Working Papers

Reforming the Rules of Origin for Least Developed Countries

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11 May 2011

Author(s): Eckart Naumann

Over the past four decades Least Developed Countries (LDCs) have received preferential access to the markets of most of the major developed countries under various Generalised System of Preference (GSP) programmes. While a number of GSP programmes offer duty-free and quota-free access to LDC beneficiary countries for virtually all products, the Rules of Origin (RoO) that underlie such access are often considered to be overly restrictive and inflexible and not conducive to LDCs taking advantage of the preferences granted. The current plethora of RoO regimes and methodologies relates to the fact that no single test for substantial transformation stands out as being the most appropriate in conferring origin across all product categories, while there is also no binding international standard at this stage.

Within the framework of the Non-Agricultural Market Access (NAMA) negotiations the LDC group submitted a proposal on RoO reform, which considers a value-added/local content based methodology as a preferred choice. This paper analyses a number of features of the proposal in more detail, particularly the methodological basis for conferring origin and the related proposals on cumulation. In the interim, the latest draft text (Fourth Revision of Draft Modalities for Non-Agricultural Market Access) calls on members to use the model proposed by the LDC group in the design of RoO for their autonomous preference programmes. However, not much formal progress has been made since then to bring this issue to a conclusion.

Adopting a new standard on preferential RoO in non-reciprocal trading arrangements will continue to present a major challenge. Consensus and implementation are likely to be a long way off given the seeming lack of appetite among grantors of GSPs to harmonise their unilateral preferences; this is despite the fact that many developed countries have acknowledged either explicitly or implicitly that reform is necessary, and that there has been a relatively limited uptake of GSPs especially by LDCs. The LDC proposal, albeit presented without specific substantial processing thresholds and leaving the door open for alternative rules in certain sectors, nevertheless represents a good basis for LDC RoO reform.

This paper considers that a much broader and more flexible approach to cumulation both within and between GSP regimes may significantly improve the effective market access that LDCs have in developed countries. Cumulation has the potential not only to increase trade flows between preference-giving and preference-receiving countries (in the case of many LDCs), but also to invigorate South-South trade and economic integration more broadly. Expanded provisions relating to cumulation could be politically far more palatable and defensible in the short to medium term. To achieve this, existing regimes would need to be retrofitted through appropriate technical adjustments, and as a minimum should consider cumulation between all beneficiaries under a given GSP, with third countries party to a Free Trade Agreement with a donor country, within customs unions and in all product categories that already enjoy duty-free access to the preference-giving country under normal trade relations.

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