Cumulation

Cumulation (or accumulation, as it is called in US FTAs) is the provision that allows materials and/or processes used/undertaken in another partner of the agreement to be considered originating in the country where the final good is produced. Cumulation is considered to be a very important provision in order to integrate the economies of the FTA.⁵² The reason is that it allows manufacturers to structure different stages of their production in those countries of the FTA were conditions are best for that particular stage and still satisfy the origin requirements. There are three types of cumulation: bilateral, diagonal and full, described below.

3.4.1.1. Bilateral cumulation

This type of cumulation is the most basic of all. It allows the use of materials originating in an FTA partner to be considered originating when used in the production of a good in

51 See Cadot et al. (2006), Estevadeordal (2000), Estevadeordal and Suominen (2003), Cornejo and Harris (2007) and Augier et al (2004) for different views on regime-wide provisions.

52 Augier et al (2004)

another partner as if they had originated there.⁵³ To illustrate bilateral and the other types of cumulation, let us consider the example of a manufacturer of mixture of juices, although in this case, extra sweet juice, and the specific rule contained in the EU-CARIFORUM EPA will be used:

- all the materials used are classified within a heading other than that of the product;

- the value of any materials of Chapter 17 used does not exceed 30% of the ex-works price of the product

Example 16:

A manufacturer of juice mix made of pineapple and orange in the EU uses orange juice (HS 2009.41) produced by him and pineapple juice (HS 2009.41) imported from CARIFORUM.

The CARIFORUM producer also imports sugar from Cuba. The pineapple juice he produces has an ex-works price of $ 0.50, of which $ 0.15 correspond to sugar.⁵⁴ The sweet pineapple juice becomes originating in CARIFORUM because it meets the specific RoO. The orange juice is originating in the EU because it is made of wholly obtained materials. Bilateral cumulation allows the producer of the final good to use originating materials from other

53 When defining cumulation, the literature on RoO ignores the case of several countries belonging to the same agreement. Bilateral cumulation is considered to happen between two partners of an FTA; diagonal cumulation between countries that have a network of FTAs among them. The case of several countries belonging to the same FTA is largely ignored. Here, I consider bilateral cumulation to cover that case as well.

54 Sugar is contained in Chapter 17.

countries of the FTA, so when the originating pineapple juice is mixed with the orange juice, the final mixture automatically acquires originating status in the EU.⁵⁵

3.4.1.2. Diagonal cumulation

The provision of diagonal cumulation allows materials from countries belonging to different FTAs to consider originating materials from other countries of the FTA network as long as all the countries have FTAs in place and the same RoO in all of them.

Example 17:

Consider an FTA between Mexico and CARIFORUM with the same specific RoO for HS 2009 as in the EU-CARIFORUM EPA. The EU and Mexico already have an FTA.⁵⁶ Consider also that the three blocks have diagonal cumulation provisions among them. As in Example 15, the sweet pineapple juice originating in CARIFORUM is imported into the EU, where it is mixed with originating orange juice. The ex-works price of the final good is $1.00, of which

$0.50 are associated to the orange juice. However, there is no need to pass the test of the specific RoO because both juices are originating from the EU-CARIFORUM FTA, which grants the final mix EU origin. Under diagonal cumulation, the manufacturer in the EU can then export the mixture of juices to Mexico under preferential terms.

Example 18:

The CARIFORUM producer now decides to add higher quality sugar in such a way that the resulting ex-works price of his pineapple juice is $0.65, of which sugar accounts for $0.30.

The sweet pineapple juice does not meet the specific RoO because sugar accounts for more than 30 percent of the ex-works price of the product. The non-originating pineapple juice is then exported to the EU, where it is mixed with orange juice, which again contributes to the final price with $0.50. The resulting mix does not acquire originating status because the required CTH has not taken place on all the non-originating materials, as mandated by the specific rule (pineapple juices is the same heading as mixture of juices, HS 2009).

55 There is no need to restore to the specific rule because the final good is considered wholly produced in the EC, as it is made only from materials wholly obtained in the area.

56 The actual specific RoO for HS 2009 in the EC-Mexico FTA is slightly different, as it is complemented by a percentage requirement for sugar products. In this example, I disregard this variation of the rule for practical purposes.

3.4.1.3. Full cumulation

The most complete case of cumulation is that of full cumulation. Under this provision, FTA members may accumulate not only originating materials but also production processes before passing the origin test. A material that enters the FTA area and is transformed in a country but does not meet the specific RoO can be exported to another country of the FTA (non-preferentially), undergo another stage of production and then become originating.

Example 19:

In the same case as the one described in Example 17 the final mixture of orange and sweet pineapple juice becomes originating and allowed to be exported under preferential terms in both Mexico and CARIFORUM. The reason is that since full cumulation allows to accumulate processes, the final mixture of juices meets the specific RoO in the EU. The ex-works price of the final product is $1.15, of which non-originating sugar accounts for $0.30.

The reminding materials of the sweet pineapple juice are originating, so they do not need to undergo the RoO test, i.e. there is no need for the pineapple juice, except the sugar, to meet the specific RoO. Since the orange juice added in the EU dilutes the percentage of the value of the sugar below 30 percent of the ex-works price of the product, the final mixture is now granted EU origin and can be exported under preferential terms to CARIFORUM and Mexico.

As it can be shown from the previous examples, full cumulation facilitates the integration of productive structures by allowing combining processes of non-originating goods and still achieve originating status. This is of particular interest for developing countries where they may not have the structure to substantially transform one good but just add partly to this transformation.

3.4.2 De minimis

The de minimis or tolerance is a recurrent provision in most origin protocols that permits final goods that do not meet the specific RoO if the non-originating materials contained therein do not represent more than a certain threshold of the total value of the product. As in the case with the determination of the regional value content, here there are differences between FTAs with regards what price to consider, whether FOB, ex-works, Cost, insurance, freight

(CIF), etc. The lower the price (ex-works<FOB<CIF), the more restrictive the de minimis provision becomes, as it is easier for the non-originating materials to surpass the threshold.

As Estevadeordal and Suominen (2006) point out, the threshold varies between FTAs but is normally set in the range of 7-10 %. It is also frequent to exempt entire sectors from this rule.

For instance in the Pan-European System of Rules of Origin (PANEURO), it does not apply to textiles, for which there is a substitute provision based on the weight instead of value. This tolerance rule does not apply when the value of the non-originating materials would imply that the total value of the non-originating materials would exceed any percentage rule specified for the product in question.

Example 20:

Continuing with the example of the orange and pineapple juice producer, let us now consider that the EU producer of orange juice imports sugar from CARIFORUM and pineapple juice from Brazil and has decided to change the taste into an almost pure orange juice with a slight pineapple touch. The ex-works price of the product is $1.00, of which $0.20 is sugar and $0.15 pineapple juice and the rest is orange juice. The mixture of juices does not become originating in the EU because it has not met the required CTH for the pineapple juice. However, the EU-CARIFORUM EPA tolerance rule states that non-originating materials may nevertheless be used if their total value does not exceed 15 percent of the ex-works price of the product. In this example, it does not, so the mixture of juices can be granted originating status.