Preferential Rules of Origin and the Multilateral Trading System

As mentioned above, the WTO Agreement on Rules of Origin explicitly excludes preferential rules of origin from its scope.¹²⁰ Therefore, the only WTO article that applies to preferential RoO is GATT Article XXIV. This article may be invoked by WTO members to allow them departing from the MFN principle if two or more members participate in an FTA. However, some conditions must be met. In particular, Article XXIV:5 states:

Accordingly, the provisions of this Agreement shall not prevent, as between the territories of contracting parties, the formation of a customs union or of a free-trade area or the adoption of an interim agreement necessary for the formation of a customs union or of a free trade area; Provided that:

(b) with respect to a free-trade area, or an interim agreement leading to the formation of a free-trade area, the duties and other regulations of commerce maintained in each if the constituent territories and applicable at the formation of such free-trade area or the adoption of such interim agreement to the trade of contracting parties not included in such area or not parties to such agreement shall not be higher or more restrictive than the corresponding duties and other regulations of commerce existing in the same constituent territories prior to the formation of the free-trade area, or interim agreement as the case may be;

120 The only reference to preferential rules of origin in this agreement is made in the Common Declaration attached to it where it states that the rules should be transparent.

And Article XXIV:8.b:

A free-trade area shall be understood to mean a group of two or more customs territories in which the duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV and XX) are eliminated on substantially all the trade between the constituent territories in products originating in such territories.

Preferential rules of origin are therefore not explicitly mentioned in WTO law.

However, the term ―other restrictive regulations of commerce‖ (ORRC) could apply to them. ORRC is not precisely defined in WTO and thus, has been suggested to include measures like Sanitary and Phitosanitary Measures (SPS) or Technical Barriers to Trade (TBT), although no final decision has been made (WTO, 2000). Even though the exact provisions of what belongs or not to ―other restrictive regulations of commerce‖ are not defined, the WTO includes rules of origin as part of the factual presentations which are drafted to promote transparency of FTAs. Factual presentations are objective overviews of what are considered to be key provisions of the agreements.

Including or not RoO as part of the definition of ―other restrictive regulations of commerce‖ is crucial. In order to be allowed preferential, discriminatory treatment under Article XXIV, an agreement must fulfill the conditions indicated above. If it does not, the agreement could be challenged before the WTO court. Article XXIV:5 is usually seen as the external requirement for FTAs, while Article XXIV:8 specifies the internal conditions under which an agreement may be considered an FTA. This means that FTAs have one external and one internal criterion they need to fulfill in order to qualify under Article XXIV.

In accordance to WTO (1997), rules of origin have been suggested by some member states to be included in the definition of ―other restrictive regulations of commerce‖. If such were the case, and rules of origin were found to be ―more restrictive than … prior to the formation of the free trade area‖, there could be a potential legal basis to challenge the agreement. In fact, preferential rules of origin are always more restrictive than multilateral rules of origin, i.e. prior to the formation of the agreement. Their potential for diverting trade is well documented in the literature, as has been shown in previous chapters. Moreover, diverting trade may actually be the very reason of their

existence, as suggest Duttagupta and Panagariya (2003). Therefore, imposing overly restrictive rules of origin could give rise to a WTO dispute.

In addition, the internal requirement specifies that ―other restrictive regulations of commerce…are eliminated on substantially all the trade‖.¹²¹ As has been seen before, restrictive rules can divert trade, but overly restrictive rules can actually suppress it, as noted by Augier et al. (2004). Again, this could encourage countries to challenge an FTA on the grounds that ―other restrictive regulations of commerce‖ have not been eliminated.

Further complaints raised at the Committee on Regional Trade Agreements related to rules of origin include concerns about the issue of diagonal cumulation. Voices raised against this provision adduce that diagonal cumulation extends preferential treatment to members with whom there is no legal basis. Lastly, WTO (1997) details how some countries defend how, in order to calculate whether ―substantially all trade‖ is liberalized between the parties of an FTA, account must be taken of the degree of restrictiveness of the rules. The extension of this reasoning is that tariff liberalization can be overwhelmed by restrictive rules of origin. This argument is in line with the theoretical and empirical literature in the vein of Anson et al. (2005) who defend that rules of origin undermine trade preferences.

In sum, as long as no decision on excluding RoO from the scope of the term ―other restrictive regulations of commerce‖, any member imposing trade diverting rules of origin could potentially be challenged on the basis of Article XXIV.

No FTA itself has been challenged at the WTO.¹²² Every WTO member except Mongolia is part of at least one Regional Trade Agreement (RTA). Thus, challenging one RTA could turn against itself. However, although unlikely, if any member were to depart from regionalism in favor of multilateralism, it could challenge RTAs on the basis of not liberalizing trade among the parties sufficiently (XXIV:8) or imposing additional barriers on third countries (XXIV:5). If rules origin maintain their current restrictive configuration, they could be a prime target of such challenge.

121See WT/REG/W/37 for a discussion on the concept of “substantially all the trade”.

122 See WTO (2007b) for a summary of disputes at the WTO.