UNIVERSITY OF AMSTERDAM
Faculty of Law
Rules of origin in the EU’s free trade agreements:
their role and the impact on trade and domestic
industries
LL.M Thesis
Elina Andrijevska
Thesis supervisor: Dr. Ingo Venzke
2
CONTENT
ABSTRACT ... 4
INTRODUCTION ... 5
1. The Function of Rules of Origin ... 8
2. Modern Rules of Origin of the EU – the Result of Political Developments and Economic Necessity ... 11
2.1. The political landscape of the 1990s affecting the EU's rules of origin ... 11
2.2. European "spaghetti bowl" of the 1990s ... 12
2.3. The decline of the EU's bilateral cumulation ... 13
3. Creation of the Pan-European Rules of Origin ... 16
3.1. The proposal of the European Commission ... 16
3.2. Practical analysis: the development of rules of origin in the trade agreement with the Czech Republic ... 17
3.3. Trade impact of the Pan-European rules of origin ... 21
4. The Pan-Euro-Mediterranean Cumulation of Origin ... 24
4.1. Role of rule of origin in Euro-Mediterranean trade relations ... 24
4.2. Practical analysis: rules of origin in the trade agreement with Morocco ... 26
4.3. Trade impact of the Pan-Euro-Mediterranean cumulation ... 28
5. Rules of Origin in the EU trade policy towards developing countries... 33
5.1. Rules of Origin in the Cotonou Agreement and the GSP ... 33
5.2. New approach towards rules of origin with developing countries ... 36
CONCLUSIONS ... 40
3
ACRONYMS
Acronym Definition
ACP African, Caribbean and Pacific group states ASEAN Association of Southeast Asian Nations
CACM Central American Common Market
CEEC Central and Eastern European Countries CEFTA Central European Free Trade Agreement
COMESA Common Market for Eastern and Southern Africa
CTH Change of Tariff Heading
EBA Everything But Arms
EEA European Economic Area Agreement
EFTA European Free Trade Association
EU European Union
Euro-MED EU-Mediterranean
FTA Free Trade Agreement
GAFTA Greater Arab Free Trade Area
GATT General Agreement on Tariffs and Trade
GSP General Scheme of Preferences
HS Harmonised System Nomenclature
LDC Least developed countries
MERCOSUR Southern Common Market
MFN Most-Favoured Nations
MPC Mediterranean Partner Countries
PEMCS Pan-Euro-Med Cumulation System
ROC Rules of Cumulation
RoO Rules of Origin
SAARC South Asian Association for Regional Cooperation
T&C Textile and Clothing
4
ABSTRACT
Globalization has intensified and boosted international trade, therefore, the role of rules of origin (“RoO”) gained its importance. RoO are not only a product’s origin-allocation criterion but also an important political tool to manage trade flow and intensity. Since the European Union (“the EU”) is one of the main economic players, the paper aims to analyse the historical evolution of the EU’s RoO, and the impact of these reforms on trade and domestic industries in the EU’s trade relations with the Central and Eastern European countries (“CEEC”), the Mediterranean partner countries (“MPC”), and the developing African, Caribbean and Pacific group states (“ACP”).
For the research purposes, the initial and amended RoO contained in the origin protocols to the trade agreements with the CEEC, the MPC, and the ACP have been analysed, assessing reasons for these reforms and ultimate trade effects.
The main finding is that the EU’s RoO cause trade creation, trade reorientation, or trade suppression depending on their formulation and goals pursued by their introduction. Accordingly, a correlation exists between RoO, trade intensity, and the economic development of a region.
Concerning the CEEC, the MPC, and the ACP the EU initially applied strict and complex RoO which protected the EU’s industries and directed trade in the EU’s favour. However, recent RoO reforms demonstrate that the EU is giving away a protectionist stance by easing the rigid application of RoO to the benefit of smaller economies. RoO is only one of many elements that impact trade. Therefore, the RoO effect on trade shall always be viewed in a broader political and economic framework.
Keywords: rules of origin, cumulation, the Central and Eastern European countries, the
Mediterranean partner countries, developing countries, free trade agreements, “spaghetti bowl”, Pan-European cumulation, Euro-Mediterranean cumulation.
5
INTRODUCTION
Globalization made it profitable for companies to move parts of the manufacturing process to low waged countries, and import least-cost inputs from different regions. As a result, international trade intensified increasing the role of RoO which are at the centre of economic integration1.
RoO establish the nationality of a product which is crucial because different tariff rates apply to products based on their origin. Generally, a foreign product is subject either to preferential treatment pursuant to a free trade agreement (“FTA”) or to most-favoured nations (“MFN”) treatment pursuant Article I of the GATT. Thus, RoO ensure that preferential market access is provided only to products which have the nationality of the beneficiary country2.
The EU is one of the main economic actors which adjusts its trade strategy to the politically changing world. For decades, the EU has been using RoO not only as means to establish the origin of imported goods but also as a political tool tailored to direct trade flow pursuant to its interests.
Therefore, the paper aims to analyse the historical evolution of the EU’s RoO, reasons for these developments, and practical impact on trade and domestic industries. Accordingly, the research question is – what is the role of RoO in the EU’s FTAs and how these RoO impact trade and
domestic industries? The thesis focuses on the analysis of the EU's RoO in trade relations with
the CEEC before they acceded to the EU, because it demonstrates reasons for changes to the traditional RoO approach, and RoO in relation to the MPC, and the ACP because these groups of countries display how RoO can be shaped to achieve different objectives.
To answer the research question, the thesis is structured in the following way.
The first chapter is devoted to the analysis of the concept of RoO. The technical clarification of the term is required for later discussions.
In the second chapter, I look at the historical causes of changes to the traditional EU's RoO policy. In particular, I analyse Europe’s political landscape of the 1990s which led to the creation of the network of trade agreements referred to as the “spaghetti bowl”. It established a complex and ineffective system of RoO which was a leverage point for further changes.
1 Jakob Thinam, Gernot Fiebiger, “Preferential Rules of Origin – A Conceptual Outline, Foreign Trade” (2003)
Vol. 38 Intereconomics, p.138 <
https://www.intereconomics.eu/pdf-download/year/2003/number/3/article/prefential-rules-of-origin-a-conceptual-outline.html> accessed 14 June 2020
6
In the third part, I analyse the new Pan-European RoO created in a response to the "spaghetti
bowl". The Origin Protocol to European Agreement between the EU and the Czech Republic
serves as a basis for comparison between the traditional and modified RoO. Developments in trade are assessed to determine the existence of a link between RoO and trade patterns. I claim that new RoO facilitate trade and, therefore, are beneficial for small economies of the CEEC.
In the fourth part, I assess the development of RoO in the EU’s relation to the MPC. The Origin Protocol to the Euro-Mediterranean Agreement with Morocco serves as a basis for comparison between the traditional RoO and the new Euro-Mediterranean cumulation system (“PEMCS”). The correlation is assessed between the PEMCS and trade intensity in the region. I argue that for now, the PAMCS fails to advance the EU’s goals in the region, therefore, further reforms are expected.
The fifth part focuses on the EU's RoO in the Cotonou Agreement and the General Scheme of Preferences (“GSP”) applied to the ACP. Trade statistics and normative assessment demonstrate that correctly tailored RoO promotes trade and domestic industries of the ACP.
The research is conducted applying three research methods: the legal historical, comparative research, and evaluative research methods. Althought, legal historical method is generally unsettled regarding its scope, objectives, and form3, in this research I engage in historical inquire and cause-effect analysis of EU’s RoO evolution to untie RoO related problems which encouraged subsequent reforms.
The comparative analysis is applied to compare the EU’s traditional RoO with modified identifying differences and similarities. The third chapter provides a comparison of traditional and amended RoO in the Origin Protocol to the Europe Agreement with the Czech Republic - it is chosen as an example to demonstrate the EU’s general approach towards the CEEC since the modified set of RoO was equally applied to all the CEEC. To assess RoO in relation to the MPC, in the fourth chapter I analyse RoO in the Agreement with Morocco which is chosen as an example because it demonstrates not only the EU’s general approach towards the MPC but also particularities in relation to MPC which have been granted full cumulation. With regards to RoO applied to the ACP, the comparison is made between RoO in the GSP system and the
3 Thomas Duve, “Global Legal History: A Methodological Approach” (2017) Oxford Handbooks Online, p.1
< https://www.oxfordhandbooks.com/view/10.1093/oxfordhb/9780199935352.001.0001/oxfordhb-9780199935352-e-25?print=pdf> accessed 8 June 2020
7
Cotonou Agreement since these are main EU’s schemes in trade relations with the developing countries4.
Lastly, evaluative research method is applied to assess the impact of traditional and modified RoO on trade and domestic industries of the CEEC, MPC, and the ACP. Normative standard herein is that modified EU’s RoO induce cost-effective trade flow to the benefit of smaller economies, including producers and workers therein.
Accordingly, the analysis of historical events reveals reasons for subsequent amendments of RoO, whereas normative assessment demonstrates the trade impact of modifications. On its part, the comparison between old and new RoO distinguishes modifications that caused positive trade impact. Findings lead to the conclusion that EUs RoO induce either trade creation, trade reorientation, or trade suppression. Overall, I claim that improved EU’s RoO satisfy the normative standard.
4 Commission, “The Countries of Africa, the Caribbean and the Pacific” (ACP) (2020)
< https://ec.europa.eu/taxation_customs/business/calculation-customs-duties/rules-origin/introduction/countries-africa-caribbean-pacific-acp_en> accessed 21 July 2020
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1.
The Function of Rules of Origin
RoO is an indispensable element of preferential trade agreements. RoO prescribe conditions under which a product is granted economic nationality based on which it is eligible either to preferential or to the MFN treatment5. RoO are complex and technical, therefore, the first section provides the theoretical analysis of the concept required for further discussions.
Although there is no binding international approach towards the determination of a product’s origin, a range of various methodologies has developed (see Table No 1). The main distinction is between “wholly produced” and “sufficiently transformed” products, that is, products made up of different parts obtained in various countries. The first category is relatively straightforward - goods are wholly produced in a beneficiary country if materials of foreign origin are not employed in their production. However, the “sufficient transformation” requirement raises further questions6. There is no universal threshold of “sufficient
transformation”, moreover, different products require different transformation levels to be
conferred origin. Nevertheless, the main methods of sufficient transformation are 1) the change of tariff heading (“CTH”), 2) the value-added, and 3) specific process criterion7.
(1) The CTH provides that a product is sufficiently processed when it is classified in a 4-digit heading of the Harmonised System Nomenclature (“HS”). For example, the production of a straw basket is classified under heading 4602 of the HS. The catalogue sets out the condition for the whole Chapter 46: "manufacture in which all the materials used are
classified within a heading other than that of the product8". Since the basket falls under 4602, whereas the straw material under 1401, the origin requirement of a straw basket is fulfilled9.
(2) The value-added criterion establishes a certain value-added percentage of a product’s ex-works price which must be of the local origin10. For instance, the unit ex-price of the toy
5 Tralac, “A basic guide to Rules of Origin with focus on the EU system” (2010) Trade law centre for South
Africa, p. 1 <https://www.tralac.org/images/docs/6999/sbt-roo-workshop-cape- town-march-2010.pdf> accessed 12 June 2020
6 UNCTAD, “Rules of Origin and Origin Procedures Applicable to Exports from Least Developed Countries”
(2011) p.3 < https://unctad.org/en/Docs/ditctncd20094_en.pdf> accessed 11 June 2020
7 Eckart Naumann, “Rules of Origin in EU-ACP Economic Partnership Agreements” (2010) ICTSD EPAs and
Regional Programme paper No 7, 104 <https://www.files.ethz.ch/isn/139232/naumann_web_final_opt.pdf> accessed 17 June 2020
8 International Convention on the Harmonized Commodity Description and Coding System [1987] OJ L 198 9 Commission, “The EU's rules of origin for the Generalised System of Preferences, A Guide for Users” (2010),
p. 12 < https://ec.europa.eu/taxation_customs/business/calculation-customs-duties/rules-origin/general-aspects-preferential-origin/a-guide-users-gsp-rules-origin_en > accessed 20 April 2020
10 Olivier Cadot, Calvin Djiofack, and Jaime de Melo, “Trade Preferences and Rules Of Origin: The Economic
9
car is EUR 100, and the value of the foreign toy car components is EUR 65. The product list provides that the value of foreign inputs in the toy car shall not exceed 70%. Thus, the toy car satisfies the origin criterion11.
(3) The specific process criterion provides for specific production stages that have to be performed in a beneficiary country. For instance, for a garment to be considered originating, the weaving of yarn and all subsequent production stages must be performed in a beneficiary country12.
The EU’s RoO are product specific. Therefore, the origin of some products is determined based on one method, but in some cases methods are combined13.
Table No 1 Origin-conferring procedure
Under certain regimes, there are exceptions to the substantial transformation requirement. The most common exception is tolerance or de minimis provisions, which set the threshold of permitted use of non-originating materials, and provisions on “non-qualifying operations” not regarded as the substantial transformation, for instance, packaging or a mixture of materials14.
Although the main principles of RoO are that all processing operations are performed in a beneficiary country, there are certain exceptions. The concept to determine to what extent the use of foreign inputs is permitted is known as cumulation15. Rules of cumulation (“ROC”) are
développement, p.99 <https://www.cairn.info/revue-d-economie-du-developpement-2008-5-page-93.htm> accessed 17 June 2020
11 UNCTAD, “Generalized System of Preferences: Handbook on the Rules of Origin of the European Union”
(2013), p.6 <https://unctad.org/en/PublicationsLibrary/itcdtsbmisc25rev3add1_en.pdf> accessed 21 July 2020
12 Commission (n 8) p.13
13 M. Ataman Aksoy, John C. Beghin, “Global Agricultural trade and developing countries” (2005) World
Bank, p.4-6 <https://openknowledge.worldbank.org/handle/10986/7464> accessed 9 June 2020
14 UNCTAD (n 6) p.4-6 15 Nauman (n 7) p.105 Product Procedural requirements Origin criteria Wholly obtained or produced Substantially transformed goods Methods Change of tariff heading Value-added Specific process Exceptions Tolerance rules Non-qualifying operation
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conditions fulfillment of which ensures that components imported from a country other than an exporting country are considered originating in an exporting country, therefore, the final product is not deprived of origin16.
ROC in FTAs are bilateral, diagonal, or full, some FTAs contain no ROC:
(1) Most restrictive treatment results from FTAs with no cumulation. In this case, the preference is provided exclusively to wholly obtained products of country A. Thus, country A cannot process components of country B without losing preferential origin17.
(2) The second most restrictive degree of cumulation is bilateral cumulation which allows producers to use inputs sourced in the preference receiving country. Thus, country A is allowed to use inputs only from country A and B for the final product to preserve the nationality of country A;
(3) Diagonal cumulation is broader providing that a final product can be made of components imported from any of the preferential regime parties to which the same RoO are applicable;
(4) Full cumulation allows producers to make use of components imported from the FTA parties regardless of whether or not inputs benefit from the preference18.
Thus, bilateral cumulation is the most restrictive, whereas full cumulation is the most flexible form of cumulation which allows a rational choice of suppliers.
In conclusion, the application of RoO is product-specific and technically complex. However,
RoO is not only a technical tool but also a political instrument to ensure trade flow in the desired direction to the benefit or detriment of certain countries as discussed throughout this paper.
16 Thinam (n 1) p.144-145
17 James H. Mathis, “Regional Trade Agreements in the GATT/WTO” (T.M.C Asser Press 2002) p.154 18 Pamela Bomnarda and Elisa Gamberoni, “Firm Heterogeneity, Rules of Origin and Rules of Cumulation”
(2009) Graduate Institute of International and Development Studies, p.9 <
https://hal.archives-ouvertes.fr/file/index/docid/874949/filename/Firm_Heterogeneity_Rules_of_Origin_and_Rules_of_Cumulation. pdf> accessed 21 July 2020
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2.
Modern Rules of Origin of the EU – the Result of Political
Developments and Economic Necessity
Already in the 1970s, the European Community (since 1992 the EU) adopted the basic set of RoO based on the CTH and the list of product-specific RoO19. The CTH anticipated that
non-originating materials do not fall in the same chapter as the final product, therefore, RoO set the minimum requirement of transformation for non-originating materials to be classified under the same heading as the final product20.
However, the same set of RoO was not applied to all the EU’s FTAs with third countries21. To
the opposite, the EU applied RoO specifically tailored to its interests in relation to different countries. Accordingly, traditionally the EU’s trade policy has been complex, whereas in the 1990s it reached the peak of disorder22 indicating a pressing need for changes.
Therefore, the next chapter analyses the historical development of the EU's RoO in light of the political landscape of the 1990s. It, in turn, is required to comprehend the trade effect caused by RoO. Moreover, insight into the historical development is valuable for further analysis of the gradual change in the EU’s RoO approach.
2.1. The political landscape of the 1990s affecting the EU's rules of origin
In the late 1980s, the EU reached a significant level of integration with the European Free Trade Association (“the EFTA”) countries (Switzerland, Norway, Liechtenstein, and Iceland) and the EFTA countries which joined the EU in 1994 (Austria, Finland, and Sweden)23.
Duty-free trading with the EFTA was ensured since the min-1970s when the EU concluded separate FTAs with each of the EFTA members. On 1 January 1994 the EU, Norway, Liechtenstein, and Iceland entered into the European Economic Area Agreement (“EEA”) deepening the level of integration24. As a result, the single market between the EU and three EFTA countries was established providing the free movement of goods, services, persons, and capital. Until now relations between the EU and Switzerland are governed by the FTA of
19 Inama (n 2) p.235
20 WTO Committee on Rules of Origin, “Preferential rules of origin for least-developed countries, Rules of
origin based on the criterion of change of tariff classification” (2018) G/RO/W/178, p.2
21 Inama (n 2) p.235
22 Richard Baldwin, “Lessons from the European Spaghetti bowl” (2013) ADBI Working Paper No 148, p. 3
<https://www.adb.org/sites/default/files/publication/156273/adbi-wp418.pdf> accessed: 1 June 2020
23 Ibid p.3-4
24 EFTA Secretariat, “Free Movement of Goods” (August 2014), available:
<https://www.efta.int/media/publications/fact-sheets/EEA-factsheets/GoodsFactSheet.pdf> accessed: 14 April 2020
12
197225. Consequently, the single market excluded the application of RoO between the EU and the EFTA.
The RoO related challenges occurred in the early 1990s following the collapse of the Soviet Union and the emergence of the CEEC26. To establish fruitful trade relations with the CEEC,
the EU concluded a network of trade agreements. However, RoO contained in FTAs with the CEEC were not identical causing trade distortion and restrictions for the European manufacturers.
The situation in Europe in the1990s with regards to RoO is referred to as the “spaghetti bowl” effect27. Therefore, the next subchapter is devoted to the analyses of the “spaghetti bowl”
phenomena which is required for further assessment of the RoO impact on trade and domestic industries.
2.2. European "spaghetti bowl" of the 1990s
Before the analyses of the “spaghetti bowl”, the abstract concept requires explanation. The European “spaghetti bowl" consisted of three aspects. Firstly, Association Agreements concluded by the EU with each of the CEEC. Secondly, separate bilateral agreements between the EFTA and the CEEC. Thirdly, FTAs concluded among some of the CEEC, the most important being the CEFTA of 199128.
Hence, complexity was caused by the fact that the EU-CEEC and the EFTA-CEEC FTAs provided for bilateral cumulation and contained different sets of RoO. Whereas the CEEC-CEEC agreements contained different RoO than FTAs with the EU and the EFTA. Consequently, European manufacturers faced a fragmented non-cumulative system that disrupted their abilities to look for lower-cost inputs across Europe29.
Bilateral cumulation used by the EU in FTAs was an instrument to protect the EU's domestic industries30 by tailoring bilateral concessions according to the EU interests. In the 1990s the EU’s trade relations with its partners are defined as hub-and-spoke bilateralism (the EU as a
25 EFTA Secretariat (n 24)
26 The CEEC comprised of Albania, Bulgaria, Croatia, the Czech Republic, Hungary, Poland, Romania, the
Slovak Republic, Slovenia, and the three Baltic States: Estonia, Latvia, and Lithuania (OECD glossary <https://stats.oecd.org/glossary/detail.asp?ID=303> accessed: 15 April 2020
27 Patricia Augier, Michael Gasiorek and Charles Lai Tong, “The impact of rules of origin on trade flows” (2005) Vol. 20 (43) p.581 Economic Policy <
https://academic.oup.com/economicpolicy/article-abstract/20/43/568/2918706> accessed 7 June 2020
28 Baldwin (n 22) p.4-5 29 Mathis (n 17) p.165
30 Loewen Howard, Zorob Anja, “Initiatives of Regional Integration in Asia in Comparative Perspective,
13
large economy - the “hub”, whereas the smaller economies are “spokes”)31. In the 1990s the EU had concluded bilateral FTAs with such spokes as Latvia, Estonia, Iceland, Hungary, etc. However, only a few spokes concluded trade deals among themselves (for instance, the EFTA).
The effect of trade arrangements containing bilateral cumulation was the reduction of trade among spokes due to the following: (1) spokes provided the EU based companies with the preferential access to the spoke’s market not granting the same preference to other spokes32; (2)
bilateral cumulation induced supply switching from third countries in favour of the EU33.
Consequently, the EU’s bilateral FTAs increased trade between the FTA parties leading to trade creation, nevertheless, creating a comparative disadvantage to non-parties caused by trade diversion34.
An example is illustrative: In the 1990s the EU’s had a bilateral FTA with Hungary and Poland. In case the EU’s fabric industry competes with Polish, it is beneficial for the EU to apply bilateral cumulation in the FTA with Hungary, which anticipates that to benefit from the preference in the production of shirts Hungary can use only locally or the EU’s sourced fabric. Thus, RoO induced Hungarian shirt manufacturers to purchase the EU’s fabric instead of Polish35. As a result, the effect of bilateral cumulation resembles Hungarian tariff on Polish fabric manufacturers causing a decrease of Polish export to the benefit of the EU's domestic manufacturers36.
Despite difficulties to quality for preferential treatment, it is merely a volunteer option if a company can satisfy origin-conferring requirements37. An alternative option is importing at the MFN rate. Therefore, the question arises - do the benefits of compliance with RoO exceed those of the trading at a non-preferential rate? An answer to this question is not straightforward as discussed further.
2.3. The decline of the EU's bilateral cumulation
Technological innovations of the 1990s - an increase in speed and reduction of costs of transportation and communication - eliminated distance-related problems. This, in turn,
31 Augier (n 27) p.578 32 Ibid p.580
33 Ibid p.578
34 Aditya Mattoo, Alen Mulabdic and Michele Ruta, “Trade Creation and Trade Diversion in Deep
Agreements” (2017) Working Paper No 8206, p.2
<http://documents1.worldbank.org/curated/en/208101506520778449/pdf/WPS8206.pdf> accessed 12 June 2020
35 Baldwin (n 22) p.5 36 Ibid
37UNCTAD, “The Use of the EU’s Free Trade Agreements, Export and Import Utilization of Preferential
Tariffs” (2018) UNCTAD study, p.2 <https://unctad.org/en/PublicationsLibrary/EU_2017d1_en.pdf> accessed 3 June 2020
14
promoted global integration of products, capital, and labour contributing to a more efficient distribution of economic resources. Such changes increased competition providing consumers with a greater choice of goods at lower prices38.
Consequently, to preserve a market share, producers were forced to seek the cheapest inputs. It necessitated the development of the complex supply network spreading across many countries. Thus, it was lucrative for European companies to off-shore parts of the manufacturing process to low-income CEEC39.
However, the "spaghetti bowl” created obstacles to the efficient optimization of the manufacturing process. The automobile sector provides an example of the difficulties faced. The automobile industry is dependent on local distributors of components for the production and later for the replacement. However, distributors cannot perceive the EU, the CEEC, and the EFTA as one preferential market, because auto parts which satisfied RoO under one FTA might be considered non-originating under RoO of another agreement40.
Accordingly, RoO harmed companies in three different ways: (1) RoO curtailed the number of sectors which were initially protected since many EU’s manufacturers relocated to low-wage countries, (2) bilateral cumulation prevented the import of least-cost inputs, thus, companies which initially lobbied for protectionism were placed into the victim's position41; and (3) compliance with RoO created administrative complexity and costs because in the mid-1990s in Europe about 60 bilateral FTAs with different sets of RoO were concluded42.
Some final goods are made out of components that pass thought several countries during their manufacturing process. Every component could lose its nationality every time it enters a new country. Therefore, it became extremely complicated for companies to estimate how outsourcing of inputs would alter the nationality of a final product43.
In this light, let's recall the example of the EU's shirt producer which previously benefited from the EU's bilateral cumulation. In case the producer relocates to Hungary, RoO contained in the EU-Hungary FTA would induce it to purchase fabric from the EU although purchasing from Polish producer is cheaper. Moreover, the unbundling to Hungary subjects the company to different RoO, since the shipment of products to the EU is governed by the EU-Hungarian RoO,
38 WTO, “Globalization and Trade” (2008) World Trade Report, p.20-21
<https://www.wto.org/english/res_e/booksp_e/anrep_e/wtr08-2b_e.pdf> accessed: 17 April 2020
39 Baldwin (n 22) p.7
40 Commission, “Communication on the Unification of Rules of Origin in Preferential Trade Between the
Community, the Central And East European Countries and the EFTA Countries” SEC (94) 1897 final, p.2-3
41 Baldwin (n 22) p.7 42 Augier (n 27) p.581 43 Ibid
15
whereas shipment to Poland by Hungarian-Polish RoO. Respectively, compliance with two types of RoO was an expensive and time-consuming process requiring two different sets of documents44.
Facing myriad obstacles, many companies acknowledged that costs of compliance with RoO exceed the costs of importing at the MFN rate45. Therefore, instead of applying for preferential treatment, many companies gave priority to the MFN treatment. Moreover, during the Uruguay Round, the EU reduced its import tariffs on average by 37% for all WTO members46. Therefore,
the preferential treatment under FTAs lost its relevance.
In conclusion, the complexity and restrictiveness of RoO in the EU’s bilateral FTAs of the
1990s contradicted the economic reality of the unbundling process. As a consequence, the application of RoO was gradually declining. Such a situation created a fertile ground for the development of a new approach towards RoO as discussed further.
44 Baldwin (n 22) p.7 45 Augier (n 27) p.577
46 Lucian Cernat and Daphne Gerard, “Consumer benefit from EU trade liberalization: How much did we save
since the Uruguay Round?” (2018) p.5
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3.
Creation of the Pan-European Rules of Origin
Challenges of the “spaghetti bowl” encouraged European businesses to lobby for the RoO reform47. As a result, in the Communication of 1994, the Commission proposed a uniform set
of RoO48. Thus, the following chapter is devoted to the reform proposal which led to the establishment of the “Pan-European Rules of Origin” system which modernized the EU’s trading relations also with partners outside Europe (see Chapter 4). To discern the practical implications of the reform, the chapter provides the analysis of RoO contained in the Origin Protocol to the European Agreement with the Czech Republic.
3.1. The proposal of the European Commission
The Commission acknowledged the economic disadvantages of the EU’s cumulation system. Moreover, the EU’s businesses relocated abroad and suffering from the complexity of RoO lobbied for diagonal cumulation. Also, the EU, the EFTA, and CEEC governments called for the introduction of a common RoO system49. Thus, the ultimate goal of the RoO reform was extended cumulation system and harmonization to promote trade between different origin “blocs”50.
The Commission emphasized benefits of the RoO reform: 1) improved the EU’s and the EFTA’s market access for the CEEC originating products; 2) deepened collaboration between the EU, the CEEC, and the EFTA; 3) extended sourcing options and enhanced intra-CEEC trade, and 4) opportunities to implement economies of scale by coordinating activities across Europe51. Further, the Commission identified three stages of a progressive strategy towards the unified RoO.
The first stage requires simplification of RoO by extending diagonal cumulation. In other
words, extension presupposed that all the CEEC countries sign the agreement on identical RoO52.
The second stage requires the introduction of diagonal cumulation between the EU and the
EFTA countries. Afterward, both territories would be considered as one territory for the RoO application and trade purposes. This stage requires the introduction of no-drawback provisions.
47 Augier (n 27) p.581 48 Inama (n 2) p.236 49 Augier (n 27) p.581 50 Commission (n 40) p.6 51 Ibid 52 Ibid
17
Duty drawback provides for the recovery of import duty paid for non-origination goods if they are used for the production of a subsequently exported final product53. Initially, the “no-drawback” provision was present in the EU-EFTA agreements but excluded from the EU-CEEC agreements. As a general rule, exclusion of the “no-drawback” rule locates third country producers in a more beneficial competition position than producers of the processing country encouraging tariff circumvention and discrimination of economic operators54.
The final third stage anticipates the establishment of full cumulation into all agreements. As a
result, the whole of Europe would be considered a free trade area free from any artificial origin barriers55.
The Commission noted that the complexity of RoO stems also from the fact that origin protocols enclosed product-specific list which sets out conditions for a product to be considered
“sufficiently transformed”56. Simplification and harmonization of a product list would reduce
confusion and discrepancies among exporters.
Thus, the RoO reform proposal was the basis for the establishment of the Pan-European RoO in 1997. Since then the Association Agreements of the EU have undergone modifications - origin protocols in every trade agreement have been replaced by the Pan-European RoO. Within this framework, the EU adopted the “single list” which unified product-specific RoO across all agreements57. To understand the effect of the reform, the next part focuses on the developments of RoO as the example taking the Europe Agreement with the Czech Republic.
3.2. Practical analysis: the development of rules of origin in the trade agreement with the Czech Republic
In 1993 the EU concluded the Europe Agreement with the Czech Republic. The Agreement contained Protocol 4 concerning the definition of the concept of “origination products” (“Protocol”), which was then amended in 1996 (by the Decision No 3/96) and in 1998 (by the Decision No 6/98) (“Amended Protocols”). The impact of the reform is examined hereinafter (see Table 2).
The Protocol provided for bilateral cumulation between the EU and the Czech Republic encouraging trade between parties. Article 2 of Protocol stipulated that materials originating in one party are considered originating in another party providing that working operations
53 Thinam (n 1) p.142 54 Inama (n 2) p.252 55 Commission (n 40) p.8 56 Ibid p.3 57 Cadot (n 10) p.94
18
performed therein go beyond insufficient operations. Non-qualifying operations listed in Article 5(3) of Protocol are, for instance, operations to preserve goods during transportation, changing of packaging, or affixing of labels58. Also, Amended Protocols contain bilateral cumulation and a list of insufficient working operations.
In addition to bilateral cumulation with the EU, Article 3 of Protocol provided for cumulation with Poland, Hungary, and the Slovak Republic, because identical RoO were applied among these countries, the Czech Republic and the EU59. Therefore, diagonal cumulation in practice
was possible, however, with a limited number of countries.
Article 4.1 of Amended Protocol of 1996 extended cumulation stipulating that “materials
originating in Poland, Hungary, the Slovak Republic, Bulgaria, Romania, Latvia, Lithuania, Estonia, Slovenia, Iceland, Norway or Switzerland […] shall be considered as originating in the Community or the Czech Republic when incorporated into a product obtained there60”.
Accordingly, diagonal cumulation extends the list of partner-countries materials from which the Czech companies could import not compromising the Czech nationality of a final good. Thus, the extended diagonal cumulation encouraged the spokes-spokes trade.
Changes occurred also with regards to the allocation of origin. Since the origin-conferring criterion is product specific, only general considerations are provided below.
The Protocol provided various methods for origin allocation purposes. The traditional method was the CTH (Article 5.1 of Protocol) which stipulated that non-originating inputs (materials of the EU origin) obtain the Czech origin if they are sufficiently processed, that is, “when the
obtained product is classified in a heading which is different from that in which all the non-originating materials used in its manufacturing are classified61”. The CTH was not the only
method employed. Specific products listed in Annex II to Protocol were subject to the value-added method62.
Further, the value-added method was applied also to products originating in Poland, Hungary, and the Slovak Republic. Article 3.2 of Protocol set out that product is of the EU’s or the Czech origin when “the value-added there exceeds the value of the materials used originating in
Poland, Hungary or the Slovak Republic63”. For the calculation of added value materials of
58 Protocol 4 to the Europe Agreement establishing an association between the European Communities and their
Member States and the Czech Republic [1994] OJ L 360, Art.5(3)
59 Ibid Art. 3(4)
60 Decision No 3/96 of the Association Council of 29 November 1996 amending Protocol 4 to the Europe
Agreement between the European Communities and the Czech Republic [1996] OJ L 343, Art. 4
61 Protocol 4 (n 58) Art. 5.1 62 Ibid Art. 5.2
19
Polish, Hungarian or Slovak origin which have undergone sufficient operations in the EU or the Czech Republic were not taken into consideration64.
Some origin-conferring method modifications were introduced by the Amended Protocol of 1996. The preamble of the Decision 3/96 stressed that “the presentation of the list of processing
rules could be improved by extending it to cover all headings of the [HS]65”. Therefore, the
undertaken approach was the extension of the list of processing rules (the “product list”) which sets out requirements for non-originating materials to acquire the EU’s or Czech origin66. For
some goods, the requirement was the CTH, for others’ performance of certain working operations. Since the product list contained all the CTH requirements under the HS, it was supposed to be more convenient in its application. Moreover, the same product list was applied across all EU's agreements preventing that the product is allocated the origin in one country, but deprived of it in another67.
Notwithstanding the introduction of a simplified product list, in case non-originating materials were incorporated into the final product without undergoing prior origin-conferring procession, the product was considered originating in the EU or the Czech Republic if the valued added there exceeded the value of non-originating materials68.
The allocation of origin is explained by the hypothetical example below.
Example: different parts of a suit are produced in two countries and packed in the Czech
Republic. The value of the skirt originating in Poland is EUR 180; the value of the jacket produced in Estonia is EUR 100. The value of operations performed in the Czech Republic (packing) is EUR 2. The price of the ex-works of the final commodity is EUR 330. To determine the origin, the value-added in the Czech Republic is compared with the values of other components: value-added in the Czech Republic (including EUR 2 for the packaging = EUR 330 (ex-works value) - (minus) EUR 280 (180 + 100) = EUR 50 = the Czech “added value”). The Polish value (180) exceeds the Czech added value and the value of other components. Consequently, the final product is of Polish origin69.
64 Ibid Art. 3.2
65 Decision No 3/96 (n 60) 66 Ibid Art. 6.1
67 Commission (n 40) p.2-3
68 Decision No 6/98 of the Association Council of 21 December 1998 amending Protocol 4 to the Europe
Agreement the European Communities and the Czech Republic [1999] OJ L 35, Art.3-4
69 Irish Tax and Customs, “Tax and Duty Manual: Customs Manual on Preferential Origin” (2019), p.20
<https://www.revenue.ie/en/tax-professionals/tdm/customs/origin/preferential-origin.pdf> accessed: 21 April 2020
20
Accordingly, it can be seen that the allocation of origin is a complex and technical procedure, which employs different methods varying from product to product. Therefore, the Commission expressed concerns at that time that occasionally preferential treatment is granted to non-eligible products based on wrong tariff classification, false information on custom values, or circumvention of RoO70. The Pan-European RoO system attempted to address these concerns.
Proceeding with the amendments to RoO, the preamble of the Decision 3/96 stipulates that “certain processing requirements for non-originating materials to obtain originating status
need to be amended to take account of the evolution of processing techniques71". Such endeavour resulted not only in a simplified product list but also in the introduction of tolerance rules. Accordingly, Article 6.2 of Amended Protocol of 1996 permitted the use of non-originating materials in the amount of 10% of the ex-works price72 granting certain flexibility to producers.
Table No 2 Comparison between RoO in the Europe Agreement with Czech Republic Origin Protocol of 1994 Origin Protocol of 1998
Cumulation
Bilateral cumulation with the EU, diagonal with Poland,
Hungary, and the Slovak Republic
Diagonal cumulation with the EU, and 15 other countries
Substantial transformation
methods
The CTH, value-added, specific process criteria
Diverse product-specific RoO in FTAs
“Single list” - unified product-specific RoO in all FTAs
No-drawback rule No Yes
Tolerance rule No Yes
Principle of
territoriality Yes
Further, Protocol and Amended Protocols incorporate the principle of territoriality which anticipates that once an originating product leaves the EU or the Czech Republic, it loses its origin73. The exception is situations when a product returned to the EU or the Czech Republic is the same as the exported one and it had not undergone any operations exceeding what is
70 Commission, “Communication from the Commission on the Management of Preferential Tariff Arrangements”
COM (97) 402 final, p.15
71 Decision No 3/96 (n 60) 72 Ibid Art. 6.2
21
necessary for its preservation74. The exception is provided because the direct transportation of products is not always possible - transit takes place through third countries where unloading and reloading are performed. Thus, under rigid conditions, the principle of territoriality permits fragmentation of a production process not depriving a product of origin75.
An innovation introduced under Article 15 of Amended Protocols is the “no-drawback” rule, that is, the prohibition of exemption from customs duties of whatever kind76. The effect of the
“no-drawback” rule is explained by the hypothetical example.
Example: alternators for export purposes are manufactured in Poland from materials of
Taiwanese origin. The absence of the “no-drawback” rule means that customs duties are not imposed on Taiwanese materials imported into Poland. Neither any custom duties are charged in the EU since alternators are of Polish origin. In case alternators were constructed in the EU for the EU’s market, Taiwanese materials would be charged 5.6% customs duty. Equally, Polish producers would pay 5.6% customs duty, if the final destination of alternators would be Poland. The EU would release itself from custom duty if the product manufactured therein would be intended for the Polish market77.
The example demonstrates that the absence of the “no-drawback” rule encourages export-oriented companies to import components from abroad or move their production to foreign countries. Accordingly, the prohibition of duty relief promotes the use of locally sourced intermediates stimulating domestic industries.
Overall, the Pan-European RoO provide producers with greater flexibility and trade openness. To discern the actual effect, the next section discussed trade impact of the RoO reform.
3.3. Trade impact of the Pan-European rules of origin
Despite the benefits of the Pan-European RoO, they have a two-fold effect as there are winners and losers of the reform. Restrictive RoO were beneficial to EU’s industries which imported little from the CEEC and/or did not unbundle. Such domestic industries did not lobby for diagonal cumulation as it could decrease their EU’s market share to the benefit of foreign producers78. Thus, by the RoO reform, the EU opened up its protected market for competition harming certain local industries and encouraging companies to relocate. However, the overall
74 Ibid
75 Maria Donner Abreu, “Preferential Rules of Origin in Regional Trade Agreements” (2013) WTO Working
Paper ERSD-2013-05, p.13-14 <https://www.wto.org/english/res_e/reser_e/ersd201305_e.pdf> accessed 18 June 2020
76 Decision No 3/96 (n 60) Article 15 77 Commission (n 40) p.4
22
trend of the 1990s was a differentiation of operations, therefore, the majority of the EU’s industries benefited from the reform as it permitted a flexible and rational choice of resources. Although EU’s businesses, in general, were winners, the gain of the EU as a trading block is debatable, because the CEEC’s import from the EU decreased79. Besides, according to Trump’s
narrative, RoO reform harmed the EU since jobs previously held by Europeans within the EU moved to foreign lands80. Nevertheless, in the EU’s RoO reform I rather discern reflection of
the establishment narrative which promotes openness of trade arguing that it brings “higher
productivity, greater competition, lower prices, and improved living standards81”. Thus, even
though the trade is rearranged, everyone is involved in making the process more productive82.
Indeed, the CEEC benefited from the reform since domestic industries of the CEEC grew as a result of increased demand and intensified spokes-spokes trade83. Moreover, the Pan-European RoO encouraged the development of EU’s subsidiaries in the CEEC for sales, distribution, or low value-added manufacturing purposes stimulating also the development of domestic industries of the CEEC84. As the Pan-European scheme transformed the EU into a harmonized, integrated trade area, it impaired the interests of exporters of non-member countries urging other countries to join. Thus, the RoO reform promoted further integration85.
Overall, although RoO affects countries, industries, and individual products differently, the general finding is that the Pan-European RoO have a positive trade effect. The trade between the CEEC increased by 22%86. The absence of cumulation would decrease trade flow between the EU’s spokes by 25% to 70% depending on the period. Cumulation mainly affected trade in intermediate goods than finalized products87.
Currently, the EU is a customs union consisting of 27 members (the majority of the CEEC joined the EU), therefore, there are no duties or customs formalities between its members. Accordingly, the EU has achieved its goal of full cumulation becoming a single territory for
79 Jong-Kil Kim, Pierre-Bruno Ruffini, “Corporate Strategies in the Age of Regional Integration” (Edward Elgar
Publishing Ltd 2007), p.260
80 Nicolas Lamp “How Should We think about the Winners and Losers from Globalization?” (2019) Queen’s
University Legal Research Paper No 2018-102, p.9
<https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3290590 > accessed: 22 July 2020
81 Ibid p.17 82 Ibid
83 Jong-Kil (n 79) p.260
84 Frank Mc.Donald, Heinz Tuselmann and Colin Wheeler, “International Business: Adjusting to New
Challenges and opportunities” (Palgrave Macmillan 2002), p.124
85 OECD, “European Union” (2009) Economic Surveys Vol.13, p.139-140
<http://www.oecd.org/economy/surveys/European-union-2018-OECD-economic-survey-overview.pdf > accessed 18 June 2020
86 Augier (n 27) p.606 87 Ibid
23
trade purposes. Therefore, once custom formalities have been performed in one EU member, then the product is considered to be in “free circulation” in the EU88.
In conclusion, the EU's RoO have developed from trade-restrictive to a more liberal,
harmonized, and trade facilitating system. The main features of the Pan-European RoO are diagonal cumulation inducing more rational utilization of resources, increased flexibility in the use of non-origination materials, and simplification of the origin-conferring procedures. The RoO reform improved trade flow and benefited smaller economies of the CEEC. Lessons learned from trade relations with the CEEC are a valuable basis for EU’s trade policy with other countries as discussed further.
24
4.
The Pan-Euro-Mediterranean Cumulation of Origin
After the collapse of the Soviet Union, the EU started to pay attention to the Mediterranean neighbourhood89. Notable changes in the EU's relations with the MPC (“Euro-MED” relation)
took place in the mid-1990s following the Barcelona Process the aim of which was the promotion of prosperity of the MPC by deepening integration90.
The Barcelona Declaration of 1995 called for the conclusion of the new Euro-Mediterranean Agreements and FTAs between the EU and the MPC91. Thus, since 1995 the EU has entered into Association Agreements with such countries as Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, and Tunisia92. The main goal of these agreements was bilateral trade liberalization through reduced tariffs and the harmonization of certain standards93.
Recent developments in the Euro-MED trade relations speed up, therefore, the next chapter is devoted to the EU's policy towards RoO in relation to the MPC. The goal is to comprehend the RoO reform, reasons for that, and the ultimate trade impact.
4.1. Role of rule of origin in Euro-Mediterranean trade relations
RoO can be used either to restrict or liberalize trade adjusting it to the interests of the party with greater bargaining power. Overall, in relation to the EU, the MPC do not possess considerable bargaining power. For instance, for Morocco and Tunisia, the EU is the main, whereas for the EU the MPC is the fifth trading partner. In addition, dependency on the EU increases because the MPC are unable to establish a common position94.
Thus, in relation to the MPC, the EU has altered its policy in accordance with objectives pursued. Prior to the analyses of the Euro-MED RoO, it is valuable to understand the trade effect caused by the traditional bilateral cumulation which has brought positive and negative effects.
The positive impact is illustrated by the hypothetical example below.
89Stefanie Georgakis Abbott, “The EU and the Middle East: From the Euro-Mediterranean Partnership to
the Union for the Mediterranean” (2018) E-International Relations < https://www.e-ir.info/2018/11/28/the-eu-and-the-middle-east-from-the-euro-mediterranean-partnership-to-the-union-for-the-mediterranean/> accessed: 17 April 2020
90 Luc De Wulf and Maryla Maliszewska, “European Integration in the Euro-Mediterranean Region” (2009)
Final Report of the CASE, p.22 <
https://www.ceps.eu/wp-content/uploads/2013/05/79e41509407be76e8f_1.pdf> accessed 11 June 2020
91 Barcelona declaration p.4 92 Wulf (n 90) p.23
93 Augier (n 27) p.1449
94 Ferdi De Ville, Vicky Reynaert, “The Euro-Mediterranean Free Trade Area: An Evaluation On The Eve of
The (Missed) Deadline’ (2010) Vol.2 L'Europe en formation, p.202 < https://www.cairn.info/revue-l-europe-en-formation-2010-2-page-193.htm> accessed 2 July 2020
25
Example: the EU, Morocco, and Norway’s are trading partners. The EU and Morocco entered
into the FTA. RoO are required to preclude Norway from exporting its production to Morocco through the EU. That is, RoO prevent trade deflection caused in case a non-beneficiary country imports its commodities into the free trade area through the country with the lowest external tariff95. Thus, Norway might attempt to import its products into Morocco via the EU if the external tariff of the EU is lower than of Morocco. RoO ensure that trade rules are observed.
Despite the positive impact of RoO, negative consequences are present as illustrated by the hypothetical example below.
Example: RoO in the EU-Morocco FTA provides that a commodity is originating in Morocco
if the value of non-originating inputs is below 40%. If prior to the conclusion of the FTA Morocco purchased inputs from Norway in the amount of 50% of the product’s value, now it is induced to change the source of supply either to domestic production or to the EU’s intermediates.
Consequently, RoO create a two-fold effect: 1) trade suppression if Morocco shifts to domestic production, or 2) trade diversion if Morocco orientates towards the EU96. Regardless of the choice, intermediates purchased likely will be of a higher price, thus, the price of a final commodity will increase.
The negative impact of RoO could, nevertheless, be remedied by appropriate cumulation. Traditionally the EU-MPC Association Agreements stipulated bilateral cumulation with the exception of the agreement with Morocco, Tunisia, and Algeria that contained full cumulation since 197897.
As in the case of the CEEC, bilateral cumulation facilitated hub-and-spoke trade since the MPC (“spokes”) directed its trade closer to the EU (the “hub”). Therefore, the establishment of the intraregional supply chain and regional cooperation was impeded, whereas the dependency on the EU grew98. To give an example, pursuant to bilateral cumulation Morocco could employ
the EUs components and export the final commodity back to the EU. Nevertheless, in case the final product incorporates materials from Egypt, these materials are considered non-originating, therefore, the final product might be deprived of preferential access to the EU99. At the same
95Augier (n 27) p.1450
96Ibid p.1452
97 Timo Behr, “Regional Integration in the Mediterranean Moving out of the Deadlock?’ Notre Europe (2010)
p.60-61 <
https://institutdelors.eu/wp-content/uploads/2018/01/regionalintegrationmediterraneanbehrnemay10.pdf> accessed 18 June 2020
98 Behr (n 97) p.61
99 Michael Gasiorek, “The impact of the diagonal cumulation of Rules of origin in the context of Euro-Med
http://www.abhatoo.net.ma/maalama-26
time, if the same inputs are exported from Egypt to the EU, it can be granted duty-free entry pursuant bilateral cumulation contained the EU-Egypt agreement. Thus, bilateral cumulation considerably confined inter-regional trade.
To remedy the situation, in 2002 the European Council extended the Pan-European cumulation system to the Euro-MED partnership. Origin protocols in Euro-MED agreements were gradually replaced by the system of the PEMC adopted in 2005100.
The Protocol enclosed to Euro-MED FTAs was similar to the CEEC’s, however, some differences are identified. For instance, Maghreb union countries (Algeria, Morocco, and Tunisia) have been granted full cumulation, whereas the FTA with Tunisia and Morocco did not contain “no-drawback” clause101. Besides, the application of the PEMCS was subject to specific conditions as explained below.
To provide practical insight into the operation of the PEMCS, further, the amended Origin Protocol to the Euro-Mediterranean Agreement with Morocco is analyzed.
4.2. Practical analysis: rules of origin in the trade agreement with Morocco
Initial EU-Morocco Cooperation Agreement contained bilateral cumulation with the EU, and full cumulation between the EU, Algeria, Tunisia, and Morocco102. The application of full cumulation might be explained by the fact that traditionally Tunisia and Morocco have been exporting to the EU around 80% of their commodities103. Therefore, flexible cumulation rules were required to maintain a high level of cooperation and high trade intensity with the EU. The benefit of full cumulation is that it permits parties to perform working or processing operations of non-originating intermediates in the wider geographic territory104.
The amended Origin Protocol has “[extend] the system of cumulation […] making it possible
to use materials originating in the Community, Bulgaria, Romania, Iceland, Norway, Switzerland (including Liechtenstein), the Faeroe Islands, Turkey or in any other country which is a participant in the Euro-Mediterranean partnership, based on the Barcelona
textuelle/developpement-economique-et-social/developpement-economique/commerce/libre-echange/the-impact-of-the-diagonal-cumulation-of-rules-of-origin-in-the-context-of-euro-med-integration> accessed 12 June 2020
100 Inama (n 2) p.258 101 Ibid p.260
102 Decision No 2/2005 of the EU-Morocco Association Council of 18 November 2005 amending Protocol 4 to
the Euro-Mediterranean Agreement, concerning the definition of the concept of ‘originating products’ and methods of administrative cooperation [2005] OJ L 336
103 Seatzu Franceso, “Under Construction: the Euro-Mediterranean Free Trade Area (EMFTA)” (Oxford
University Press 2019), p.176
104 Claire Brunel, “Morocco-EU Trade Relations” (2009), Peterson Institute for International Economics, p.227
27
Declaration105”. Thus, in 2005 diagonal cumulation was introduced among Morocco, the EU,
the Euro-MED partnership countries, and another seven countries (Article 3 of Amended Protocol) expanding the supply choices for Moroccan producers. Besides, new Protocol contains a prohibition of drawback (Article 15 of Amended Protocol).
Despite similarities with the Pan-European cumulation, the PEMCS application is subject to certain criteria106. Firstly, the origin of a product is allocated. The origin is determined based
on the “last working and processing” performance place, “provided that the working or
processing carried out [therein] goes beyond the operations107”. The origin-conferring
operations are set out in Annex II to Protocol (Article 6.1 of Protocol). As in the case of the Pan-European RoO, the list of processing rules contains product-by-product requirements.
If in a country of the final production, a product does not undergo operations beyond the required minimum, the origin is allocated to the country which has contributed the highest value of materials used for the final product (Article 3.3 of Protocol) 108. Thus, the PECMS and Pan-European RoO contain the same “substantial transformation” methods.
Further, once the origin is determined, it is assessed if the variable geometry applies to the case at hand. It provides that cumulation can be employed only if “a preferential trade agreement under Article XXIV of the [GATT] is applicable between the
countries involved in the acquisition of the originating status and the country of destination109”
and “materials and products have acquired originating status by the application of [RoO]
identical to those given in this Protocol110”. Put differently, all the countries’ components from
which have been incorporated into the final product must have entered into an FTA with identical RoO with the country of the final destination111. As seen, the variable geometry sets a
very high threshold as illustrated by a hypothetical example.
Example: the textile of the EU’s origin is imported into Morocco. The lining used for the suit
is of the Norwegian origin. The suit is sewed in Morocco. The last working operation going beyond the required minimum is performed in Morocco. Therefore, the suit is of Moroccan origin and can be exported to countries with which cumulation is permitted. In case there is no
105 Decision No 2/2005 (n 102) 106 Inama (n 2) p.263
107 Decision No 2/2005 (n 102) Art.4.1 108 Inama (n 2) p.265
109 Decision No 2/2005 (n 102) Art. 4(5)(a) 110 Ibid Art. 4(5)(b)
28
FTA between Morocco and Norway, the Norwegian lining is considered non-originating, therefore, the suit is not granted originating status and will not benefit from cumulation112.
The amended Origin Protocol with Morocco has not affected full cumulation rules with Tunisia, Morocco, and Algeria (Article 3). However, full cumulation rules restrict export outside Maghreb countries and the EU as illustrated below.
Example: non-originating cotton yarn is exported to the EU where weaving operations are
performed. Further, the textile is transported to Morocco where it is cut and sewn into a dress. Pursuant full cumulation, the operations performed in the EU are considered performed in Morocco, therefore, the final product is of Moroccan origin. However, the originating status is not in line with the PEMCS which requires that weaving and sewing are performed in one country for the final product to be of Moroccan origin. Consequently, the dress cannot claim preferential status outside the Maghreb and the EU where full cumulation is not applicable113.
Overall, in comparison with the Pan-European cumulation, the application of the PEMCS is conditional – it can be applied only between countries which have entered into the FTAs containing identical RoO114. This requirement goes hand in hand with the EU’s objective of creating a Mediterranean free trade area. Therefore, the MPC are encouraged to conclude FTAs among themselves. In case the MPC do not launch trade negotiations, the EU will preserve bilateral relationships with the MPC. Under such circumstances, investors will be more interested in investing in the EU as it would provide beneficial access to all the MPC. In contrast, by investing in any of the MPC investors would get access only to the market of a particular country and the EU. Thus, the EU would preserve its “hub’s” status, whereas the MPC would maintain the role of “spokes”115.
Hence, the framework of the PEMCS gives the impression that it is a useful instrument to encourage closer cooperation among the MPC. To assess if the theory works in practice, the next section analysis the trade impact of the PEMCS.
4.3. Trade impact of the Pan-Euro-Mediterranean cumulation
Despite the Barcelona process objective of establishing an FTA with the EU, the multilateral trading negotiations were slow and complex. Nevertheless, the MPC began to conclude mutual
112 Ibid p.267 113 Inama (n 2) p.267
114 Decision No 2/2005 (n 102) Art.4.5 l
115 Bernard Hoekman, “Deep and Comprehensive Free Trade Agreements” (2016) EUI Working Paper RSCAS
2016/29, p.5 <https://cadmus.eui.eu/bitstream/handle/1814/41405/RSCAS_2016_29.pdf?sequence=1 > accessed: 4 June 2020
29
FTAs. For instance, the Agadir Agreement of 2006 established a free trade zone between Egypt, Jordan, Morocco, and Tunisia. The main goal of the Agreement is to facilitate trade, promote integration, economic development, and attract foreign direct investments through the enforcement of the PEMCS116. Another example is the Regional Convention on
Pan-Euro-Mediterranean RoO of 2011 (“Regional Convention”) which revives the attempt to establish a Euro-MED free trade area117.
Even though inter-region cooperation increased, a Euro-MED free trade area has not been established by 2010 as aimed by the Barcelona Declaration. The negotiations stalled due to the different economic strength of negotiating parties making it difficult to find a concession. For example, the EU was not ready to lower its agricultural market standards, whereas the MPC could not provide a better deal to investors118.
Currently, it is difficult to estimate winners and losers of the PEMCS since so far it has brought little benefits. On the one hand, the MPC are beneficiaries, because the reform limits the hub-spokes effect and attracts investments. On the other hand, the MPC are unwilling to extend cumulation among themselves since the MPC have similar comparative advantages, whereas deeper regional integration would induce greater intra-regional competition119. Therefore, for the MPC extra-regional trade is preferred over intra-regional trade120.
From the EU’s viewpoint, the extension of cumulation is unfavourable since it could cause trade reorientation away from the EU. Nevertheless, the RoO reform is a part of a broader liberalization of trade and the EU’s aim to establish a common area of peace and stability121
which is beneficial to EU’s investors and companies abroad.
The PEMCS was specifically advocated by certain industries, in particular, the EU122 and
Mediterranean T&C industries. The T&C sector has been traditionally restrictive locating Mediterranean producers into a disadvantageous position in relation to Chinese competitors123.
More flexible inputs sourcing from other spokes would have a positive impact on trade
116 Seatzu (n 103) p.174 117 Ibid p.147 118 Seatzu (n 103) p.187 119 De Ville (n 94)p.203 120 Ibid
121 Commission, “Communication to the Council and The European Parliament - Progress Report on the Euro-
Mediterranean Partnership and Preparations for the Second Conference of Foreign Affairs Ministers” COM
/97/0068 Final, p.2
122Augier (n 27) p.612
123 OECD, “African Economic Outlook” (2007) African Development Bank, p.381 < https://www.oecd-ilibrary.org/development/african-economic-outlook-2007_aeo-2007-en> accessed 16 June 2020
