Thread by @DmitryOpines

1/ What the hell are Rules of Origin? A tip of the iceberg thread.

With the US-Mexico deal and Post-Brexit FTAs in the news, Rules of Origin (RoO) are suddenly everywhere.

But what are they, and why do they matter?

2/ First, a disclaimer:

RoOs are among the most complicated sub-topics in trade. The level of complexity is boundless.

I'm a trade guy doing a 'just the basics' thread and I'll still probably get stuff wrong.

Be sure to read the replies when smarter people correct me.

3/ Second, some sources to learn more:

@SamuelMarcLowe writes and talks about ROOs for a living. His blog is a great place to start.

@SoumayaKeynes and @ChadBown also get into this stuff on @Trade__Talks. Subscribe, listen and learn.

medium.com/@SamuelMarcLow…

4/ With that, on to our story.

Think of tariffs like a fence around the economy.

The higher the tariffs, the stronger (better value) a product has to be to jump the fence, and the sweatier and less attractive (more expensive) it will be to consumers once it clambers over.

5/ Under WTO Rules, if you build a fence of a certain height for a product, that's the height the fence has to be for products of that time regardless of where they come from.

HOWEVER!

Signing a Free Trade Agreement lets you lower or create gaps in the fence for your partners.

6/ Trade negotiators consider letting stuff through their tariff fence a concession, and one they only want to offer to those they're negotiating with.

After all, if they wanted everyone's products to get through fence free, they'd have just dismantled the fence.

7/ Rules of Origin are tests which determine if a product from your country gets to use the gaps your trade agreements have created in a country's tariff fence.

8/ Why is this necessary?

Well, consider the EU's Everything But Arms Agreement (EBA), which provides Least Developed Countries (LDC) tariff free access to the EU on everything, including cars.

Now picture China (not an LDC) wants to USE EBA to get cars into the EU tariff free.

9/ If Rules of Origin didn't exist China could sign an FTA with Bangladesh (an LDC) which included no tariffs on Chinese cars, then ship unpainted cars to Bangladesh, paint them there, and use the EBA to ship them from Bangladesh to the to the EU tariff free.

10/ So how do Rules of Origin prevent that?

Basically they establish in an agreement ways of calculating the minimum amount of work that has to go into a product in a given country for it to be considered 'made in that country' for the purposes of that deal's lower tariffs.

11/ Sounds simple enough, why the fuss?

First, because it can be monstrously complicated to establish where something is actually made.

A product is often worked on multiple times and includes many different components from different sources. Turning that into a % is hard.

12/ Second, because if ROO standards become high enough they can stop being about avoiding cheating and instead impose regional protectionism.

If the US demands that 75% of a car's value come from a NAFTA country, manufacturers in Mexico can't source the best value parts abroad.

13/ Third, because the administrative burden of ROOs can lock smaller firms out of the benefits of a trade agreement

Proving compliance with some ROOs requires producing and storing for years dozens of pages of documents. That can be prohibitive to a small business.

14/ Fourth, because things much messier when multiple sets of overlapping trade agreements get involved.

This is the notion of 'cumulation' @SamuelMarcLowe's blog talks about.

How are inputs from a partner in one FTA counted in meeting the ROO requirements of another FTA?

15/ This last point is critical to post-Brexit FTA's.

Now, any work or inputs sourced in EU 28 countries counts against the EU's 'total' for meeting ROOs in EU FTAs.

If UK inputs stop counting against the EU's total and vice versa, even rolled over FTAs may be less useful.

16/ I want to again emphasize this is barely scraping the surface of this issue.

Hopefully the above thread provides you an on-ramp to understand the debate and learn more yourself.

/Thread

P.S Check out the ITC/WCO Rules of Origin Facilitator:

findrulesoforigin.org