Trade Policy Note Final-rev08 - Development

use of regional agreements between developing countries to diversify their export
markets. 128
Rules of Origin
Preferential tariff treatment inevitably involves rules of origin. The US FTAs, for
example, impose “yarn forward” rules of origin, under which duty free treatment is
granted only to those T&C exports made from yarns and fabrics originating in either
the USA or the exporting county. FTAs with different partners contain variations of
the “yarn forward” rules, some more liberal than others. The EU preferences include a
double transformation criterion. Stringent and complicated Rules of Origin may result
in either (a) the non-compliance of exports do not comply with the criteria, thereby
disqualifying them from preferential treatme nt. They are thus, dutiable at MFN rates,
(b) the compliance of exports with the rules which allow them to enter duty free.
However, they are so burdened by the criteria that they cannot compete, even with the
benefit of preferential tariff margins. It is obvious that rules of origin permitting
inputs from the cheapest and highest quality sources would be preferable. The extent
to which the exporting country produces input (i.e. textiles and fabrics) determines the
impact of such rules. Nevertheless, even major producers of raw materials have found
it necessary to use imported inputs to remain competitive.
Experience has shown that rules of origin are a major determining factor in access to
T&C markets. When Canada relaxed its rules of origin for clothing imports from
LDCs, eliminating double transformation and reducing value added to 25 percent,
imports from LDCs increased exponentially! Stringent rules of origin may explain
why preferential exporters are losing their share of markets despite tariff margins 129 .
Cumulation provisions can facilitate conformity with rules of origin and promote
trade among developing countries.
The post ATC trade flows (for 2005) indicate that most preferential suppliers, are
losing their market shares, particularly in the United States market to China and a few
other Asian countries (e.g. India, Pakistan, Bangladesh, Indonesia and Cambodia),
which have held their own in the post ATC scenario. In the absence of quotas,
preferential tariff margins generally do not provide an adequate cost advantage over
more competitive suppliers, particularly when handicapped by “yarn forward” types
of rules of origin. In other smaller countries, where textile and clothing industries
128 See Adhikari, Ratnakar and Yumiko Yamamoto, Sewing Thoughts, How to realize Human
Development gains in the post-Quota World, Tracking Report (Colombo: UNDP Asia Pacific Trade
and Investment Initiative, April 2006)
(www.undprcc.lk/Publications/Publications/TC_Tracking_Report_April_2006.pdf).
129 The submission by the relevant sectoral advisory committee (ITAC-5) on the USA Bahrain FTA is
quite eloquent on the impact of the yarn forward rule. A survey of major apparel retailers conducted by
the National Retail Federation confirms the deficiencies of the yarn forward rules of origin. It was the
unanimous view of survey respondents that a yarn forward rule is not cost effective and results in a net
increase in the cost of apparel production, even when the savings from the elimination of tariffs and
quota charges are factored in. All retail ers participating in the survey further reported that yarn
forward rules of origin have affected their sourcing operations by accelerating the shift in apparel
trade away from preferential trading partner countries, such as Mexico, that are subject to this rule to
certain large Asian suppliers, notably China. Although segments of the US textile industry have
strongly advocated a yarn forward rule of origin in FTAs as necessary to protect domestic yarn and
fabric production from Chinese competition, experience has shown that such a rule has the opposite
effect and has resulted in an accelerated shift of apparel sourcing to China.
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