Customs Administration: Trade and Regulations

Customs Administration

Trade and Regulations

Customs Administration

Trade and Regulations

Mandaakin Deshpande

Customs Administration: Trade and Regulations

Mandaakin Deshpande

ISBN - 9789361521515

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Preface

The experiences of recent decades have shown that the countries that have most successfully integrated into the world economy also have tended to record the highest growth rates. Integration brings with it improved allocation of resources, intensified competition, and pressures to raise productivity, as well as exposure to new technologies, designs, and products. With world trade growth expanding more than twice as rapidly as the world gross domestic product (GDP) over the past decade, the potential rewards from participating in world trade are considerable. Increased trade openness, through lower levels of protection in developed and developing countries, has contributed to this outcome. Nevertheless, it is widely acknowledged that an open trade regime will only foster trade integration when a range of complementary policies is in place.

One of the most important complementary policies is to put in place a well-functioning customs administration that provides traders with transparent, predictable, and speedy clearance of goods. Indeed, poorly functioning customs administration can effectively negate the improvements that have been made in other trade-related areas.

This book aims to provide you with a reliable handbook explaining the services and administration of the customs, which has become an integral part of global business or to any kind of business.

Table of Contents

Introduction 1

1 Introduction to Customs Service - An Overview 2

1.1 Improving Customs Processes Is Part of the Trade Facilitation Agenda 2

1.2 Good Diagnostics Are the Key Starting Point 4

1.3 Human Resources Policies Need to Be at

the Center of Customs Reforms 5

1.4 An Adequate Legal Framework Is Important 6

1.5 Improved Integrity Is Key to Promoting Investment

and Growth 7

1.6 Risk Management Underpins Much of Modern

Customs Practices 8

1.7 Rules of Origin Should Be Simplified 11

1.8 Good Duty Relief and Exemption Control Systems

Are Important 12

1.9 Customs Procedures Should Facilitate Transit 13

1.10 Security Has Become an Integral Customs Objective 14

1.11 Information and Communications Technology

Promotes Customs Modernization 16

1.12 Exercise 18

2 Strategy For Customs Modernization 19

2.1 Objectives of Customs Operations 21

2.1.1 Evolution of Customs Role 21

2.1.2 Customs Role and Priorities in the 21st Century 23

2.2 Contextual Factors Necessary for a Successful

Customs Reform 26

2.2.1 Global Environment 26

2.2.2 Political Support 28

2.2.3 Adequate Diagnostic Work 30

2.2.4 Desire to Reduce Trading Costs 33

2.3 Development of a Customs Modernization Strategy 35

2.3.1 Modernization Program: Comprehensive

or Partial? 35

2.3.2 Proper Sequencing and Pacing of Reforms 37

2.3.3 The Role of Strategic Partners 44

2.3.4 External Advice 47

2.3.5 Financing Plan 49

2.3.6 Collaboration with Other Government Agencies 49

2.4 Implementation of a Customs Modernization Strategy 51

2.4.1 Leadership 51

2.4.2 Flexible Implementation 52

2.4.3 Involvement of Stakeholders 53

2.5 Exercise 56

3 Human Resources and Organizational Issues in Customs 58

3.1 Human Resources: An Organization Is Only as Good

as Its Staff 58

3.1.1 Staff Profile 59

3.1.2 Recruitment 61

3.1.3 Training 62

3.1.4 Staff Compensation 63

3.1.5 Integrity and Sanctions 65

3.2 Customs Organization and Organizational Placement 66

3.2.1 Internal Organization 67

3.2.2 Customs’ Position in the Overall

Government Structure 68

3.2.3 Revenue Agencies 69

3.3 Autonomous Revenue Authorities 72

3.3.1 Management Structure and Responsibilities 74

3.3.2 Financial Autonomy 75

3.3.3 Human Resources 77

3.3.4 Compensation 78

3.4 Management Contracts 81

3.5 Operational Conclusions 85

3.6 Exercise 87

4 Legal Framework For Customs Operations and Enforcement Issues 88

4.1 Case Study 89

4.2 The Need for Modern Customs Legislation 90

4.3 The Revised Kyoto Convention 92

4.3.1 Elements of the Revised Kyoto Convention 92

4.3.2 Overview of the Convention 94

4.4 Preparing a Modern Customs Code 99

4.4.1 Obligations under the Revised Kyoto Convention 99

4.4.2 Practical Guide to the Modernization of

Customs Codes 100

4.5 Case Study (4.2) 101

4.6 Potential Obstacles to Customs Modernization 102

4.6.1 Legal Tradition 103

4.6.2 Drafting Styles 104

4.6.3 Organization 105

4.6.4 Determination of Which Principles to

Implement and How to Implement Them 107

4.6.5 Interaction with Other Government Entities 108

4.6.6 Translation 109

4.7 Enforcement of Customs Laws 109

4.8 Model Legislation for International Property Rights 112

4.9 Case Study (4.4) 112

4.10 Operational Conclusions 114

4.11 Exercise 116

5 Integrity in Customs 117

5.1 Consequences of Corruption in Customs 118

5.2 Types of Corruption in Customs 121

5.2.1 Definition of Corruption 123

5.2.2 An Analytical Framework for

Understanding Corruption 124

5.3 The International Customs Response 125

5.3.1 Leadership and Commitment 129

5.3.2 Regulatory Framework 131

5.3.3 Transparency 132

5.3.4 Automation 133

5.3.5 Reform and Modernization 135

5.3.6 Audit and Investigation 137

5.3.7 Code of Conduct 138

5.3.8 Human Resources Management 140

5.3.9 Morale and Organizational Culture 144

5.3.10 Implementation of the Strategy 147

5.4 Operational Conclusions 148

5.5 Exercise 150

6 Risk Management in Customs 151

6.1 The Importance of Managing Risk 151

6.2 Facilitation and Control 152

6.3 Achieving a Balanced Approach 154

6.4 Managing Compliance 155

6.5 Putting the Theory into Practice 157

6.6 Compliance Assessment and Trade Facilitation 159

6.7 Exercise 162

7 Customs Valuation in Developing Countries and

The World Trade Organization Valuation Rules 163

7.1 Significance and Historical Overview of Customs Valuation 163

7.1.1 International Valuation Standards 164

7.1.2 The Uruguay Round and the Decision on

Shifting the Burden of Proof 167

7.1.3 State of Implementation 168

7.2 The Agreement on Customs Valuation: An Introduction 168

7.2.1 Special Provisions for Developing Countries 170

7.2.2 Implementation Requirements 171

7.2.3 Organizational Structure and Training 172

7.3 ACV Implementation in Developing Countries 173

7.3.1 Lack of Ownership 173

7.3.2 Revenue Loss 173

7.3.3 Less Compliant Trading Environment 175

7.3.4 Administrative Limitations 175

7.3.5 Doha Ministerial Conference 177

7.4 Toward Better Customs Valuation Practices 177

7.4.1 Addressing Ownership Questions 178

7.4.2 Reforming the Tariff and Trade Regime 178

7.4.3 Modernizing Customs Administration 179

7.4.4 Establishing a Value Database 180

7.4.5 Exchanging Information with Exporting

Countries’ Customs Administrations 182

7.4.6 Minimum Values and Reference Prices 185

7.4.7 Technical Assistance 186

7.5 Pre-shipment Inspection Companies and Other

Related Services Programs 186

1.1.1 Case Study (7.1) 188

7.5.1 Traditional PSI Programs 190

7.5.2 Evaluation of Effectiveness of Traditional

PSI Services 191

7.5.3 New Trends in the Provision of Customs

Valuation Services 196

7.5.4 International Value Databases 198

7.6 Exercise 199

8 Rules of Origin, Trade, and Customs 200

8.1 Defining Origin 201

8.2 Methods for Determining Substantial Transformation 201

8.2.1 Change of Tariff Classification 201

8.2.2 Value-Added 204

8.2.3 Specific Manufacturing Process 204

8.3 Status of the Harmonization Work Program for Non-preferential Rules of Origin 206

8.3.1 The Uruguay Round and the Agreement

on Rules of Origin 207

8.3.2 The Harmonization Work Program and

the Draft Harmonized Non-preferential

Rules of Origin 209

8.3.3 Implementing the HRO: Implications 212

8.3.4 The Harmonization of Non preferential

Rules of Origin: Conclusions 213

8.4 The Definition of Preferential Rules of Origin 214

8.4.1 Methods for Determining Sufficient Processing 215

8.4.2 Additional Features of Preferential

Rules of Origin 218

8.5 The Economic Implications of Rules of Origin 225

8.6 Rules of Origin and the Utilization of Trade Preferences 226

8.7 Rules of Origin and Economic Development 230

8.8 Customs and the Costs of Administering

Preferential Rules of Origin 233

8.8.1 Checking the Authenticity and Validity of Certificates of Origin 235

8.8.2 Labor Requirements to Deal with

Preferential Rules of Origin 237

8.8.3 Overlapping Rules of Origin from

Multiple FTAs 238

8.8.4 Implementation Difficulties of

the Value-Added Criterion 240

8.9 The Doha Round and Rules of Origin 241

8.10 Key Operational Conclusions 243

8.11 Exercise 246

9 Duty Relief and Exemption Control 247

9.1 Duty Relief for Inward Processing 248

9.1.1 Economic Rationale 248

9.1.2 Prior Exemption versus Drawback 250

9.1.3 Administration: From Physical Control to Audits 251

9.1.4 Temporary Admission for Inward Processing 253

9.1.5 Drawback 260

9.1.6 Export Processing Zones 265

9.1.7 Conclusions and Guidelines for Duty

Relief for Inward Processing 268

9.2 Warehousing, Temporary Admission, and Transit 269

9.2.1 Customs Warehousing 269

9.2.2 Temporary Admission 272

9.2.3 Transit 274

9.3 Exemptions 275

9.3.1 Issues 275

9.3.2 Economic Rationale 276

9.3.3 Economic or Administrative Issues by Category 276

9.3.4 Rationalizing the Exemption System 280

9.3.5 Establishing Effective Administrative

Systems and Procedures 281

9.4 Exercise 284

10 The Role of Customs in Cargo Security 285

10.1 Initiatives to Improve Cargo Security 287

10.1.1 World Customs Organization 287

10.1.2 Air Cargo: Organizations and Initiatives 295

10.1.3 Land Border Security 298

10.2 Management Implications for Customs 299

10.2.1 Organizational Structure 299

10.2.2 Legislative Framework 300

10.2.3 Access to Information 300

10.2.4 Risk Management, Redeployment of

Resources, and New Procedures 301

10.2.5 Cooperation with other than National

Customs Partners 303

10.3 Technical Means to Assist Security Checks 304

10.3.1 Manual and Low-Technology Approaches 304

10.3.2 Intrusion-Detection Technology 305

10.3.3 Modern Technology in the Service of Security 305

10.3.4 Container Scanning Equipment 306

10.4 Operational Conclusions 311

10.5 Exercise 313

Appendix 314

Glossary 316

Index 326

Introduction

This book has two parts. The chapters in the first part cover cross-cutting issues that provide insights into the key elements of a successful customs modernization strategy. The chapters discuss key organizational issues that any customs service needs to deal with and focus on the legal framework of customs and the issues of integrity and risk management.

The chapters in the second part successively discuss and provide guidelines on several issues that affect customs operation and trade facilitation. These are customs valuation, rules of origin, duty relief and duty exemption regimes, transit, security, and the use of ICT. The case studies included in the chapters illustrate specific points or describe specific cases. Case studies are used to illustrate points made in the chapters; the situation on the ground may have since changed. Their usefulness rests in illustrating that theory and guidelines can be implemented. Many of these case studies and boxes were prepared by the editors of the handbook, drawing on papers prepared for this project and on the literature.

Chapter 1. Introduction to Customs Service - An Overview

Customs is an authority or agency in a country responsible for collecting tariffs and for controlling the flow of goods, including animals, transports, personal, and hazardous items, into and out of a country. Since many businesses occur overseas and across borders, it is important to know the customs service and administration to carry out business efficiently.

Success in customs modernization is, as importantly, tied to the overall trade policy environment. Simple, transparent, and harmonized trade policies reduce administrative complexities, facilitate transparency, and reduce the incentives and opportunities for rent-seeking and corruption. Customs modernization, therefore, also needs to be examined from the broader and complementary perspective of trade policy reform.

1.1 Improving Customs Processes Is Part of the Trade Facilitation Agenda

Trade facilitation measures need to complement trade liberalization if countries are to increase their external competitiveness and become better integrated into the world economy. When the European Community introduced a common external tariff in 1968, it quickly realized that to benefit from its common market fully, it needed to streamline customs processes. In the same vein, the World Trade Organization (WTO) in 1996—as part of the Singapore agenda—added trade facilitation to its negotiation agenda realizing that nontariff barrier, to which excessive customs costs belong, is at times more important trade barriers than tariffs and prevent the achievement of trade liberalization objectives. Trade involves goods crossing borders. This requires that a number of procedures foreseen in the national legislation be followed. Some of these procedures pertain to issues of security and standards, while others deal with customs. Customs procedures are governed by the national legislation and implemented by customs staff that operates mostly under the Ministry of Finance.

Conforming to these procedures is not costless, but these costs are often excessive. It is not the intention of the handbook to elaborate on inefficiencies nor to detail all the dysfunctionalities of customs organizations and customs operations, even though some of these are described in individual chapters, as an introduction on how best to remedy them. Yet, it is their persistent recurrence and their impact on a country’s competitiveness that prompted traders and political leaders to seek out ways to make their customs organizations more effective and efficient. This handbook aims at assisting them in this ambition. It must suffice, therefore, to briefly note the main inefficiencies that these reforms aim to address.

First, outdated legislation may not clearly establish the authority of customs, may be out of tune with international commitment, may provide for inadequate transparency and predictability, and may require complex procedures while preventing full use of information technology and risk analysis.

Second, customs staff may lack the competence to interface with traders that operate in a constantly changing and challenging business. Often their compensation packages, including career management and training, are inadequate so that motivating and retaining qualified staff is a major challenge.

Third, operational procedures are often excessively and unnecessarily complex and open to discretionary decisions, while exporters have poor access to duty-free inputs. Fourth, customs all too often make insufficient use of available communications and information technology and thus are out of tune with modern business practices that rely on advanced notification, direct trader input, and tracking devices. This increases costs to traders, opens the door to discretionary decisions, and undermines oversight and audit activities. Fifth, high levels of corruption characterize many a customs agency, as is testified to in investors’ surveys and corruption indexes. Sixth, smuggling activities undermine revenue generation and impart unfair advantages to unscrupulous traders, and undermine the intended protection policies embedded in the tariff structure. In sum, customs procedures are often excessively time-consuming, unpredictable, and weak in their revenue generation function.

1.2 Good Diagnostics Are the Key Starting Point

Customs operations consist of sets of interlocking processes. To be efficient and effective, they need to be adapted to changing trade practices, and modern management approaches as well as reflect the various objectives of the country. Yet, customs practices in quite a few countries are not well attuned to these criteria. Rooted in long-standing traditions, they tend to delay the clearance of cargo and conduct operations in a non-transparent manner. Experience shows that effective customs modernization processes generally start with good initial diagnostic work to identify the shortcomings of the existing system, to define a strategy for reform, and to mobilize stakeholder support. Successful modernization also requires a comprehensive approach, that is, an approach that encompasses all aspects of customs administration to address the issues identified, as well as an adequate sequencing of actions. Strategies need to be realistic and should consider the country’s capacity to implement, the time that is required, and the level of stakeholder and political support that is needed. These reform efforts also need to be consistent with the trade policies pursued and should have the capacity to adapt to changing circumstances. For example, the emphasis on issues such as trade facilitation and national security are now more prevalent than in the past.

1.3 Human Resources Policies Need to Be at the Center of Customs Reforms

The task of customs has become increasingly difficult because of the growing complexities of trade policy due to the proliferation of regional and international trade agreements, the greater sophistication of traders, and the multiple and shifting objectives imposed on customs. Security is now a new important challenge. Uniformity of customs operations across the territory and across cargo categories is important, and speedy release of goods is crucial to supporting the competitiveness of traders. There is also a need to adhere to international standards on value and classification, as well as regional standards on rules of origin. Good human resources management is the linchpin to the effective and efficient customs administration. This is too often neglected. The management of human resources is multifaceted. It includes recruitment, training, staff compensation and promotion, as well as enforcement. None of these tasks is easy, and often must be implemented in a constrained environment.

These difficulties should not discourage the investigation of possible new initiatives and alternative approaches. However, case studies do suggest that within these constraints, still much more attention should be given to human resources issues. To address the constraints imposed on human resources reforms by rigid and often outdated civil service administration policies, many countries have pursued drastic organizational changes. For example, Autonomous Revenue Agencies (ARAs) have been established to avoid rigid civil service rules, as well as to provide more financial autonomy and greater flexibility in operational matters. However, experience has shown that creating an ARA is no guarantee for success because they have too often been focused on providing better staff compensation without sufficient attention to the other elements of customs operations that enhance effectiveness and efficiency.

Also, quite a few ARAs failed to maintain, over the longer term, the flexibility and the autonomy with which they were originally established. Another mechanism to implement reforms has been the pursuit of management contracts with the private sector. Management contracts can indeed improve aspects of customs operations if they are well designed and monitored. So far, these management contracts have largely been tested in unique circumstances in countries emerging from severe conflicts (Mozambique and Angola, for example) and where institutional capacity was exceedingly weak. Engaging private service operators in those countries had the advantage of substantially improving revenue performance in the short run and under difficult circumstances. The track record for transferring management capabilities to nationals, however, is still being tested. Initial reports suggest that this has proven more difficult than originally imagined. Changes in the organizational structure of customs can, at times, be instrumental in improving performance, as change can lift important operational constraints. Evidence suggests, however, that such changes will only have lasting effects if they contribute to good human resources management and better customs clearance practices.

1.4 An Adequate Legal Framework Is Important

The modernization of customs laws and regulations and their supporting legal environment is an essential component of the reform effort. In this area, countries can refer to (or adopt) the Revised Kyoto Convention, which provides both the legal framework and a range of agreed on standards to improve customs operations to standardize and harmonize customs policies and procedures worldwide. Countries that are signatories of the Convention can still tailor their policies and procedures in specific ways to meet their unique legal, political, cultural, and economic requirements. In many countries, the Customs Code needs to be modernized, especially to exclude non-core customs elements, seek harmonization and compliance with agreed on international commitments and ensure transparency and predictability by providing basic information on matters such as rules, decisions, consultation mechanisms, and adequate appeals processes.

A revised Code can also help trade facilitation by supporting the use of risk management practices and by eliminating complex or redundant customs formalities that delay clearance and create opportunities for unnecessary discretionary interventions. Finally, the Code should also grant adequate authority for customs to achieve its enforcement and compliance goals.

1.5 Improved Integrity Is Key to Promoting Investment and Growth

Customs are frequently perceived as being corrupt. To the extent that this is true, this image negatively affects the overall investment climate of the country and the processing of international trade transactions. Corruption undermines the country’s external competitiveness and its attractiveness to domestic and foreign investment. If left unchecked, this image of corruption undermines the growth potential of the country. Customs are vulnerable to corruption because the nature of its work grants its officials substantial authority and responsibility to make decisions that affect the duty and tax liability of traders or the admissibility of goods. High tariffs and complex regulations enhance opportunities and incentives. That many customs staff members are poorly paid adds to the problem.

The adoption of procedures that provide little discretion to customs staff and that have built-in accountability mechanisms reduces both the opportunity and incentive for corruption. In conjunction with improved trade policies, the first line of defense against corruption consists of implementing modern procedures that reduce face-to-face contact between traders and customs officials and that reduce the discretionary powers of customs officials.

In addition, providing adequate staff compensation, enhancing the risk of detection, and strengthening the capacity to investigate and prosecute breaches of integrity would go a long way toward promoting integrity in customs. Most customs managers think that corruption is such a prevalent phenomenon today that countermeasures would require the implementation of specially designed policy efforts. This is the approach that is promoted by the World Customs Organization and is incorporated into the Revised Arusha Declaration on Integrity in Customs. In looking to implement the key elements of the Revised Arusha Declaration, experience suggests that a good starting point is to conduct a comprehensive assessment of the situation to identify the shortcomings that present opportunities for corruption and to establish realistic priorities, as well as practical objectives and activities, all leading to an integrity plan that should be a part of all comprehensive customs reform efforts.

1.6 Risk Management Underpins Much of Modern Customs Practices

To achieve an appropriate balance between trade facilitation and regulatory control, customs administrations are generally abandoning their traditional, routine gateway checks and are now applying the principles of risk management with varying degrees of sophistication and success. Organizational risk refers to the possible events and activities that may prevent an organization from achieving its objectives. Risks facing customs include the potential for non-compliance with customs laws as well as the potential failure to facilitate international trade. Customs, like any other organization, needs to manage its risks and do so while interfering as little as possible with the flow of legitimate trade. There clearly is a trade-off between control and trade facilitation. Too much of one makes it difficult to achieve the other.

Customs, therefore, need to apply a set of management procedures that takes this into account. These procedures include the identification, analysis, evaluation, and mitigation of the risks that may affect the achievement of these objectives. Basic risk management has always been fundamental to customs operations and has guided the formulation of anti-smuggling policies, the functioning of border controls to verify the movements of goods and passengers, and the establishment of documentary controls and physical inspection procedures. However, in recent times the increasing complexity, speed, and volume of international trade, fueled by technological advances that have revolutionized global trading practices, have significantly affected how customs authorities implement risk management. This has led many customs administrations to adopt a more disciplined and structured approach to managing risk. Customs needs to evaluate the risks that are presented by the nature of its operations.

This includes the need for customs to review its operational procedures and assess where breaches of procedures are likely to jeopardize the attainment of stated objectives. Such an assessment could be included in those mentioned above overall diagnostic exercise. In other words, customs needs to provide a risk map that identifies the potential vulnerabilities of its processes and determine how its procedures may need to be geared toward ensuring a better realization of its objectives. Based on the risk assessment, a risk containment strategy should be defined.

This implies that priorities would be set, operational details would be geared toward these priorities, and resources would be effectively and efficiently deployed. If smuggling turns out to be a major problem, the strategy should reflect this, and border posts and mobile inspection teams may need to be strengthened. If undervaluation is a major problem, there may be a case for strengthening the valuation unit and for increasing the number of traders subject to post-clearance audit. If the risk is that goods tend to be misclassified to attract a lower tariff rate or are declared with lower unit counts or weights, there may be a need to inspect the cargo physically. In any event, risk management should ease the controls on the less risky aspects of trade and should focus on the part that represents the greatest risk. This would reflect a balanced approach between control and trade facilitation. Customs Valuation Is a Core Customs Function Customs valuation practices are subject to the WTO Agreement on Customs Valuation (ACV), which mandates that the customs value of imported goods, to the greatest extent possible, should be the transaction value, that is, the price paid or payable for the goods.

However, valuation fraud is frequently reported as a major problem in developing countries, and many of them still find that implementing ACV presents one of the most challenging aspects of customs work. Valuation work is particularly difficult in some countries in which the reliability of commercial invoices tends to be poor, and where trade was undertaken by the informal sector and in second-hand goods is significant. Also, many countries are still ill-equipped to undertake a post-clearance audit. Substantial efforts have so far been made to explain the intricacies of the ACV to customs officials of developing countries. Yet, most observers realize that valuation reform, in the absence of comprehensive customs modernization programs, is likely to disappoint. A narrow focus on valuation work will fail if reform takes place within an administratively and technically ill-equipped customs.

The reform elements that will benefit valuation work must include the streamlining of operational procedures, the introduction of a modern customs compliance improvement strategy based on a formalized risk management strategy, the use of post-clearance audits, the development of commercial intelligence capacity, and the adoption of appropriate incentives and disincentives designed to increase the level of voluntary compliance progressively. Direct technical assistance for improved valuation work might be more productive if such assistance were concentrated on the development of valuation databases, risk management systems, and post-release review and audit. A valuation database should be established and constantly updated to provide customs with a practical tool for research and risk management purposes.

The valuation function in Customs could be strengthened by setting up an appropriate legal framework, establishing valuation control procedures based on selective checking, risk analysis and management, and post-release audit, establishing central and regional valuation offices, and providing specialized training. The hiring of pre-shipment inspection (PSI) companies may be useful in assisting customs with valuation work during its initial reform stages, where capacity is being enhanced to carry out the valuation function. However, if PSI services are used, care needs to be exercised to maximize their utility and to ensure maximum consistency with the WTO valuation principles. This book spells out a number of conditions that should be investigated when considering the adoption of PSI services or when evaluating their contribution.

1.7 Rules of Origin Should Be Simplified

Determining the country of origin, or the nationality, of imported products is necessary for the application of basic trade policy measures such as tariffs, quantitative restrictions, antidumping and countervailing duties, and safeguard measures, as well as for requirements relating to origin marking and public procurement, and for statistical purposes. Such objectives are met through the application of basic or non-preferential rules of origin. Countries that offer zero or reduced duty access to imports from certain trade partners apply preferential rules of origin. These differ most frequently from the non-preferential ones.

Preferential rules are designed to ensure that only goods originating from participating countries enjoy preferences. However, rules of origin can be designed to restrict trade and, therefore, can and have been used as trade policy instruments. The proliferation of free trade agreements with accompanying preferential rules of origin is increasing the burden on customs in many countries because the clearing of preferential trade is more complex than non-preferential trade. This suggests that the trend toward more preferential free trade agreements may conflict with trade facilitation. The determination of the country of origin of products has, in the last few decades, become more difficult as technological change, declining transport costs, and the process of globalization has led to the splitting up of production chains and the distribution of different elements in the production of a good to different locations. The issue becomes, in which one or more of these stages of production define the country of origin of the good? WTO members have so far failed to reach an agreement on the definition of rules of origin, despite efforts undertaken in the World Customs Organization (WCO) since 1995.

Having harmonized rules of origin for non-preferential purposes would save time and costs to traders and customs officers and provide for greater certainty and predictability of trade. Harmonized rules would also help avoid trade disputes that arise from uncertainties in the determination of the country of origin