TWN Info Service on WTO and Trade Issues (Nov20/21)
20 November 2020
Third World Network

Discussions continue on preferential rules of origin for LDCs
Published in SUNS #9236 dated 19 November 2020

Geneva, 18 Nov (Kanaga Raja) – A meeting of the WTO Committee on Rules of Origin last week continued the discussion on the efforts being made by preference-granting members in implementing the Nairobi ministerial decision of December 2015 on preferential rules of origin for the Least Developed Countries (LDCs).

At the meeting on 13 November, the LDC Group presented a technical paper (G/RO/W/202) on the use of the ad valorem percentage by preference-giving countries, while the WTO Secretariat presented a paper (G/RO/W/203) examining the issue of under-utilization of trade preferences by LDC exporters in the minerals and metals sector.

With regards to the implementation of the Nairobi Decision on preferential rules of origin for LDCs, at the Rules of Origin committee meeting, the LDCs again called on the preference-granting members to intensify their efforts to ensure the effective implementation of the Nairobi Decision of December 2015 (WT/MIN(15)/47).

(According to the WTO, the WTO members that grant preferences to LDCs in the application of rules of origin are Armenia, Australia, Canada, Chile, China, the European Union, Iceland, India, Japan, Kazakhstan, Korea, the Kyrgyz Republic, Montenegro, New Zealand, Norway, the Russian Federation, Switzerland, Chinese Taipei, Tajikistan, Thailand, Turkey, and the United States.)

According to a Geneva trade official, Tanzania, speaking on behalf of the LDCs, said there is need for members to ensure that preferential rules of origin are transparent, simple and facilitate market access.

While acknowledging that some improvements have been made by the preference-granting members in aligning their rules of origin with the Nairobi Decision of 2015, it said that no substantial progress has been made in implementing the substantive parts of the Nairobi Decision.

In this context, Tanzania pointed in particular to the requirements for the assessment of sufficient or substantial transformation, cumulation, and documentary requirements.

According to a Geneva trade official, the LDCs called on members to revitalize the mandate of the Committee on Rules of Origin as well as establish a work programme that focuses on issues such as evaluating whether preference-granting members’ rules of origin conform with the Nairobi Decision and identify best practices for a simple and transparent administration of the rules of origin.

The LDC Group also presented at the meeting a technical paper on the ad valorem percentage criterion.

In its paper, the LDC Group noted that almost five years have now passed from the adoption of the Nairobi Decision on preferential rules of origin for LDCs.

Some progress has been recorded in achieving better transparency through the adoption of a notification template and the calculation of utilization rates of the Duty Free and Quota Free (DFQF) schemes, it said.

However, there has not been parallel progress in implementing the substantive part of the Nairobi Decision, more precisely, the paragraphs concerning the substantial transformation and certification requirements, it added.

It is now time to focus the debate in the Committee on Rules of Origin (CRO) on how to effectively implement the substantive aspects of the Nairobi Decision on preferential rules of origin for LDCs, said the LDC Group.

On the ad valorem percentage criterion to determine substantial transformation, the LDC Group’s paper cited the Nairobi Decision which provides that preference-granting Members shall:

“Adopt a method of calculation based on the value of non-originating materials. However, Preference-granting Members applying another method may continue to use it. It is recognized that the LDCs seek consideration of use of value of non-originating materials by such preference-granting Members when reviewing their preference programmes.

“Consider, as the preference-granting Members develop or build on their individual rules of origin arrangements applicable to imports from LDCs, allowing the use of non-originating materials up to 75% of the final value of the product, or an equivalent threshold in case another calculation method is used, to the extent it is appropriate and the benefits of preferential treatment are limited to LDCs.

“Consider the deduction of any costs associated with the transportation and insurance of inputs from other countries to LDCs.”

According to the LDC Group, the issues to be considered are three-fold:

(a) With the exception of Australia, New Zealand, Chinese Taipei and the US, all preference-granting Members are using a method of calculation based on a value of non-originating materials. A positive development would be the adoption by the US and other Members mentioned above of a method of calculation based on value of non-originating materials. It has to be noted in fact that the US, as well as the other preference-giving countries, consistently use a methodology based on value of materials in all FTAs (free trade agreements) of recent generation;

(b) With the notable exception of Canada, no other preference granting Member currently allows a percentage of non-originating materials of up to 75% of the final value of the product;

(c) None of the preference-granting Members allow the deduction of costs associated with transportation and insurance and/or provisions are unclear on this vital issue.

In addition, there are horizontal issues that need to be considered to carry out a balanced analysis of the use of ad valorem percentage criterion by preference-giving countries namely, but not limited to: (1) extent of the cumulation granted under each preferential arrangement; and (2) the existing practices of a preference-granting country under other preferential agreements.

Noting that there are different methodologies for the calculation of the ad valorem percentage, the LDC Group said that the methodology used by Australia, New Zealand, Chinese Taipei, and the US is what is commonly defined as a value-added calculation by addition.

It has been recognized in various instances that the methodology of calculation based on “value added calculation by addition” is not a best practice, said the LDC Group, adding that the large majority of FTAs at present uses a value of material methodology.

In its paper, the LDC Group said that it expects the following best practices to be implemented by preference- granting Members:

* Whenever it is used, the method of calculation should be based on value of materials methodology and based on the value of non-originating materials out of the ex-works price or FOB.

* Australia, New Zealand, Chinese Taipei and the US are called to introduce the necessary reforms in their rules of origin to adhere to such best practice.

* All preference-giving countries using this method of calculation should allow for the deduction of the costs of insurance and freight from the value of non-originating materials.

According to a Geneva trade official, Switzerland, Australia, Canada, Chinese Taipei and the United States said at the meeting that their preferential rules of origin for the LDCs are in line with the Nairobi Decision of 2015.

The chair of the Committee on Rules of Origin, Mr. Han-Ming Huang from Chinese Taipei, said all members agree that implementing the Nairobi Decision is a shared responsibility.

He noted that the Committee has made substantive progress in facilitating the implementation of the Nairobi Decision.

The best way forward is for LDCs and preference-granting members to engage in dialogue and identify what the next steps should be, he said.


Also at the meeting, the WTO Secretariat presented its paper on the utilization of tariff preferences, focusing in particular on the minerals and metals sector.

The WTO Secretariat said its previous studies indicated that LDCs were not making full use of non-reciprocal trade preferences available to them: in other words, imports eligible for preferential tariff treatment paid Most- Favoured Nation (MFN) duties instead of receiving preferences.

In examining the under-utilization of trade preferences in the minerals and metals sector, the WTO Secretariat study said in terms of export value, minerals and metals is one of the most significant sectors for many LDCs, even when crude and refined petroleum and other mineral fuel exports (HS 2709 and HS2710) are excluded from the analysis.

Overall, in 2018, LDCs exported minerals and metals of a total value of USD 40.7 billion to preference-granting members.

The majority of these products are subject to MFN zero duties and the rest, about one-fourth of all imports, can benefit from preferential tariff treatment.

However, not all exported mineral and metals are reportedly receiving preferential market access and are subject to MFN duty treatment instead, said the study.

Accordingly, full utilization of trade preference could lead to considerable duty savings for LDC beneficiaries, it added.

According to the WTO Secretariat, China, India, the European Union and the Republic of Korea are, by far, the most important destinations by value of preference eligible minerals and metals originating in LDCs.

In total there are almost USD 9.9 billion of trade eligible for preferences of which China alone imports 44.2%, followed by India (25.1%), the European Union (14%) and the Republic of Korea (9.7%).

Nonetheless, LDC exports eligible for preferences is substantial for all preference-granting Members except for Australia and Canada (for whom trade eligible for preferences is less than USD 5 million).

In terms of export products, the study noted that copper alone (HS chapter 74) accounts for 45% of imports from LDCs in this sector.

Other significant exports are precious or semi-precious stones, precious metals and jewellery (16%, HS chapter 71), and aluminium (14%, mostly exports from Mozambique to the EU, HS chapter 76).

The study concluded that minerals and metals are another sector for which under-utilization of trade preferences is surprisingly high: only about a third of imports from LDCs receive preferences in this sector.

This is all the more surprising as many products in this sector are wholly obtained goods, it said.

However, under-utilization does not affect all products, all LDCs and all preference-granting Members in the same manner. Utilization varies greatly between different schemes and, within each scheme, between sectors.

Given the significant values of imports of minerals and metals, improving preference utilization could yield significant duty savings for beneficiary LDCs, it said.

The WTO Secretariat also said that the reasons associated with the non-utilization or under-utilization of trade preferences are not entirely clear, but some reasons could be excluded.

First, low preferential margins do not seem to influence utilization. Second, the complexity of products (whether raw materials or more processed goods) also do not seem to influence utilization. Third, the origin criterion also does not seem to clearly influence utilization (whether wholly obtained or substantially transformed, whether the criterion is based on value or tariff classification, etc.), although this reason cannot be dismissed for specific tariff lines.

As a result, other possible reasons should be further studied, in particular: direct consignment rules (whether goods are consigned directly or were transhipped); variations in obligations related to origin certification (not yet examined); and awareness among economic operators that a preference is available, said the study.