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Photo: Bloomberg
Photo: Bloomberg

Opinion | India mustn’t rush into slapping all imports with labels of origin

Determining where a product is made can be hard and clear rules are a must so that compliance does not become a burden

About 100 years ago when Mahatma Gandhi called for a boycott of English textiles, those who heeded his patriotic call faced all manner of hardship, but they probably did not face difficulty in identifying the textiles they were to boycott. However, those who wish to boycott goods from particular countries today have an immediate practical problem—free trade and globalization have made the determination of “economic nationality" of manufactured goods very complex and difficult.

Boycotts are not the only reason—or even the primary reason—for rules of origin to exist. Free Trade Agreements (FTAs), anti-dumping actions, and preferential tariffs are impossible to implement without some sort of rules of origin.

Raw materials from country A, B and C are semi-processed in country D, and then assembled as product X in country E. So what is the nationality of product X? The answer is that it depends on the criteria one chooses to make the determination. These criteria are defined in the “rules of origin", which vary from country to country and treaty to treaty. Article IX of the World Trade Organization Agreement provides that “marks of origin" should ideally be placed at the time of import. For example in 2005, India’s government issued custom rules to determine which goods could take advantage of the Singapore-India Comprehensive Economic Cooperation Agreement; it provided that the treaty would apply to goods either wholly manufactured in one of the territories, or at least 60% of the free-on-board value of the product finally manufactured would belong to such a territory, and that there would be a change in tariff classification from the point at which the product entered the territory. There are formulae to calculate this. India’s agreements with Chile and the preferential trade agreement with the Mercosur customs union appear similar. The India-Japan free trade agreement (FTA) calls for a qualified value content of not less than 35%. The arcane rules of calculation also provide an opportunity for exporters and manufacturers to game the system and show goods to be manufactured from a particular country merely to take advantage of preferential tariffs or an FTA.

The sheer proliferation of FTAs by nations worldwide has led to what Jagdish Bhagwati has termed the “spaghetti bowl effect". International harmonization of rules of origin has been an on- going project since the 1990s. Unsurprisingly, given the number and complexities of the trading practices of some 190 countries, not much progress has been made. After many years, there seems to be a consensus on the rules of origin for Least Developed Countries, which is the lowest hanging fruit in international trade. But it seems unlikely that there will be harmonized rules of origin for all products anytime soon.

If this is not complicated enough, rules of origin also have a nasty way of embroiling trading nations in issues of territorial boundaries and disputes of third states. The European Court of Justice determined that goods manufactured in the West Bank or Gaza Settlements could not be labelled as Israeli goods under the EU-Israel agreements, naturally leading to great dissatisfaction from the Israelis. How would India treat goods made in Crimea for example?

With effect from 2018, Rule 6(aa) was inserted in the Legal Metrology (Packaged Commodity) Rules 2011, to require that packaged products convey the country of origin or manufacture or assembly in case of imported products. Unfortunately, no further guidance appears to have been provided on how this is to be implemented for all packaged commodities.

Is the place where the product is imported from sufficient to meet this requirement? This seems unlikely. Many products are imported from third countries where they are neither manufactured nor assembled. Suppose goods have been imported to India from country Y, which in turn imported them from country X. The labelling and origin of such a product would conform to the rules or origin as they apply in country Y, which may or may not be the rules of origin as they apply in India to that particular product. Thus every importer would have to do a very careful due diligence to make a truthful declaration of the rules of origin as they apply to the product in India.

Further, Rule 6(aa) adds to the complexity because the country of manufacturing, assembly and origin can each be distinct, depending on the criteria chosen to make such determination.

There can be little doubt that an accurate declaration of the origin of products aids consumer choice. However, a knee-jerk reaction that puts a difficult burden on traders and importers is not advisable. Before implementing any directions regarding the declaration of the origin of imported products, the government must understand the complexity of the situation as well as the state of our law. Our laws must formulate clear rules about how the origin of products is to be determined for purposes of metrology, and must provide guidance on what importers need to do to comply.

Boycotting is a perfectly valid way of influencing national behaviour, as the example of apartheid in South Africa showed. However, to be effective, it must be done right.

Rahul Narayan is an advocate-on-record at the Supreme Court of India.

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