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imports from taking advantage of the concessions which have been made by the
parties to the preferential agreement – commonly known as trade deflection.
2.1 Determining originating status
The principal for determining originating status is that substantial transformation
needs to have occurred. Typically one or more of three criteria are used in
determining whether there has been substantial transformation:
(a) The change in tariff classification rule: whether the transformation of the good
results in a different tariff classification line between the inputs and the manufactured
product;
(b) The value content rule: whether or not the value of the imported intermediate(s)
exceed(s) a certain percentage of domestic value;
(c) The specific production process rule: whether a particular specified production
process has been employed or not. These criteria are often given singly for a given
product category, but can also be employed together.
2.2 The impact of constraining ROOs on trade
As rules of origin are formulated in the context of trade liberalising preferential
agreements they are therefore, in principle, intended to support a process of (regional)
trade liberalisation. Nevertheless, de facto, rules of origin may result in a far less
substantial degree of trade liberalisation than might be, on the face it, implied by the
preferences, which have been granted. There are two principal reasons for this. The
first reason concerns the administrative and bureaucratic costs and difficulties
involved with administering rules of origin regimes, and the second concerns the
possible trade diverting or trade supressing properties of rules of origin.
With regard to the former for a good to be granted originating status the exporting
firm needs to be able to provide detailed documentary evidence in order to obtain the
relevant certification. This requires firms to operate detailed and precise records of
their use of intermediate inputs as well as requiring knowledge of the certification
procedures. There is anecdotal evidence though not much formal empirical evidence
to suggest that due to reasons of both costs or simply lack of organisational capacity
certification may not be acquired even where there may be eligibility.
With regard to the latter, the classical analysis of the impact of a preferential trading
agreement focuses, of course, on the possibilities of trade creation and trade diversion.
These impacts arise because of the asymmetric preferences being granted to countries
as part of the regional agreement. There is a small but growing theoretical literature
which shows that the ROOs underlying these agreements can also materially impact
on trade flows - and thus can also be used for protectionist purposes. Hence in
addition to the “classical” effects, there may be further significant trade diversion
and/or trade suppression arising from the nature of the rules of origin, which are put in
place.
• Rules of origin provide a way of determining whether a good truly originates from
the country exporting the good, as opposed to being re-routed via another country.
In so doing the rules provide limits either on the amount of imported intermediates