Rules of origin under the Australia-New Zealand closer economic relations trade agreement

Rules of origin (RoO), such as those in the CER Agreement between Australia and New Zealand, are required to confine access to trade concessions to goods from member countries.

RoO are discriminatory. They provide an incentive for producers to purchase inputs from suppliers in member countries rather than from other, lower-cost, sources. The additional costs can outweigh the gains from more liberal trading arrangements.

The global increase in the number of preferential trading agreements (PTAs) will result in diverse RoO, adding to the complexity and compliance costs of engaging in trade.

• Origin rules based on the change in tariff classification model adopted in most non-CER PTAs differ significantly in detail. The benefits for traders from adopting this model for all of Australia's PTAs would consequently be minor.

CER RoO are relatively 'clean' and simple. Nevertheless, they have some shortcomings, primarily because they have not kept pace with changes in technology and the organisation of production. The shortcomings:

• reduce efficiency; and
• add to compliance and administration costs.

Trade concessions available under CER have declined in value as tariffs have been reduced and the relevance of origin rules has consequently diminished.

• Over half of the value of trans-Tasman trade is in items with a most favoured nation tariff rate of zero and is unaffected by RoO.
• A further 35 per cent of that trade is in items with a tariff rate of 5 per cent or less and is not significantly affected by RoO.
• The remaining 12 per cent or so is in items with a tariff rate of more than 5 per cent and is more likely to be affected by RoO.

In view of the maturity of the CER agreement and the significant limitations of the alternative models, the basic framework of the CER RoO should remain unchanged.

The most fruitful approach to addressing problems with CER origin rules would be:

• to implement, as soon as practicable, some relatively minor changes to reduce operational problems; and
• to liberalise the current rules by applying a waiver to provide duty free entry for CER goods manufactured in Australia or New Zealand which face trans-Tasman tariff differences of 5 percentage points or less.

These proposals are consistent with the intent of the CER Agreement, particularly the goal of eliminating barriers to CER trade. They would alleviate the present regulatory burden and would not impose significant adjustment costs.

The proposals also are consistent with recent initiatives by both governments to develop a single economic market comprising Australia and New Zealand.

The rules of origin under the Closer Economic Relations Trade Agreement between Australia and New Zealand should be liberalised, according to a research report released by the Productivity Commission. This would allow freer trans-Tasman trade and better meet the intent of the Agreement.

Rules of origin are designed to confine access to trade concessions to goods from member countries. In its report - Rules of Origin under the Australia-New Zealand Closer Economic Relations Trade Agreement (CER) - the Commission found that the CER rules of origin have not kept pace with changes in technology and business practices. For example, outsourcing of some components or even a growth in sales can result in firms failing to meet rules of origin requirements.

The Productivity Commission’s recommendations include relatively minor changes to reduce operational problems and more substantial changes to liberalise the current rules. It recommends automatic duty free entry - via a waiver of CER content requirements - for goods produced in Australia or New Zealand which face small trans-Tasman tariff differences.

The Commission’s recommendations would reduce restrictions on businesses and enable them to lower costs, improve productivity and expand trade across the Tasman. The recommendations would also reduce compliance and administrative burdens, and would not impose significant adjustment costs.

Preliminaries
Cover, Copyright, Terms of reference, Contents, Abbreviations, Key Points, Overview, recommendations and findings

1 About the study
1.1 Background
1.2 The reference
1.3 Outline of the CER RoO
1.4 CER in the context of the international trading system
1.5 Parallel study
1.6 Conduct of this study
1.7 Structure of the report

2 Trends in preferential trade
2.1 Global trends in preferential trade
2.2 Trends in CER trade
2.3 The changed tariff environment for CER
2.4 Concluding comments

3 Rules of origin and their role in trade agreements
3.1 The need for RoO
3.2 Assessing origin is difficult
3.3 Special origin rules are common
3.4 The WTO's efforts to harmonise RoO
3.5 Concluding comments

4 Economic effects of rules of origin
4.1 Trade and welfare effects
4.2 Investment effects
4.3 The efficiency and productivity of firms
4.4 Empirical work on RoO
4.5 International developments
4.6 Concluding comments

5 Problems with CER rules of origin
5.1 Background
5.2 Inconsistent implementation
5.3 Difficulties with last process of manufacture requirement
5.4 Regional content threshold (50 per cent rule)
5.5 Compliance and enforcement
5.6 Determined manufactured raw materials
5.7 Differences in duty on inputs
5.8 Recent developments
5.9 Concluding comments

6 Compliance and administration costs
6.1 Scope of compliance and administration costs
6.2 Claiming preference - the process
6.3 What costs does proving origin impose on business?
6.4 Costs incurred by Customs in administering RoO
6.5 Compliance and administration costs under multiple RoO
6.6 Concluding comments

7 Design principles
7.1 General design principles for RoO
7.2 What these principles mean at a practical level

8 Options for change
8.1 Determination of substantial transformation
8.2 Regional value content approach
8.3 Change in tariff classification approach
8.4 Rely only on a standard definition of manufacture
8.5 Waivers
8.6 Tariff-based options

9 The Commission's proposals
9.1 CER RoO have become unduly restrictive
9.2 The tariff environment is changing
9.3 Where to from here?

A Conduct of the study

B Stocktake of preferential trade agreements

C Definitions of manufacture under the CER

References