Abstract
Global value chains are increasingly characterized by regional manufacturing “factories”: “factory” Europe, “factory” Asia, and “factory” North America. Underpinning these are the rules of origin (ROOs) of the regional trade agreements (RTAs). ROOs provide incentives to sourcing intermediate goods from the RTA parties, resulting in exclusionary effects on exports from third countries. The exclusionary effects are exacerbated in some ROOs because they are more restrictive than necessary to determine origin. Overall, product-specific ROOs in a plurilateral RTA that includes a manufacturing hub nation tend to be more restrictive than those in a bilateral RTA. Hence, the question arises whether the EU and Asia can develop an arrangement that can bridge the two regions without further fracturing global value chains. This chapter proposes that the extension of the Regional Convention on Pan-Euro-Med Preferential Rules of Origin (PEM Convention) to EU’s trading partners in Asia can enable geostrategic cooperation between the EU and its trading partners in Asia. In tandem with the underlying bilateral RTAs, the extended PEM Convention has an advantage over a plurilateral RTA because bilateral RTAs allow differentiated agreements in value-based issues. However, that the extension of the EU’s regional value chains to Asia may risk weakening global value chains.
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Notes
- 1.
Article I of the General Agreement on Tariffs and Trade (GATT) provides the MFN principle.
- 2.
Although the preferential elimination of tariffs under an RTA is in violation of GATT Article I, it is permitted under GATT Article XXIV as an exception to the GATT.
- 3.
This trade diversion effect occurs in addition to the trade diversion effect due to tariff elimination on final products.
- 4.
As the restrictive ROOs protect the industries within an RTA, the RTA parties would be less willing to conclude a new RTA with third countries. Thus, restrictive ROOs arguably pose obstacles to an RTA’s expansion of its membership.
- 5.
The parties to the RCEP are the ASEAN countries, China, Japan, Korea, Australia, and New Zealand.
- 6.
The parties to the CPTPP are Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.
- 7.
The term RTA refers to both a free-trade area (FTA) and a customs union.
- 8.
Strict ROOs are employed to raise the cost in RTAs between developed and developing countries.
- 9.
The scope of the wholly obtained or produced could change depending on the definition of vessels, which may include any combination of registry, flag, and ownership of the vessels.
- 10.
The AFTA entered into force on 31 August 1977.
- 11.
The Agreement was signed by five founding members of the ASEAN and Brunei Darussalam on 28 January 1992 and came into force on the same date.
- 12.
In theory, non-discriminatory ROOs may be derived from some fundamental assumptions regarding wholly obtained and substantial transformation criteria. However, this approach would not bring fruitful results because countries do share common understanding about the wholly obtained and substantial transformation criteria.
- 13.
The PSRs for products under Chapter 2 under the KORUS FTA states: “A change to heading 02.01 through 02.10 from any other chapter, except from fowls of the species Gallus domesticus (chickens) of heading 01.05.”
- 14.
Crisscrossing RTAs is called spaghetti bowl of ROOs.
- 15.
The WTO Agreement on Rules of Origin is silent with regard to harmonization of preferential ROOs.
- 16.
See the preamble and paragraph 1 of Article 9 of the Agreement on Rules of Origin of the WTO Agreement.
- 17.
Empirical studies provide evidence that ROOs negatively affect sourcing of intermediate goods from third countries.
- 18.
The Free Trade Agreement between Canada and the United States of America (Canada-US FTA) was signed on 2 January 1988 and was phased out as NAFTA was enacted in January 1, 1994.
- 19.
The KORUS ROOs for ketchup (2103.20) states: “A change to subheading 2103.20 from any other chapter, provided that tomato ketchup of heading 2103.20 does not contain non-originating goods from subheading 2002.90.”
- 20.
The product-specific rule for ketchup in the Korea-EU FTA states: “Manufacture from materials of nay heading except that of the product. However, mustard flour or meal or prepared mustard may be used.”
- 21.
The committee has yet to decide on the rule.
- 22.
Under the PEM Convention, the PSRs for products under Chapter 84 except some states: “Manufacture in which the value of all the materials used does not exceed 30% of the ex-works price of the product.”
- 23.
Under the Korea-EU FTA, the PSRs for products under Chapter 84, except a few tariff lines, state: “Manufacture in which the value of all the materials used does not exceed 50% of the ex-works price of the product.”
- 24.
The RVC is calculated using the net cost method, which results in a more stringent requirement than the usual method based on transaction value.
- 25.
For ROOs for passenger vehicles (HS 8703.21 through 8703.90).
- 26.
Cross-cumulation can “only be applied if the Parties of final manufacture and of final destination have concluded free trade agreements, containing identical rules of origin, with all the Parties participating in the acquisition of originating status, i.e. with all the Parties from which the materials used originate. Materials originating in a Party which has not concluded an agreement with the Parties of final manufacture and/or of final destination shall be treated as non-originating.”
- 27.
If the cross-cumulation system were absent, the materials from the non-parties to the RTA would be deemed non-originating materials in the bilateral RTA between two countries that are parties to the convention.
- 28.
The EU initiated the PECS in 1997 between the EU members, the European Free Trade Association (EFTA) countries, the Central Eastern European Countries, and the Baltic States.
- 29.
In 2005, the system widened to participants to the Barcelona Process, resulting in the creation of the PEMCS based on bilateral protocols on ROOs.
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I would like to thank Ferdi De Ville, Johan Adriaensen, and Hans-Guenther Hilpert for helpful comments on the paper.
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Kim, J.B. (2022). Rules of Origin: Bridging Regions to Withstand Turbulent Times. In: Adriaensen, J., Postnikov, E. (eds) A Geo-Economic Turn in Trade Policy?. The European Union in International Affairs. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-81281-2_8
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