Rules of Origin shouldn’t impinge on India’s trade interests

K K Jain

The World Trade Organisation (WTO) negotiations on defining the general principles and formulating the Rules of Origin of products are finally over. Indian trade and industry is naturally anxious to know what the Rules exactly are, and the possible impact they could have. Now that the general principles have been defined, there is need for India to be circumspect and cautious in further negotiations to formulate the Rules so that the country’s trade interests are protected.

The Rules of Origin essentially identify the country of origin of an imported product. The Rules, in turn, bring into play a variety of trade measures in favour of, or against the entry of a product. In other words, the country of origin of the product determines whether it is subject to preferential treatment as the Most Favoured Nation (MFN), a partner in a free trade area or customs union, or ends up attracting anti-dumping, countervailing duties etc.

At present, two committees—the Committee on Rules of Origin (CRO) at Geneva and the Technical Committee on Rules of Origin (TCRO) at Brussels— are evolving a set of harmonised Rules of Origin. As all decisions of these committees have to be on the basis of consensus, India can intervene and ensure that nothing that adversely affects her.

The subject is vast and complicated. The Agreement on Rules of Origin has taken care to ensure that the final set of Rules do not impinge on any nation’s legitimate interests and rights. The general principles enunciated in the Agreement to guide the formulation of the Rules are comprehensive. The main ones are as follows:

The rules should not themselves create restrictive, distorting or disruptive effects on international trade;

• They should not be used as instruments to pursue trade objectives, directly or indirectly;
• They should not impose unduly strict requirements or fulfilment of conditions not related to manufacturing or processing;
• They should be clear, consistent, transparent, uniform and reasonable, not only in formulation but also in application.

The basis for the Rules are thus clear. There are points on which we can say that we are in a transition period. The negotiations had to be concluded in May 1998, but the deadline has passed without any indication as to when they will be over. Meanwhile, developing countries have been facing hurdles put up by developed countries, ostensibly as part of their adherence to WTO norms, but actually as instruments to obstruct free and fair trade, and protect their high-cost industries. In this regard it may be noted that countries like the US have unilaterally declared their own national Rules for some products like textiles, contrary to the spirit of the WTO. The European Union, too, has raised disputes. India, therefore, needs to assert its interests in the area of textiles as well as other products.

The formulation of acceptable Rules is a difficult exercise as the factors involved are complex, and the consequences of the application of the finalised rules could retard trade . There are multiple adverse instruments that will come into play as a result of their application. Take the textile sector, the broad stages that a textile product goes through have been spelt out thus:

• Processing (including bleaching, texturing, mercerisation, dyeing, printing, coating/impregnating and embroidery);
• Conversion to made-up articles such as bed linen, kitchen and table linen, curtains and draperies, cushion covers etc;
• Final assembly of garments.

In determining the Country of Origin of a product, Article 9(1) of the Agreement on Rules of Origin states that the country of origin should be: (i) either the country where the goods have been wholly obtained; or

(ii) when more than one country is involved in the production of the goods, the country, where the last substantial transformation has been carried out.

The phrase “substantial transformation” appears to defy definition. It could be measured in terms of value addition or manufacturing/processing operations. The proposals being discussed by developed countries in evolving Rules is that of “substantial transformation”. According to them, processing and production will not meet the criteria in the matter of textiles, and so it is the origin of yarn and fabrics that should determine the origin of the final product. We, in India, and many other developing countries are clear that processing and production of a textile product fully meets the criterion of “substantial transformation” and, therefore, the country where processing and production has been done should be taken as the Country of Origin.

The notion of the Country of Origin as the one where the yarn and fabric is produced, as proposed by developed countries, is restrictive and can jeopardise the interests of India and other developing countries that carry out a substantial level of processing and production.

This is a simplistic way of explaining the kind of complexities that come into play in determining the origin of a product, but the stand of developed countries in this instance indicate the kind of hurdles one can face if the issue is not confronted.

There are many other factors that are involved. The criteria that is finally decided upon to determine origin can manifest in multiple consequences for the processor, producer and the exporter by way of anti-dumping measures, countervailing duties, safeguard actions, violation of Intellectual Properties Rights (for the print or design which may have a geographical appellation) etc. There are cases where base fabrics are a mixed lot, the constituents coming from different sources. If an importing country starts insisting on getting precise information on the origins of these fabrics, things could get really complicated.

Similar complications have been pointed out in the case of tea , which many countries do not produce, yet process and export. In the same way, one can have leather, diamonds, wines, whisky, fruits, vegetables and so many other products which may originate in one country as per one set of criteria, and can be picked up by another and transformed and sold as its original product to a third country. What will be the origin of that final product?

In the matter of agricultural products, for instance, India has firmly stated that the country of production is the Country of Origin. Rice or tea are a case in point. Tea can be grown in one country and dried, mixed, flavoured, packaged and sold by another. Similarly, rice can be grown in one country, but cleaned, polished and packaged and exported by another. Thus, in the matter of agricultural products, India, along with other developing countries, has made it clear that the country where they are grown is the place of origin.

(The writer is President, Federation of Indian Export Organisations)