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Regulating Free Trade from the WTO Perspective Read chapter Read first chapter

2017 | Supplement | Chapter

5. Unfolding the Intricacies of Trade Subsidies Through the WTO Rules of Origin

Author : Gurwinder Singh

Published in: Subsidies in the Context of the WTO's Free Trade System

Publisher: Springer International Publishing

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Abstract

The discussion in this chapter continues from the previous chapters where the line of discussion follows that since the formation of the WTO, the international trade pattern has been progressing in the direction of free trade and has by and large been competitive and based on efficiency; nevertheless it is more beneficial to the multinationals. This has raised new forms of trade related issues that can be compared with benefits of several types, and one such is comparing the benefit obtained by multinationals, with the subsidies defined under the SCM Agreement.
As the present trend of trade between the Developed and Developing nations, in intermediate products is growing, so the legal requirement of the declaration of the nationality of the products and intermediate products is necessitated. Declaration of the nationality of the products will unfold the complexities involved whilst also strengthening the promotion of free trade. The declaration of the nationality of a product is the key feature of market transparency and at the procedural level, it also helps in applying the regulatory provisions. On the basis of these emerging concerns, it seems that the application of the “Rules of Origin” to determine the place of manufacture in the present day international trade is quite relevant. Furthermore, with regards to the trends in free trade, the manufacturing process of the products is no longer confined to one place or nation, but is becoming allocated to several countries. In today’s complex trading system, more and more products are being given a final shape by obtaining intermediate parts from other nations, wherever they can be cheaply manufactured or are available. The choice of the place for the manufacturing of intermediary products can often be discriminatory, as the priorities are to attain cost efficient products. From the market observation, it can be said that this newly-developed pattern of trade, based on different production places, demands a new approach in the legal analysis to uncover the production intricacies. The WTO, as a trade regulating institution, has thus included a Rules-of-Origin Agreement, so as to determine the place from which the product has actually originated or is being produced.
In this chapter, an attempt has also been made to analyse the adverse effect of applying the Agreement on Rules of Origin by the Member States.
What can then be seen, are the challenges to free trade because of the preference given to the products based on the Rules-of-Origin. With the proliferation of regional-trade agreements such as NAFTA, ASEAN, CAFTA and several others, the WTO Member States, some of which are also the members of these regional trade agreements, prefer trading among themselves by giving tariff preferences. An examination from this standpoint also covers the broader issue of trade subsidies in terms of financial contribution and benefit, which from the WTO perspective, is a form of tension between legal values and the economic compulsions associated with international trade.
Testing such obtained trade gains, within the limits of subsidies classified as prohibited or actionable subsidies in the SCM Agreement, for restricting the subsidies of exports, finally raises questions concerning the new forms of subsidies. The study in this chapter is to inquire about the unconventional form of trade benefits obtained by applying the Rules of Origin, as the features of such profits can be compared with subsidies.

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previous chapter Subsidies for Dumping
next chapter The Impact of Trade Subsidies on the Environment: A Problem for the WTO Trading System
Footnotes
1
Vermulst et al. (1995), p. 8.
 
2
Brenton et al. (2011), p. 165. www.​worldbank.​org.
 
3
Brenton et al. (2011), p. 161. www.​worldbank.​org.
 
4
For detail reference, see Rules of Origin, Gateway to Dubai’s Prosperity, p. 2. www.​dubaicustoms.​gov.​ae.
 
5
Article 1 (Agreement on Rules of origin) For the purposes of parts I–IV of this Agreement, Rules of Origin shall be defined as those laws, regulations and administrative determinations of general applications applied by any Member, to determine the country of origin of goods provided such rules of origin are not related to contractual or autonomous trade regimes leading to the granting of tariff preferences going beyond the application of paragraph 1 of Article I of GATT 1994.
Article 1 para1 of the GATT 1994 states: With respect to customs duties and charges of any kind imposed or in connection with the importation or exportation or imposed on the international transfer of payments for imports or exports, and with respect to the method of levying such duties and charges, and with respect to all rules and formalities in connection with the importation and exportation, and with respect to all matters referred to in paragraphs 2 and 4 of Article III, of GATT any advantage, favor, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties.
 
6
Estevadeordal and Suominen (2008), p. 86.
 
7
Article XXIV Clause 4, the contracting parties recognize the desirability of increasing freedom of trade by the development, through voluntary agreements, of closer integration between the economies of the countries parties to such agreements. They also recognize that the purpose of a customs union or of a free trade area should be to facilitate trade between the constituent territories and not to raise barriers to the trade of the other contracting parties with such territories. Under Clause 5, accordingly, the provision of this Agreement shall not prevent, as between the territories of contracting parties, the formation of a customs union or 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.
 
8
International Convention on the Simplification and Harmonization of Custom Procedures, adopted in 1974 by the Custom Cooperation Council at its 41st and 42nd sessions held in Kyoto. In substance, Annex D1 did not provide for ready-to-use rules of origin.
 
9
Harilal and Beena (2003), p. 10.
 
10
Article 2(c) of the Rules of Origin Agreement, Rules of Origin shall not themselves create restrictive, distorting or disruptive effects on international trade. They shall not pose unduly strict requirements or require the fulfilment of a certain condition not related to manufacturing or processing, as a prerequisite for the determination of the country of origin. However, costs not directly related to manufacturing or processing may be included for the purposes of the application of an ad valorem percentage criterion consistent with subparagraph (a).
 
11
Relevant part of the preamble. “Members, noting that ministers on 20 September 1986 agreed that the Uruguay Round of Multilateral trade negotiations shall aim to bring about further liberalization and expansion of world trade, strengthen the role of GATT and increase the responsiveness of the GATT system to the evolving international economic environment.” Desiring to further the objectives of GATT 1994, Recognizing that clear and predictable Rules of Origin and their application facilitate the flow of international trade. Desiring to ensure that Rules of Origin themselves do not create unnecessary obstacles to trade, desiring to ensure that Rules of Origin do not nullify or impair the rights of members under GATT 1994.
 
12
From the Preamble of the WTO.
 
13
Article 1 cl(2) Rules of Origin referred to in paragraph 2 as mentioned above in the text, shall include all Rules of Origin used in non-preferential commercial policy instruments, such as in the application of: most-favoured-nation treatment under Article I, II, III, XI and XIII of the GATT 1994; anti-dumping and countervailing duties under Article VI of GATT 1994; safeguard measures under Article XIX of GATT 1994; origin making requirements under Article IX of GATT 1994; and any discriminatory quantitative restrictions of tariff quotas. They shall also include Rules of Origin used for government procurement and trade statistics.
 
14
The principle of GSP was agreed at the United Nations Conference on Trade and Development, and is a facility granted to Developing countries by certain Developed Countries. GSP Rules of Origin are contained in Articles 66 to 97 and Annexes 13a to d, 16 to 18 and 21 Reg. 2454/93(CCIP) [as amended by Regulation (EU) No. 1063/2010]. The list rules are contained in Annex 13a CCIP. (as amended by Regulation No. 1063/2010).
 
15
These preferences are unilateral in the sense as that they do not involve any reciprocal preferences from them. The preferences are set and conditioned by the grantor countries alone, and can be modified or revoked by them at their discretion.
 
16
Jones and Martin (2012), pp. 6–10. www.​crs.​gov. RL33663.
 
17
European Communities-Conditions for granting of Tariff Preferences to Developing Countries WT/DS246/AB/R, Para 162. In sum, we read paragraph 3(c) as authorizing preference-granting countries to respond positively to needs that are not necessarily common or shared by all Developing countries. Responding to the needs of Developing countries may thus entail treating different Developing country beneficiaries differently. Para 163 However, paragraph 3(c) does not authorize any kind of response to any claimed need of Developing countries. First we observe that the types of needs to which a response is envisaged are limited to ‘development, financial and trade needs.’
 
18
Harris (2009), p. 7. www.​iadb.​org.
 
20
WT/DS 243/R. On 21 July 2003, the DSB adopted the Panel report.
 
21
See, WT/DS 243/R, para 1.3.
 
22
WT/DS243/R, para 3.9. However, section 334(b) (1) (C) establishes a new rule, which fixes the origin of a fabric in the country where it is woven, knitted or otherwise formed in the greige state. No recognition of origin is given for any operations which follow the forming of the fabric, such as dyeing, printing or other finishing steps. This is a major departure from the previous rule, under which dyeing and printing as well as at least two additional finishing operations were deemed sufficient to transform greige fabric formed in one country into a new product of the country where finishing operations were performed.
 
23
See WT/DS 243/R, para 3.31.
 
24
See Para 3.4 of the WT/DS243/R The United States Rules of Origin set out in section 334 of the Uruguay Round Agreements Act (section 334 or the 1996 rules of origin) and modified in section 405 of the Trade and Development Act of 2000 (section 405 or the 2000 rules of origin) and the customs regulations implementing these statutory provisions, and their application are inconsistent with the United States obligations under Article 2(b), (c), (d) and (e) of the Agreement on Rules of Origin.
 
25
Article 2(b) notwithstanding the measure or instrument of commercial policy to which they are linked, the rules of origin are not used as instruments to pursue trade objectives directly or in directly.
 
26
Article 2(c) Rules of Origin shall not themselves create restrictive, distorting, or disruptive effects on international trade. They shall not pose unduly strict requirements or require the fulfillment of certain conditions not related to manufacturing or processing, as a pre-requisite for the determination of the country of origin. However, costs not directly related to manufacturing or processing may be included for the purpose of the application of an ad-valorem percentage criterion consistent with sub paragraph (a).
The specific measures challenged by India in this case were the Rules of Origin set out in section 334 of the URAA (Uruguay Rounds of Agreement Act) and modified in section 405 of the trade development act of 2000.
 
27
2(b) notwithstanding the measure or instrument of commercial policy to which they are linked, the rules of origin are not used as instruments to pursue trade objectives directly or in directly; 2(c) Rules of Origin shall not themselves create restrictive, distorting, or disruptive effects on international trade. They shall not pose unduly strict requirements or require the fulfillment of certain conditions not related to manufacturing or processing, as a pre-requisite for the determination of the country of origin. However, costs not directly related to manufacturing or processing may be included for the purpose of the application of an ad-valorem percentage criterion consistent with sub paragraph (a).
The specific measures challenged by India in this case were the Rules of Origin set out in section 334 of the URAA (Uruguay Rounds of Agreement Act) and modified in section 405 of the trade development act of 2000.
 
28
Para 3.9. Section 334(b) (1) (c) establishes a new rule, which fixes the origin of a fabric in the country where it is woven, knitted or otherwise formed in the “greige” state. No recognition of origin is given for any operations which follow the forming of the fabric, such as dyeing, printing or other finishing steps. This is a major departure from the previous rule, under which dyeing and printing as well as at least two additional finishing operations were deemed sufficient to transform “greige” fabric formed in one country into a new product of the country where the finishing operations were performed.
 
29
C.F.R, Code of Federal Regulations.
 
30
See WT/DS243/R, para 3.47. These exceptions resulted in absurd cases. If cotton fabric is woven in India and exported to Portugal where it is dyed, printed and subject to two or more finishing operations, that fabric is now considered a product of Portugal. If, however, the same cotton fabric is now used in Portugal to produce a finished sheet, the origin reverts back to India. Therefore, even though operations were performed in Portugal on a Portuguese product, the origin of that product would be determined as Indian.
 
31
See WT/DS243/R, para 3.36.
 
32
United States Rules of Origin for Textile Products, WT/DS243/R, para 3.57.
 
33
See para 6.76.
 
34
See para 3.224.
 
35
Questions from the WTO Panel to India. Question 26(c) Would India agree that Article 6.3 of the SCM Agreement contemplate a showing of “actual” adverse effect? If so, is there any reason why the Panel, when interpreting the phrase “create” [.....] effects,” should not seek inspiration from the provisions of Article 6.3 as well as the case law on Article III and IX of the GATT 1994?
 
36
Article 2 Until the work programme for the harmonization of Rules of Origin set out in part IV is completed, members shall ensure that: (a) when they issue administrative determinations of general application, the requirements to be fulfilled are clearly defined. In particular:
1.
in cases where the criterion of change of tariff classification is applied, such a Rule of Origin and any exceptions to the rule must clearly specify the subheadings or headings within the tariff nomenclature that are addressed by the rule;
 
2.
in cases where the ad-valorem percentage criterion is applied, the method for calculating this percentage shall also be indicated in the Rules of Origin;
 
3.
in cases where the criterion of manufacturing or processing operation is prescribed, the operation that confers origin on the good concerned shall be precisely specified.
 
 
37
For detail references, see Agreement on Rules of Origin, Annex II Clause 1 Recognizing that some Members apply preferential Rules of Origin, distinct from non-preferential Rules of Origin, the Members hereby agree as follows. Clause 2 For the purpose of this Common Declaration, preferential Rules of Origin shall be defined as those laws, regulations and administrative determinations of general application applied by any member to determine whether goods qualify for preferential treatment under contractual or autonomous trade regimes leading to the granting of tariffs preferences going beyond the application of paragraph 1 of Article I of GATT 1994.
 
38
GATT Article I clause 1, With respect to customs duties and charges of any kind imposed on or in connection with importation or exportation or imposed on the international transfer of payments for imports or exports, and with respect to the method of levying such duties and charges, and with respect to all rules and formalities in connection with importation and exportation, and with respect to all matters referred to in paragraphs 2 and 4 of Article III, any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all the contracting parties.
 
39
As mentioned in Article 9 Clause 1, of the Rules of Origin, With the objectives of harmonizing rules of origin and, interalia providing more certainty in the conduct of world trade, the Ministerial Conference shall undertake the work programme set out below in conjunction with the CCC, on the basis of the following principles (a) rules of origin should be applied equally for all purposes as set out in Article1; (b) rules of origin should provide for the country to be determined as the origin of a particular good to be either the country where the good has been wholly obtained or, when more than one country is concerned in the production of the good, the country where the last substantial transformation has been carried out.
 
40
Cadot et al. (2006), p. 73.
 
41
De Wulf and Sokol (2005), p. 191.
 
42
Annex II, Clause 2. For the purposes of this Common Declaration, Preferential Rules of Origin shall be defined as those laws, regulations and administrative determinations of general application applied by any Member to determine whether the goods qualify for preferential treatment under contractual or autonomous trade regimes leading to the granting of tariff preferences going beyond the application of paragraph 1 of Article of GATT 1994.
 
46
Article 1, Clause 2, Rules of Origin referred to in paragraph 1 shall include all Rules of Origin used in non-preferential commercial policy instruments, such as in the application of: Most-Favoured Nation treatment under Articles I,II,III,XI and XIII of GATT 1994; anti-dumping and countervailing duties under Article VI of GATT 1994; safeguard measures under Article XIX of GATT 1994;origin marking requirements under Article IX of GATT 1994; and any discriminatory quantitative restrictions or tariff quotas. They shall include Rules of Origin used for government procurement and trade statistics.
 
47
Article 1 of the Agreement on Rules of Origin. For the purposes of parts I to IV of this Agreement, rules of origin shall be defined as those laws, regulations and administrative determinations of general application applied by any member to determine the country of origin of goods provided such rules of origin are not related to contractual or autonomous trade regimes leading to the granting of tariff preferences going beyond the application of paragraph 1 of Article I of GATT 1994.
 
48
Jones and Martin (2012), p. 3. www.​crs.​gov.
 
49
Jones and Martin (2012), p. 2. www.​crs.​gov.
 
50
Jones and Martin (2012), p. 2. www.​crs.​gov. Footnote 6.
 
51
Article 3 clause (b) of the Agreement on Rules of Origin.
 
52
Varavithya and Esichaikul (2007), pp. 128–138.
 
53
Article XV GATTS Cl (1) Members recognize that, in certain circumstances, subsidies may have distortive effects on trade in services. Members shall enter into negotiations with a view to developing the necessary multilateral disciplines to avoid such trade-distortive effects. Cl (2) Any Member which considers that it is adversely affected by a subsidy of another Member may request consultations with that Member on such matters.
 
54
GATS: General Agreement on Trade in Services. Annex1B.
 
55
Inama (2009), p. 100.
 
56
Inama (2009), p. 100.
 
57
Article 3.3 of the Anti-dumping agreement of the WTO “Where imports of a product from more than one country are simultaneously subject to anti-dumping investigations, the investigating authorities may cumulatively assess the effects of such imports only if they determine that (a) the margin of dumping established in relation to the imports from each country is more than de minimis, as defined in paragraph 8 of Article 5 and the volume of imports from each country is not negligible and (b) a cumulative assessment of the effects of the imports is appropriate in the light of the conditions of competition between imported products and the conditions of competition between the imported products and like domestic products.”
 
58
Article 15.3 of the SCM agreement, “Where imports of a product from more than one country are simultaneously subject to countervailing duty investigations, the investigating authorities may cumulatively assess the effects of such imports only if they determine that (a) the amount of subsidization established in relation to the imports from each country is more than de minimis as defined in paragraph 9 of Article 11 and the volume of imports from each country is not negligible and (b) a cumulative assessment of the effects of the imports is appropriate in light of the conditions of competition between the imported products and the condition of competition between the imported products and the like domestic products.”
 
59
Article 4 clause 2(b) The determination referred to in subparagraph (a) shall not be made unless this investigation demonstrates, on the basis of objective evidence, the existence of the causal link between increased imports of the product concerned and serious injury or threat thereof. When factors other than increased imports are causing injury to the domestic industry at the same time, this shall not be attributed to increased imports.
 
60
Article XV of the GATS deals with Subsidies.
 
61
Article 9(b) Rules of Origin should provide for the country to be determined as the origin of a particular product to be either the country where the product has been wholly obtained or, when more than one country is concerned in the production of the product, the country where the last substantial transformation has been carried out.
Article 3cl (b) Under their Rules of Origin, the country to be determined as the origin of a particular product is either the country where the product has been wholly obtained or, when more than one country is concerned in the production of the product, the country where the last substantial transformation has been carried out. This clause is applicable after the transition period that is a result of the harmonization work.
 
62
Turning Hills into Mountains? Current Commitments, Under the GATS and Prospect for Change.
WTO, Economic Research and Statistics Division March, 2005, pp. 3–5. http://​www.​wto.​org/​english/​res_​e/​reser_​e/​ersd201209_​e.​pdf.
From the Preamble. “Recognizing the growing importance of trade in services for the growth and development of the world economy…Desiring to facilitate the increasing participation of Developing countries in trade in services and the expansion of their service exports including, inter alia, through the strengthening of their domestic services capacity and its efficiency and competitiveness…Taking particular account of the serious difficulty of the Least-Developed countries, in view of their special economic situation and their development trade and financial needs.”
 
63
The trade in services as defined in GATS, Article 1 Clause 2. For the purposes of this Agreement, trade in services is defined as the supply of a service (a) from the territory of one Member into the territory of any other Member, (b) in the territory of one Member to the service consumer of any other Member (c) by a service supplier of one Member, through commercial presence in the territory of any other member (d) by a service supplier of one Member, through presence of natural person of a Member in the territory of any other Member.
 
64
Athukorala (2010), p. 1.
 
65
Global production sharing has evolved through three distinct phases. At the formative stage, the production sharing involved locating small fragments of the production process in a low-cost country and reimporting the assembled components to be incorporated in the final product. Subsequently, production networks began to encompass many countries engaged in the assembly process at different stages, resulting in multiple border crossings by product fragments before they were incorporated in the final product.
 
67
Ventura and Lima (2001), p. 11.
 
69
For the purpose of this Agreement, trade in services is defined as the supply of a service:
(a)
from the territory of one Member into the territory of any other Member;
 
(b)
in the territory of one Member to the service consumer of any other Member;
 
(c)
by a service supplier of one Member through commercial presence in the territory of any other Member;
 
(d)
by a service supplier of one Member, through presence of natural persons of a Member in the territory of any other Member.
 
 
70
GATS Article II for Most-Favoured-Nation Treatment 1. With respect to any measure covered by this Agreement, each Member shall accord immediately and unconditionally to services and service provider of any other Member treatment no less favourable than it accords to like service suppliers of any other country. 2. A Member may maintain a measure inconsistent with paragraph 1, provided that such a measure is listed in, and meets the conditions of the Annex on Article II Exemptions. 3. The provisions of this Agreement shall not be so construed as to prevent any Member from conferring or according advantages to adjacent countries in order to facilitate exchanges limited to contiguous frontier zones of services that are both locally produced and consumed.
 
71
Article XV GATTS Cl (1) Members recognize that in certain circumstances, subsidies may have distortive effects on trade in services. Members shall enter into negotiations with a view to developing the necessary multilateral disciplines to avoid such trade-distortive effects. Cl (2) Any Member which considers that it is adversely affected by a subsidy of another Member may request consultations with that Member on such matters.
 
72
Finger (1976), pp. 598–611. [The US tariff contains an offshore assembly provision, (OAP). The tariff on certain imported goods is charged on the value of such goods less the value of incorporated domestically produced components, i.e., the tariff on an assembled product is applied only to the value-added in foreign assembly or processing if domestically produced components are used].
 
73
EC, community tariff schedules contain this provision. When a company import goods from outside the Community, they normally have to pay duty on the full customs value of the goods. When Community goods are exported outside the customs territory of the EC, they lose their Community status, and if they are later re-imported they are treated in the same way as non-Community goods, and are liable to duty on the full customs value. When using the OPR procedure (outward processing relief procedure), it will enable a company to claim relief from duty on the Community goods which have been exported for process, as long as it can be shown that the exported goods were used to produce, or are incorporated into, the products imported. Before claiming duty relief under OPR, however, a company must be authorised to use the arrangements. For detail reference, see [Article 66 Special provision relating to non-originating goods, Article 235 of Proposal for the regulation of the European Parliament and of the Council laying down the Union custom code COM2012/64 final].
 
74
Trachtman (2008), pp. 226–227.
 
75
Trachtman (2008), p. 227.
 
76
Vermulst et al. (1995), p. 19.
 
77
Lloyd (2002), p. 180.
 
78
For detail reference, see the Preamble of the Agreement on Rules of Origin.
 
79
Article 3(b) of the Agreement on Rules of Origin “Under their rules of origin, the country to be determined as the origin of a particular good is either the country where the good has been wholly obtained or, when more than one country is concerned in the production of the good, the country where the last substantial transformation has been carried out.”
 
80
Vermulst et al. (1995), p. 169.
 
81
Brenton et al. (2011).
 
82
Article 1, definition of subsidy (mentioned in the previous chapters).
 
83
World Trade Report (2006), Exploring the links between subsidies, trade and the WTO, p. 49. http://​www.​wto.​org/​english/​res_​e/​publications_​e/​wtr06_​e.​htm.
 
85
Opportunity Cost is the cost of forgoing something because the company has opted for something else or it can be said as what the company has given up in order to obtain the item. Illustration:—A company employs three software engineers and commits to finish a project by using the services of all the three. The company also takes money in advance for this. Later, a larger opportunity is presented, as someone else is ready to pay more for the project, which can be used somewhere else. However, this is no longer possible because the three engineers are already occupied. Therefore, the cost of first project is not only the time and salary of the three engineers who are working as it is also the loss of revenue and market share that the company might have attained had the engineers worked either in partnership or separately on this new offer.
 
86
The free trade measure signifies here the trade measures promoted by the WTO.
 
87
Absolute advantage states that a particular individual or country can produce more of a specific commodity than another individual or country using the same amount of resources.
 
88
Comparative advantage states that a particular country or individual can produce a specific commodity at a lower opportunity cost (in terms of forgone production in an alternative commodity) than another country or individual.
 
89
Lloyd (2002), p. 172.
 
90
When more units of a product or a service can be produced on a greater scale, with lower input costs, economies of scale are said to be achieved. Economies of scale are categorised in two forms. (1) Internal and External economies of scale. Södersten and Reed (1994), p. 335.
 
91
Intra-industry trade arises if a country simultaneously imports and exports similar type of goods or services. Vertical intra-industry trade refers to the simultaneous exports and imports of goods classified in the same sector but at different stages of processing.
 
92
Lindert (1986), p. 39.
 
95
Suranovic et al. (2011).
 
96
Article 3.1(a) of Agreement on subsidies and countervailing measures the WTO prohibits, ‘Subsidies contingent, in law or in fact, whether solely or as one of several other conditions, upon export performance, including those illustrated in Annex I.’
 
97
An upstream firm produces only the intermediate products, while a downstream firm produces the final product and buys the intermediate product in an open market. Strauss-Kahn (2005), p. 302.
 
98
Inama (2009), p. 279.
 
99
See United States International Trade Commission, 1992 ITC Lexis 195, Apr., 1992; Int’l Trade Rep. (BNA) (March 4, 1992) Chapter 20 of the NAFTA on the basic institutional arrangements and dispute settlement procedures established in Chapter 18 of the FTA. The Honda case involved a ruling by the US Customs service on March 2, 1992 that Canadian exports of Honda Civics during 1989/90 failed to qualify as North American products under FTA content rules, resulting in US duties being applied to the products. US Customs held that Canadian manufacturer had used engines made in the United States that contained too many foreign parts to qualify as North American. However, Revenue Canada had previously approved the engines on import into Canada as meeting rule-of-origin requirements. For further information, see “Customs Rules that Canadian Honda Civics Failed to meet Content Standards under FTA, International Trade Reporter”, Vol. 9:10, March 4, 1992, 384, as cited in Winham (1992).
 
100
The Japanese car making company in Canada.
 
101
Marysville, Ohio. Honda’s manufacturing operations in the United States began with a motorcycle plant in Marysville in 1979. Levin and Fleeter. (firm) Honda in Ohio: The Economic Impact of the First 25 Years, “A study prepared by June (2004).” Online Computer Library Centre (OCLC) number 60885765. http://​dandftest.​com/​files/​Download/​Honda%20​Economic%20​Impact%20​Study%20​June%20​04.​PDF.
 
102
In calculating the domestic content requirement to 50% of the assembly costs, the CFTA (Canada Free Trade Area) utilises the direct costs methods, which requires 50% of the value of originating materials plus costs of processing be produced domestically. Direct costs are limited to direct labor, materials and processing costs. CFTA utilises the “roll up” method to calculate domestic content of automotive parts that consist of materials manufactured throughout the world.
 
103
Kerr and Gaisford (2006), p. 135. Roll up:—If a member country of a regional trade agreement uses an input from a second country, perhaps to produce intermediate products, the product would be designated as that of the former country provided it satisfied the ad-valorem criterion. If that intermediate product is then used in the manufacture of a final product, a roll-up rule would allow that very intermediate product to be counted as a product that was 100% from the first country.
Roll-down system:—In the case of a roll-down system, a product would be treated as 0% from a country, in which one country used an input from a second country to produce an intermediate product and the second country did not fulfil the ad-valorem threshold. It is basically the subtraction of the entire price of the part that doesn’t meet the ad-valorem standards to be considered as originating. (Roll-up and Roll-down methods are helpful in the case to determine product or intermediate product from the preferential trading region or outside).
 
104
On the basis of the facts, the US Customs service reached the opposite conclusion. The US Customs determined that the Honda Civics did not qualify for the duty-free treatment given to cars under the FTA, because they contained too many Japanese parts, and thus did not meet the 50% local content requirement of the FTA.
 
105
For Canada, the decision was important, Prime minister Mulroney said, “We are getting sides wiped, by American Japan-bashing.” Others thought it was more like Canada-bashing, or at least confirmation of their negative views on the FTA in general. Canada feared that Honda and other third country automobile manufacturers would not benefit from the FTA, and they would simply relocate their assembly work in the United States. US customs in this case refused to allow North American costs as an amount spent for direct costs of processing in the US.
 
106
Cantin and Lowenfeld (1993), p. 383.
 
107
An upstream firm produces only the intermediate goods, while a downstream firm produces the final product and buys the intermediate product in an open market.
 
108
Estevadeordal and Suominen (2008), p. 92.
 
109
Vermulst et al. (1995), p. 8.
 
110
Trade diversion means that a free trade area diverts trade away from a more efficient supplier outside the FTA, towards a less efficient supplier within the FTA.
 
111
Members, noting that Ministers on 20 September, 1986 agreed that the Uruguay Round of Multilateral Trade Negotiations shall aim to “bring about further liberalization and expansion of world trade,” “strengthen the role of GATT” and increase the responsiveness of the GATT system to the evolving international economic environment.
 
112
Article 2(d) the Rules of Origin that they apply to imports and exports are not more stringent than the Rules of Origin they apply to determine whether or not a product is domestic and shall not discriminate between other Members, irrespective of the affiliation of the manufacturers of the goods concerned.
 
113
Article 2 of the ‘Agreement on safeguards.’ A member may apply a safeguard measure to a product only if that member has determined, pursuant to the provisions set below, that such product is being imported into its territory in such increased quantities, absolute or relative to domestic production, and under such conditions as to cause or threaten to cause serious injury to the domestic industry that produces like or directly competitive products.
 
114
Article 2(b) Notwithstanding the measure or instrument of commercial policy to which they are linked, their rules of origin are not used as instruments to pursue trade objectives directly or indirectly;
Article2(c) Rules of Origin shall not themselves create restrictive, distorting or disruptive effects on international trade. They shall not pose unduly strict requirements or require the fulfillment of a certain condition not related to manufacturing or processing, as a prerequisite for the determination of the country of origin. However, costs not directly related to manufacturing or processing may be included for the purposes of the application of an ad valorem percentage criterion consistent with subparagraph (a).
 
115
WT/DS342/R. On 12 January 2009, with respect to WT/DS340 and WT/DS342, the DSB adopted the Appellate Body reports and the Panel reports as modified by the Appellate Body reports.
 
116
WT/DS342/R. para 3.4(g) Articles 3.1(b) and 3.2 of the SCM Agreement, by exempting domestic auto parts from charges imposed by the measures, as well exempting imported parts from charges imposed by the measures, as well as exempting imported parts from the charges if the motor vehicle manufacturer uses domestic over imported parts in order to meet the specified threshold.
 
117
Para 4.36 The measure constitutes a financial contribution since ‘government revenue’ that is otherwise due is foregone or not collected, Article 1.17(a) (1) (ii) of the SCM agreement. “The appropriate bench mark for comparison is the revenue that China raises through duties on imports of auto parts that are automobile parts characterized as complete vehicles.” China has established a duty rate which typically amounts to 25% of the value of the parts. If the local content requirements of the measures are not satisfied, this duty would be paid on imports of auto parts. If the imports, on the other hand, satisfy the local requirements, China has given up an entitlement to raise revenue that it could “otherwise” have raised. By charging this second category of parts imports with duties of typically only 10%, China has ignored the normative benchmark that it established for the first category of part’s imports and thus, has forgone “government revenues that are otherwise due.”
 
118
The EC, US and Canada identified policy measures as such. (1) Policy on the development of automotive industry that entered into force on 21 May, 2004. (See Para 2.1 of WT/DS 339/R, Order of the National Development and Reform Commission no. 8, Policy Order (that entered into force on 21 May 2004) (2) Administrative rules on the importation of automobile parts characterised as complete vehicle. (Decree of the People’s Republic of China, No. 125 (Decree 125), which entered into force on 1 April 2005). (3) Rules on the verification of imported automobile parts characterised as complete vehicle. (Public announcement of the Customs General Administration of the People’s Republic of China, no 4 of 2005 [announcement 4], which entered into force on 1 April 2005.
 
119
See para 4.33.
 
120
SKD Kit-Semi Knock Down Kit.
 
121
CKD Kit-Complete Knock Down Kit.
 
122
Article 1.1 (ii) of the SCM Agreement. ‘Government revenue that is otherwise due is foregone or not collected, e.g. loan fiscal incentives such as tax credits.’
Article 3.1 (b) of the SCM Agreement ‘Subsidies contingent, whether solely or as one of the several other conditions, upon the use of domestic over imported goods.’
 
123
Appellate Body recommended that China bring its measures into conformity with the Agreement.
 
124
Article 2 of the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994, ‘For the purpose of this Agreement, a product is to be considered as being dumped, i.e. introduced into the commerce of another country at less than its normal value, if the export price of the product exported from one country to another is less than the comparable price, in the ordinary course of trade, for the like product when destined for consumption in the exporting country.’
 
125
In the case of Case C-373/08 Hoesch Metals and Alloys GmbH v Hauptzollamt Aachen [2010]ECR I-951 p-228,247.
 
126
From the Preamble of the RoO ‘Desiring to ensure that rules of origin are prepared and applied in an impartial, transparent, predictable, consistent and neutral manner.’
 
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Metadata
Title
Unfolding the Intricacies of Trade Subsidies Through the WTO Rules of Origin
Author
Gurwinder Singh
Copyright Year
2017
Book
Subsidies in the Context of the WTO's Free Trade System

Print ISBN: 978-3-319-62421-1

Electronic ISBN: 978-3-319-62422-8

Copyright Year: 2017

DOI
https://doi.org/10.1007/978-3-319-62422-8_5