EU’s Non-Preferential Rules of Origin: A tool for determining origin of goods and promote fair trade

Introduction

In the realm of global trade, the determination of a product’s origin holds immense significance. Origin not only affects tariffs but also impacts compliance with regulations, trade agreements, trade measures and market access. The European Union (‘EU’) Non-Preferential Rules of Origin provide a comprehensive framework to ascertain the origin of goods exported to the EU and play a pivotal role in shaping trade dynamics within the EU and its trade partners.

In the complex landscape of international trade, maintaining the integrity of origin of the goods and preventing unfair practices of its misdeclaration is of paramount importance to the countries. The effective implementation of trade remedial measures (such as Anti-dumping or Countervailing duties) by the importing country also depends upon the proper declaration of origin of the goods.

To counter this, the EU has a specific circumvention provision in place under the Trade remedial laws[1]. Triggering the said provisions to extend the trade remeasures to circumventing goods requires a detailed investigation to be carried out in the manner prescribed under the anti-circumvention rules. Our last article focused on the said anti-circumvention provisions in place under the EU[2]. 

Recently it is seen that the EU has been focusing on strengthening its non-preferential rules of origin by prescribing tighter norms for determination of origin of goods. These rules are enforced by the customs authorities at the border thereby ensuring origin is properly declared in the entry documents filed before customs authorities for all regulatory purposes and duties including trade remedial duties are appropriately paid by the importers. The present article specifically focuses on the non -preferential rules of origin in the context of its assistance in effective implementation of trade remedial measures imposed by the EU.

Understanding Rules of Origin

Rules of Origin are guidelines that establish the economic nationality of a product. These rules are essential for ascertaining the true origin of the goods that are being imported into a country. Their primary purpose is to ensure the correct enforcement of trade policies, agreements and imposition of appropriate tariff vis-à-vis the country of origin of the goods.

Types of Rules

1. Preferential Rules of Origin: These rules determine whether goods are eligible for preferential treatment under trade agreements, such as reduced tariffs or duty-free access. Preferential rules encourage trade between partner countries by offering advantages to goods originating from them.
2. Non-Preferential Rules of Origin: These rules determine the origin of goods from country not part of any trade agreements. These rules are used for statistical analysis, labeling requirements, and compliance with regulations including trade remedial measures.

Legal Provisions – Non-Preferential Rules of Origin

To determine the non-preferential origin of a product, two situations may arise. These two situations, which must be distinguished, are the following:

1. wholly obtained products: If only one country is involved in producing a good, the wholly obtained concept will be applied. In practice this is mostly restricted to the products obtained in their natural state and the products that are derived from wholly obtained products.
2. products having undergone a last substantial transformation: If there are two or more countries that are involved in the production of the product and its components / raw materials, the concept of last, substantial transformationwould determine the origin of the goods.

Product specific rules have been laid down by the EU to determine the criteria to be fulfilled and/or the operations to be carried out on the specified products in the country of last production to confer origin on the said product.

For the goods where product specific rules have not been laid down by the EU, the origin is determined on a case-by-case basis by evaluating the processes or operations carried out for components / raw materials and on the final product under the last substantial processing or working test.

The key component of the non-preferential rules of origin include:

1. Substantial Transformation Criterion: This rule is fundamental to the concept of determining the origin of the product. This criterion assesses whether the processing or manufacturing conducted in the exporting country has significantly altered the product. If a substantial transformation has occurred, the product is deemed to originate from that country.
2. Accurate Documentation: Exporters are required to provide comprehensive documentation detailing the production process, materials used, and the country of origin. This documentation enables authorities to verify the authenticity of the claimed origin and detect any attempts to mis-declare the origin.
3. Traceability in Supply Chains: The non-preferential rules emphasize the importance of traceability in complex supply chains. Every stage of production and processing must be accounted for, ensuring that the origin is accurately determined based on the prescribed criteria under the rules.

Role of Non-Preferential Rules of Origin in preventing non-payment of trade remedial duties

Traditionally, Anti-circumvention provisions under the EU are meant to deal with misdeclaration of origin to avoid payment of trade remedial duties. However, the EU recognizes that conducting an Anti-circumvention investigation is a cumbersome process leading to duty evasions for goods imported into the EU. Hence, the EU is now increasingly using the Non-Preferential Rules of Origin to serve as a crucial border mechanism to prevent non-payment of trade remedial duties in place in the EU and ensuring the integrity of the declared origin of the product. In cases where a product from a specific country is subject to either anti-dumping measures or countervailing measures, the non-preferential rules of origin are used as a tool to identify the true origin of goods entering the EU market and to enforce these measures.

Illustration depicting changes made in preferential rules of origin for preventing circumvention of trade remedial measures

There have been anti-dumping duties which are imposed by the EU on imports of bicycles into EU from China since 1993. There have been multiple reviews of the above duties as well as multiple Anti-circumvention investigations against various countries that were conducted to stop evasion of anti-dumping duties imposed.

However, to put an end to such anti-circumvention practices, the EC laid out product specific non-preferential rules of origin for bicycles imported in the EU. The specific non-preferential rule of origin is reproduced below:

The above product specific rule prescribes the following two primary tests to decide the origin of Bicycles exported to European Union –

• CTH except from heading 8714 – which means that there should be a change of tariff heading where the tariff classification of the final product is different from the tariff classification of the non-originating components / materials that were used in the production in the exporting country. However, such components falling under 8714 cannot be non-originating in the production process, in other words, such components / parts need to be originated in the exporting country.
• 45% value added rule means the manufacture activity in exporting country where the increase in value was acquired as a result of working and processing, and if applicable, the incorporation of parts originating in the country of manufacture represents a minimum of 45% of the ex-factory value.

Similarly, there is an existing Anti-dumping duty and Countervailing duty applicable on exports of e-bikes from China to EU. The Anti-dumping duty and Countervailing duty are applicable till 19^th January 2024. On 02/10/2020[3], the EC came out with product specific non-preferential rule for e-bikes (HS Code 871160) imported in the EU as reproduced below:

• In the above rule, components / parts falling under 8501, 8507, and 8714 (which constitute major components of e-bike for e.g. 8501 covers motor, 8507 covers battery and 8714 covers parts of e-bike) cannot be non-originating in the production process. In other words, such components need to originate from the exporting country in order to confer origin status to the e-bike.
• 45% value added rule means the manufacture activity in exporting country where the increase in value was acquired as a result of working and processing, and if applicable, the incorporation of parts originating in the country of manufacture represents a minimum of 45% of the ex-factory value.

By introducing above the rules, the EU ensures that the substantial transformation has occurred in the exporting country either by procuring the components within the country or by carrying out considerable manufacturing operations in the exporting country thereby mitigating the risk of circumvention of trade remedial measures already in place against imports from China.

Challenges for exporters

Determining the origin of some products can be complex, particularly in cases where raw materials are sourced from different countries and undergo various stages of processing before being assembled into a final product in the exporting country.

While the concept of substantial transformation serves as a foundation, applying EU’s Non-preferential Rules of Origin can be complex due to the intricacies of modern supply chains. Products often comprise components from various countries, requiring careful examination of each processing stage to ascertain the true origin thorough documentation.

Conclusion

As trade dynamics evolve, the EU’s initiative for robust non-preferential rules can be instrumental in true origin declaration of goods before customs authorities in the EU member countries and deter any exporter / importer from mis-declaring the origin to evade trade remedial duties in place. By prescribing origin determination criteria through substantial transformation test and enforcing it through stringent documentation may protect the EU’s domestic producers and provide them a level playing field in the global trade.

At the same time, it is extremely important for the exporters to the EU to maintain strong documentation supporting the integrity of the supply chains. The exporters are advised to stay cautious of their procurement chains for components / raw material from other countries especially for those products which are subject to trade measures in the EU.

The exporters must educate themselves of the product specific non-preferential rules of origin to stay true to the originating status of a product. This is important for an exporter to prevent any investigations by EU Authorities like the EC or the European Anti-Fraud Office.

[The author is an Associate in WTO and International Trade Division in Lakshmikumaran & Sridharan Attorneys, New Delhi]

[1] Article 13, Council Regulation (EC) No. 1225/2009 of 30 November 2009.

[2] Circumvention of Trade Remedy measures – A critical analysis of Indian provision | Lakshmikumaran & Sridharan Attorneys (lakshmisri.com)

[3] Determination of the non-preferential origin of e-bikes (europa.eu)