Position Paper. Rules of Origin in TTIP

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1 Foreign Economic Policy Position Paper Rules of Origin in TTIP The Transatlantic Trade and Investment Partnership (TTIP) aims to promote growth and jobs on both sides of the Atlantic. In order to provide improved market access through preferential tariffs, Preferential rules of origin in TTIP ought to be simplified. This is especially important considering the large bureaucracy involved in the implementation of the rules and the high costs associated with compliance. Given these costs, it becomes less and less attractive to make use of preferential tariffs. According to various studies, complying with rules of origin in their current form does not pay off for companies when the margin between the MFN tariff and the preferential tariff is only two to six percent of the value of a good. 1 Document number D-0697 Date 21. April 2015 Page 1 of 5 This dilemma is particularly clear in the case of the transatlantic market: About two thirds of the U.S. and the EU MFN tariffs for industrial goods are already low at only zero to five percent of the good s value. As such, the profit margin between the preferential tariff and the MFN tariff is quickly eroded if the costs of rules of origin are too high. Regardless of their size, all companies are affected by the relatively high compliance costs. However, for small and medium-sized enterprises they are a particular burden. Reducing administrative costs in trade, for example by simplifying rules of origin, would allow many of them to trade across the Atlantic for the first time. The Federation of German Industries (BDI) therefore calls for a uniform cross-industry value added rule in TTIP, under which an economic operator can freely choose between the European and U.S. calculation methods. Agricultural products of Chapters 1-24 are excluded from this proposal. As an alternative to the cross-industry value added rule, the criterion of change in tariff heading/subheading should also be applicable if required. As a further alternative, selected product specific processing rules would be applicable for certain products. Their definition would be sectorspecific. Overall, BDI advocates a five-column model, which is described in more detail below. This is envisioned for the annex of the Origin Protocol (product-specific rules of origin). 1 World Bank, World Bank Evaluation of the EU-Turkey Customs Union, 2014, S. 22, < (accessed August 8, 2014). Joseph Francois/ Bernard Hoekman/ Miriam Manchin, Preference Erosion and Multilateral Trade Liberalization, World Bank Economic Review, Vol. 20, No. 2. May Bundesverband der Deutschen Industrie e.v. Mitgliedsverband BUSINESSEUROPE Telekontakte T: F: Internet V.Kantel@bdi.eu S.Mildner@bdi.eu

2 HS- Position If necessary, description of the product Uniform cross-industry value added rule Sector-specific change in tariff heading/subheading Sector-/ product specific processing rules 2 von EU: 50% Non-originating material US: 40% net cost For certain industries Sector specific A Uniform Cross-Industry Value Added Rule German industry advocates a uniform, cross-industry value added rule of 50 percent, based on the EU calculation method. According to this rule, non-originating materials may not exceed 50 percent of the value of a good. The basis for determining the admissible share of non-originating materials is the ex-works price of the finished product. For the implementation of the cross-industry value added rule, the U.S. net costs and the EU-calculation method need to be applied in parallel. However, these methods differ from each other, with the U.S. method requiring a good to have a minimum regional value content as a certain percentage of the total production costs. German industry therefore proposes a general reduction of ten percent of the minimum value creation under the U.S. net cost method in comparison to the EU value added method. Non-originating materials may thus not exceed 40 percent, according to the U.S. net cost calculation. According to analyses in BDI s membership, both calculation methods then give approximately the same results concerning the preferential status of goods. An indispensable precondition for a parallel application of both methods of calculation is averaging, which is described in more detail below. Averaging Averaging is already possible under existing U.S. free trade agreements. Contrary to the product-specific calculation of origin, averaging enables a summarized view of series, calculation periods, or production sites. Averaging needs to be applied also to the EU-calculation method under TTIP. Otherwise, a parallel application of calculation methods would not lead to comparable results regarding the preferential origin. Averaging is therefore indispensable for a unified application of the value added rules. Sector-Specific Alternative Rules Alternative rules will explicitly remain a possibility for determining preferential origin. The first alternative should be a change of tariff classification (heading: 4 digits, or subheading: 6 digits) for certain industrial goods in the fourth column. Another alternative should be product-specific processing rules in the fifth column. These would be developed and proposed by the respective sectors.

3 Further market access and transnational harmonization 3 von 5 Cumulation For all industrial goods (chapters CN) BDI favors a diagonal cumulation with countries of the NAFTA region 2. Local content from Mexico or Canada should qualify for originating material just as EU or U.S. origin products. Therefore, especially the cross-industry value added rule should be subject to EU-NAFTA-wide application. Additionally, also the general rules of origin such as the provisions of general tolerance and territoriality, the gradual acquisition of origin and the duty drawback should be harmonized. This option should already now be included in the TTIP agreement, so that it can become applicable as soon as the Mexico FTA is newly negotiated. While negotiations on CETA have already been concluded, Canada should not be excluded from this option of cumulation in the long run. Blueprint for other Free Trade Agreements The uniform cross-industry value added rule and the five-column model could ideally be implemented in future free trade agreements as well thus allowing for a true harmonization of rules of origin. Especially in view of new agreements and the alignment of existing agreements, this uniform definition would be very beneficial and would allow companies to further diversify their markets. Further Simplifications General tolerance and territoriality A limited outsourcing of production stages in third countries should in principle be possible without compromising eligibility for the preferential status. A tolerance of up to 15 percent value added outside the preferential area should therefore be considered as a general rule in the Agreement. The 15 percent share is determined in relation to the ex-works price, i.e. the production costs of the final product, which essentially confirms the principle of territoriality. The 15 percent share takes into account increased globalization and the growing amount of outsourced manufacturing.the tolerance for the sugar sector should be only based on the weight of the end product. The German sugar industry rejects a rule based on the value of the end product. Insufficient Production The rule can be mostly copied from article 7, Rules of Origin and Origin Procedures Protocol, Section B, CETA. Accounting segregation A separate accounting for production materials and merchandises should replace the currently required physical separation of originating and nonoriginating goods. Keeping products of the same nature- but of different origin- physically separated makes storage considerably more difficult and expensive, thus disproportionately impacting companies with higher export rates and burdening the global value chain. 2 This option for cumulation does not apply for agricultural products of chapter 1-24 Combined Nomenclature. The German sugar industry rejects diagonal or any extended cumulation for sugar and products with high sugar content.

4 Gradual acquisition of origin A gradual acquisition of origin would make it easier for companies with a high level of vertical integration to attain preferential origin status. This is due to the fact that each intermediate product can be counted with its entire value as originating in the preference calculation of the subsequent product, if it has obtained the preferential status itself. This in turn can prevent distortion of competition which unfairly impacts industries with great vertical integration vis-à-vis more upstream industries. The economic operators should be free to choose whether they want to apply this method of acquiring origin. 4 von 5 Certification of Origin In addition, the certification of origin should be simplified. Apart from the consignment-based proof (preferential invoice declaration and the formal certificate such as EUR.1), a certificate of origin being valid for multiple shipments for a certain long-term period should be possible. Non-formal proof of origin, such as the invoice declaration, should also be allowed, as these represent a significant simplification in the handling of the preferential origin of goods. Up to a certain amount, the use of nonformal origin certification should always be possible (e.g. 6,000 Euros as in the EU-Korea FTA). Furthermore, if an exporter has been granted the status of Approved Exporter, he should be able to issue an invoice declaration without being restricted by a monetary threshold. This is already practiced in several countries, such as South Korea, Mexico and Switzerland. Supplier s declaration for products with preferential origin status A declaration stating the non-originating content of a product is already legally possible under European law in order to enable a pro-rata consideration in the preferential calculation. Economic operators can deliver these declarations in the form of single or long-term suppliers declarations. German industry believes that this should be permitted on a cross-border basis under TTIP. Transport through a non-party Products shall keep their preferential status independent from the transport route. The proof of preferential status shall be considered adduced, as long as customs authorities do not cast or claim reasonable doubts on the nonmanipulated condition/status of a good. In times of global value chains this adaption is necessary. In modern logistic-networks goods are often not directly transported from the country of origin to the country of destination that is qualifying for preferential treatment. In fact, they are first delivered to so called regional hubs that enable a short-term provisioning into the region and normally are located outside the application area of the free trade agreement. This distribution system contributes to a better organisation of supply chains and just-intime deliveries. Therefore the transport of goods through a hub should also be recognized.

5 No extraterritorial verification of Certification of Origin Direct verification and inspections on EU proof of origin on EU territory by U.S. authorities must be explicitly excluded from the agreement. Extraterritorial action by authorities is difficult to reconcile with the need to protect business secrets. Verification of the origin of goods and data specifications can disclose deep insights into sensitive production know-how. Instead, in the context of mutual administrative assistance, inspection and verification measures of the respective customs authorities should be mutually recognized. Doubts as to the preferential originating status of goods in the importing country can be addressed by a verification request to the exporting country. 5 von 5 Duty-Drawback No duty draw-back rule should apply. The rule can be mostly copied from article 6, paragraph 1 and 2, chapter X CETA. Thereafter a party may in certain cases of re-export not refund, defer or suspend a customs duty paid or payable. This is the case, if the good that is non-originating is imported into its territory on the express condition that the good, or an identical, equivalent or similar substitute, is used as a material in the production of another good that is subsequently exported to the territory of the Party under preferential tariff treatment pursuant to this Agreement. The former does not apply to a Party s regime of tariff reduction, suspension or remission, either permanent or temporary, where the reduction, suspension or remission is not expressly conditioned on the exportation of a product. The transition rule of article 6 paragraph 3 shall not apply. Dr. Stormy-Annika Mildner Verena Kantel