Rules of Origin in Mexico, as well as in North America as a whole, tell us where products come from and how they should be treated under the established rules of international trade. The “rules” are the provisions that determine the national “origin” of a product and whether that item is eligible for preferential tariff treatment offered by a free trade agreement (FTA). This is the case in North America under the United States, Mexico, and Canada free trade accord (USMCA). These rules also establish the procedures and requirements that allow customs authorities to apply rules and allow preferential treatment to goods subject to international trade.
The rules of origin in Mexico give order to the commercial system that is increasingly fragmented and global. However, the complexity and variety of the rules of origin ( RoO) that exist today sometimes present a challenge for companies doing international business that want to participate in production networks that span multiple countries and multiple free trade agreements.
This blog post will examine the critical issues related to RoO and how they can be made more inclusive at the regional and multilateral levels through simplification and harmonization. Here are the five most important aspects of the rules of origin in Mexico that the reader should be aware of.
Too strict rules of origin in Mexico could impact global value chains
Countries participating in global supply chains tend to source 15% more of the value added of their inputs from other members of the same FTA, on average, than from non-members. This is true for the signatories of the USMCA and is due, in part, to the rules of origin that determine whether those products are eligible for preferential treatment as per the trade treaty. While being a member of the USMCA trade agreement does not necessarily prevent the development of supply chains with non-member countries, empirical evidence suggests that RoO have significant implications for how firms choose to locate their production activities. Therefore, if the regulations surrounding the rules of origin are strict, they can harm the development of value chains. This happens due to discouraging using cheaper parts and materials from nations outside the free trade bloc.
Complex rules of origin can impede trade in developing countries
Origin criteria generally vary between different products within a given FTA and between various FTAs for a given product. This variability can lead to confusion and errors when deciding where to invest and where to export. Developing countries, in particular, are affected by this complexity. This is because complicated rules of origin in Mexico would add uncertainty to their decision-making and their ability to benefit from greater market access granted through FTAs and unilateral preferences. Therefore, there are those who are involved in international trade who argue in favor of the simplification and harmonization of the RoO. They are, generally speaking, in favor of the expansion of cumulation through the different FTAs and the Generalized System of Preferences (GSP) schemes. They see this as necessary to reduce the effective costs faced by active and potential participants in international production networks. This is especially relevant in the case of developing countries, whose participation rates in global value chains are relatively low.
Simplified rules of origin in Mexico represent more inclusive trade
The extensive network of FTAs that Mexico is a party to creates challenges related to the need to operate through multiple agreements with different RoOs. For example, when the RoO obliges a company to obtain certain inputs within the USMCA region, but the supply outside the trading bloc is cheaper, the companies’ costs would increase, and exports could fall. Therefore, before becoming a signatory to any FTA, a country must balance the benefits of tariff preferences with the additional costs of complying with its rules. Expanding the set of countries from which “originating” materials can be sourced – known as expanded cumulation – can reduce compliance costs. By increasing the group of countries from which “originating” materials can be accumulated, the possibilities of including the supplier that the company would have chosen without origin restrictions will be increased. In this instance, sourcing options will be expanded. This allows companies more variety to select suppliers that meet their needs and minimize costs while still being eligible for tariff preferences under the USMCA and other FTAs that may be in question.
Mega-regional agreements such as the USMCA have an essential and positive role
Regional agreements such as the USMCA, the Trans-Pacific Economic Cooperation Agreement (TPP), the Regional Comprehensive Economic Partnership (PECR), the Continental Free Trade Area in Africa (CFTA); and “ mini-mega-regionals ” like the Pacific Alliance are expanding the stack. This is accomplished by bringing together countries with multiple trade agreements under a new regime that establishes a single set of RoOs. By negotiating a new set of rules acceptable to the economic realities of participating countries, these agreements can better promote trade and trade linkages. More importantly, these regimes help reduce the costs and complexity of RoO by improving utilization rates of trade treaties.
The multilateral and regional trading system can help increase coherence in rules of origin in Mexico
Organizations such as the World Trade Organization and the World Customs Organization can help promote “best practices” for rules of origin in Mexico and other nations that trade internationally. For example, through the RoO’s definition of positive standards (what conditions give originating status), rather than listing the circumstances that do not give rise to originating goods. At the regional level, countries should focus on trade facilitation measures to make RoO regimes more productive. For example, integrating preferential origin with single electronic windows, especially those that are interoperable between countries, can help trade flow more efficiently. Authorized economic operator systems could also incorporate preferential origin by adopting a “once and done” rule whereby frequent traders prove their origin only once. The practical advantage of this is granting accelerated treatment of the goods in question in the future.
The tangled global web of FTAs that Mexico and other countries have constructed is ripe for reforms of rules of origin provisions that can make it work more rationally. Moreover, doing so would give the economies of developing countries such as Mexico more opportunities to grow through increased participation in global trade markets.