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A60 EXCISE LAW TIMES [ Vol. 372

NAFTA. In Europe, a pan-European system of rules of origin with diagonal cu-
mulation has been developed to govern EU free trade agreements with countries
of the European Free Trade Association (EFTA) and with countries in Central
and Eastern Europe. Diagonal cumulation is allowed under the EU’s GSP
scheme, but within a limited set of regional groups that have pursued their own
regional trade agreements. For example, diagonal cumulation can take place
within four regional groupings : ASEAN, the Central American Common Market
(CACM), the Andean Community, and the South Asian Association for Regional
Cooperation (SAARC). Diagonal cumulation allows originating materials from
regional partners to be further processed in another country in the group and
treated as though the materials originated in the country where the processing is
undertaken. This flexibility in sourcing is, however, constrained by the further
requirement that the value added in the final stage of production exceed the
highest customs value of any of the inputs used from countries in the regional
grouping. Thus, for example, with diagonal cumulation, shirt producers in Cam-
bodia can use fabrics from Indonesia (provided that they are originating—that is,
produced from the fibre stage) and still receive duty-free access to the EU, but
the value added in Cambodia must exceed the value of the imported fabric from
Indonesia. Similarly, producers in Nepal can import originating fabric from India
and still qualify for preferential access to the EU if the value added in Nepal is
sufficient. As demonstrated in a report by the United Nations Conference on
Trade and Development (UNCTAD) and the Commonwealth Secretariat (2001),
the value added requirement can render regional cumulation of little value. For
example, value added in the making up of clothing in Bangladesh ranges from
between 25 and 35 per cent of the value of the product, so the import content of
the fabrics that come from India is around 65 to 75 per cent. In this case, the value
added requirement placed on regional cumulation is not met, and origin of the
made-up clothing is conferred not on Bangladesh, but on India. Regional cumu-
lation still allows clothing that is produced in Bangladesh from Indian fabrics
preferential access to the EU, but not at the zero rate for which Bangladesh is eli-
gible. Rather, the rate for which India is eligible a 20 per cent reduction from the
Most Favoured Nation (MFN) rate is applied. Thus, instead of the zero duty,
which is in principle available to Bangladesh under the Everything But Arms
Regulation, a tariff of more than 9 per cent would be levied on these exports from
Bangladesh to the EU. In full cumulation, any processing activities carried out in
any participating country in a regional group can be counted as qualifying con-
tent, regardless of whether the processing is sufficient to confer originating status
on the materials themselves. Full cumulation allows for greater fragmentation of
production processes among the members of the regional group and so stimu-
lates increased economic linkages and trade within the region.
Tolerance Rules
Tolerance, or de minimis, rules allow a certain percentage of non-
originating materials to be used without affecting the origin of the final product.
The tolerance rule can make it easier for products with non-originating inputs to
qualify for preferences under the change of tariff heading rule and the specific
manufacturing process rule. This provision does not affect the value added rules.
The tolerance rule does not act to lower the limitation on the value of imported
materials; the non-originating materials will always be counted in calculating
import value content. The tolerance rules applied to the textiles and clothing sec-
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