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5. Why does the "rules of origin" can cause controversy?

Article: Rules of origin can lead to significant controversy. Under the CUSFTA (prior to NAFTA), a major dispute arose between the United States and Canada over the interpretation of the rules of origin regarding automobiles: the Canadian assembler had imported engines produced in the United States, and treated those engines as CUSFTA-made. The United States insisted that a sizable number of engine parts had been imported from outside CUSFTA, and that the autos were therefore not eligible for CUSFTA duty-free treatment. The enforcement and implementation of rules of origin also imposes costs and can thus constitute a trade barrier. A study undertaken by the European Free Trade Association estimated that the cost to EFTA members of documenting origin to receive duty-free entry into the EU averaged 3-5 percent of the price.Negotiations over rules of origin offer an opportunity for producers to lobby for restrictive rules of origin for goods of concern to them. The final sticking points in the NAFTA agreement were automobiles and garments. In both cases, the U.S. negotiators wanted more stringent rules of origin than did their Mexican counterparts. From the viewpoint of those seeking protection, rules of origin are excellent instruments for two reasons. First, they are not transparent. It is impossible for the average person to know what, for example, the "triple transformation rule" in NAFTA costs. The final NAFTA agreement contains over 200 pages of rules of origin, including some that exclude commodities altogether. Cheese, for example, is conferred origin unless it is made of dairy products (Palmeter, 1993). Moreover, rules of origin can differ across agreements and for different purposes. For example, while the United States uses "substantial transformation" as a general standard for rules of origin, actual rules of origin are different under the Caribbean Basin Initiative than they were under CUSFTA, which in turn differed from those for Generalized System of Preferences, and differed yet again for purposes of labeling rules (Palmeter, p. 338). Rules of origin can be based on process used, on percentage of value added, on change in tariff heading, or on substantial transformation. When value added is used, questions must still be addressed as to the treatment of raw materials, interest costs, accounting for overhead, and so on.