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2020 ] RULE OF ORIGIN PROVISIONS : A MOVE TOWARDS PROTECTIONISM! A61

tor are often different and are generally less favourable than the general rules on
tolerance. In many cases, the rule is applied in terms of the maximum weight
rather than the value of the non-originating materials that are tolerated, and in
cases in which the value threshold is maintained, it is set at a lower level than in
the general rule.
Absorption (Roll-Up) Principle
According to the absorption principle, parts or materials that have ac-
quired originating status by satisfying the relevant rules of origin can be treated
as being of domestic origin in any further processing and transformation. This is
of particular relevance to the value added test. For example, in the production of
a particular part, origin is conferred because imported materials constitute 20 per
cent of the final price of the part and are less than the maximum, say, 30 per cent
required by an import content rule of origin. This part will then be treated as 100
per cent originating when incorporated into a final product. The 20 per cent im-
port content of the part is not taken into account when assessing the import con-
tent of the final product. The converse of this is that if the part does not satisfy
the relevant rule of origin, it is deemed to be 100 per cent non-originating (“roll-
down”). Ideally, if the part or the materials fail to satisfy the relevant rule of
origin, the portion of value added domestically should still be counted in the de-
termination of the origin of the final product.
Duty drawback and outward processing
Provisions relating to duty drawback can lead to the repayment of duties
on non-originating inputs used in the production of a final product that is ex-
ported to a free trade or preferential trade partner. Some agreements contain ex-
plicit no-drawback rules that will affect decisions relating to the sourcing of in-
puts by firms exporting within the trade area, reducing the incentives for the use
of imported inputs from non-participating countries and encouraging the use of
originating inputs from participating ones. Increasingly important are rules con-
cerning territoriality and the treatment of outward processing by companies
based within the free trade area that is undertaken in countries that are not
members of the agreement. These rules determine whether processing outside
the area undermines the originating status of the final product exported from
one partner to another.
Analysis on proposed changes to rules of origin
Rules of origin may be an important factor in determining the invest-
ment decisions of multinational firms. Such firms often rely on imported inputs
from broad international networks that are vital for supporting firm-specific ad-
vantages such as a technological edge in the production of certain inputs. More
generally, if the nature and application of a given set of rules of origin increase
the uncertainty concerning the extent to which preferential access will actually be
provided, the level of investment will be less than if such uncertainty were re-
duced. For companies, there is not only the issue of complying with the rules on
sufficient processing but also the cost of obtaining the certificate of origin, includ-
ing any delays that arise in obtaining it. The costs of proving origin include satis-
fying a number of administrative procedures, so as to be able to provide the re-
quired documentation, and maintaining systems that accurately account for im-
ported inputs from different sources, in order to prove consistency with the
rules. The ability to prove origin may well require the use of what are, for small
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