficult to fulfill.

Christopher Wingård Senior adviser

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Rules of origin play a central role in enabling companies to benefit from tariff reductions in free trade agreements. The rules differ depending on the agreement, and the manufacturers’ ability to comply with them varies. But there is no specific type of rules of origin that is easier or more difficult to fulfill, according to a new report from the National Board of Trade Sweden.

Christopher Wingård, you are one of the authors of the report, did the results come as a surprise to you?

They certainly did. At the beginning of our work, we were convinced that we could link specific rules of origin with a high or a low utilisation of free trade agreements (FTAs). But it did not turn out that way. In the three trade agreements we focused on, we were not able to identify any such connection. A certain rule of origin could in one agreement be connected with a high utilisation, but the same rule could have a much lower utilisation in another agreement.

Something that also surprised us was that a particular rule of origin that contains the possibility to choose between alternative methods could not be connected with a higher utilisation. This feels contradictory. If a company is given increased flexibility in the form of more choices, it is reasonable to expect a higher utilisation rate in return. But we found no such pattern.

What might this be due to?

The variation is likely due to the fact that each FTA negotiation is unique. It is based on the unique economic and political conditions of the parties in question. So the pattern we found was “variation.”

We have a hard time actually answering why more choices does not lead to increased utilisation. It could possibly be related to the fact that the rules of origin become more difficult to interpret when more alternatives are introduced. Or there is some other reason that our analysis failed to capture. This is a topic to dig deeper into!

What role does the rules of origin play in international trade?

Rules of origin establish if goods are eligible for preferential tariffs, by making sure that a sufficient amount of production is done within the FTA. By requiring that production takes place within the FTA, the rules of origin also close the door on goods coming from countries outside the free trade agreement. They are a necessary part of any free trade agreement that includes some form of tariff reduction.

Since the rules of origin require processing to take place within a certain area and in a certain way, they entail an additional cost. But if the cost exceeds the benefit of the reduced tariff, then the FTA will not be used. So rules of origin play a large role in the trade of many of today’s commodities and finished products.

Why has the National Board of Trade investigated the issue at this time?

We have previously analysed how companies use FTAs, but from other perspectives. It therefore feels natural to move on and focus solely on the rules of origin. We now also have the right type of data to be able to do this particular analysis. As far as we know, we are the first in the world to do this type of analysis of the rules of origin, which is also one of the reasons why we chose to do the analysis.

What remains to be done?

Quite a lot! The rules of origin is a challenging area for everyone involved. We need more and better information on everything, from the possibilities for tariff reductions that FTAs offer, to how the rules of origin should be interpreted and applied.

It is also important to try to harmonise where possible. It is incredibly difficult, because all negotiations are different. But at a minimum, common drafting principles and templates for certificates of origin should be possible. Especially if we are now about to move towards an increased use of electronic certificates of origin.

A more far-reaching reform would be to waive the rules of origin for goods with low tariff rates (1-3 per cent). There is much evidence that the additional cost that rules of origin lead to eats up the benefit that the tariff reduction provides for many goods. But the very best thing in this context would be to completely remove low-level tariffs, because then there would be no need to take the rules of origin into consideration at all.