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Accumulation / Cumulation

29 May 2012

What is “accumulation”/“cumulation”?

The concept of "accumulation"/"cumulation" or "cumulative rules of origin" allows countries which are part of a preferential trade agreement to share production and jointly comply with the relevant rules of origin provisions. Otherwise said, the concept of accumulation/cumulation or cumulative rules of origin allows products of one country of a free trade area to be further processed or added to products in another country of that free trade area as if they had originated in the latter country. In this way, production may be aggregated with other countries’ inputs, thus, offering additional opportunities to source input materials. This essentially widens the definition of originating products and provides flexibility to develop economic relations between countries within a free trade area. Hence, with the concept of accumulation/cumulation in a free trade agreement, the use of input materials and manufacturing processes within that free trade area is encouraged. This promotes regional economic integration amongst members of a free trade area.

Accumulation/cumulation is a deviation from one of the core concepts of origin legislations. The basic rules of origin specify that only products which are either produced entirely in a specific country (wholly obtained) or sufficiently transformed according to the relevant origin rules may be regarded as originating in that country. The concept of accumulation/cumulation extends this principle in so far as accumulation/cumulation offers the possibility to use products originating in a partner country or in partner countries of a preferential trade area as originating materials for the manufacture of an originating product. The higher the degree of accumulation/cumulation, i.e. the greater the number of potential trading partners whose inputs can count towards satisfying the origin rules, the more liberal the rules and the easier to satisfy them. With wider accumulation/cumulation possibilities exporters will be less constrained in their choice of inputs and inefficient input sourcing in order to qualify for preferences is less likely and producers will be more competitive.

On the other hand, narrow accumulation/cumulation possibilities provide greater incentives to add value within the free trade area, but also impose greater costs to producers with the risk that the origin rules will not be met or will only be met at prohibitively high costs resulting in the preferences not being utilized.

Wider cumulation provisions offer greater freedom in sourcing to exporters. While wider cumulation rules make countries more competitive in manufacturing processes and thus more attractive for foreign direct investments, wider cumulation rules may, however, increase the possibility of unintended utilization of preferences by countries which do not participate in a preferential area.

Three types of "accumulation"/"cumulation"

In principle three types of accumulation/cumulation can be distinguished, although they are not specified as such in the legal texts. Those are bilateral accumulation/cumulation; diagonal/regional cumulation and full cumulation.

Provisions on accumulation/cumulation are found virtually in all origin legislations. The most common concept is bilateral cumulation.

WTO consistency of the cumulation rules

From the outset, the question is whether the formation of a free trade area is considered to facilitate trade or to constitute a barrier to trade and what role rules of origin and more precisely the rules for cumulation/accumulation play. It goes without saying that a free trade area generally promotes intra-regional trade which can change sourcing patterns. It is however difficult to prove that origin legislations violate the WTO law and little action had been undertaken in the GATT/WTO context to challenge the WTO consistency of rules of origin and amongst those the rules for cumulation/accumulation.

Rules for cumulation/accumulation are not specifically mentioned in the Common Declaration With Regard To Preferential Rules of Origin annexed to the WTO Agreement on Rules of Origin. Nevertheless the WTO regime as such has no bearing upon the cumulation/accumulation rules. Especially Article XXIV, paragraph 4 of GATT 1947 stipulates that the purpose of a customs union or a free trade area should contribute to facilitating trade between the constituent territories and not raise barriers for the trade with other countries. Thus, the question is whether cumulation/accumulation rules affect trade patterns and if yes, how.

Analysis shows that the cumulation/accumulation schemes affect trade patterns. But the views on how they do it are divided. Proponents of cumulation/accumulation schemes argue that cumulation/accumulation schemes would reduce trade barriers and thus facilitate trade among economies participating in preferential regimes. Critics argue that cumulation/accumulation schemes extend preferences of individual preferential arrangements to non-participating parties without any legal basis and in this way they may discriminate third parties.

The most inclusive legislation on accumulation/cumulation is found in the European origin legislation (Pan-Euro cumulation system and Euro-Med cumulation system). The European General System of Preferences (GSP) for developing countries and the Economic Partnership Agreements (EPAs) concluded between the EU and ACP (African, Caribbean and Pacific) countries also have comprehensive accumulation/cumulation possibilities for the promotion of regional integration.

The European origin legislation mostly offers the possibility of diagonal cumulation to its free trade partners, meaning the possibility to cumulate with originating inputs. The economies in the countries of Eastern Europe were in this way connected to the core European economies of the EU member states, Turkey and EFTA countries. Diagonal cumulation is also foreseen for the European partner countries in the Balkans and the Mediterranean rim (Euro-Med) and the Mediterranean countries are gradually integrated into the diagonal cumulation system offered by the Euro-Med cumulation. Diagonal cumulation also offers a better economic integration for members of a regional group of beneficiary countries in the European GSP scheme.

The NAFTA origin legislation also offers the possibility of cumulation, called accumulation. The NAFTA accumulation is in fact a full cumulation concept for the calculation of the regional value content requirement. However, compared to the European concept of cumulation, the NAFTA accumulation allows the use of origin conferring manufacturing stages solely for the calculation of the regional value content which is only one element of the origin determination. All other requirements set out in the product specific origin rules, such as tariff classification changes required for non-originating materials must be fulfilled anyway. This means that the NAFTA accumulation offers less room of manoeuvre for widening the definition of originating products compared to bilateral/diagonal cumulation concepts offering originating input from other partner countries.

It has to be acknowledged that the concept of accumulation/cumulation will deliver its full potential for product specific rules based on value added requirements or for specific rules of origin based on manufacturing operations (i.e. in the textile sector where different manufacturing stages are required, such as spinning and weaving or weaving and sewing or other finishing operations). The accumulation/cumulation concept within rules of origin based on a tariff shift model has a limited impact for the development of economic relations within a free trade area and the NAFTA accumulation system has to be seen under this angle.

The ASEAN origin legislation offers regional accumulation that allows only originating materials to benefit from regional accumulation (goods which have obtained originating status according to the ASEAN model). In short, this means that materials originating in one member state of the ASEAN origin legislation shall be considered as originating materials in the other state.

The TPP origin legislation offers full cumulation and this means that manufacturing processes can be carried out in different territories of the parties provided that processing has been done within several TPP parties within the same preferential area.

Administration of different types of accumulation/cumulation

Full cumulation models require a sophisticated system to trace back the different manufacturing processes made by the various producers in the different countries. A producer may only be sure to comply with the specific origin rules when he knows what kind of origin conferring contributions were provided by previous manufacturers (the use of originating or non-originating input in the case of cumulation with originating inputs or the totality of the share of origin contributions in the manufacturing chain for the overall assessment of total or full cumulation).

The traceability for originating inputs is easier to provide in bilateral/diagonal cumulation than in full cumulation. Under bilateral/diagonal cumulation the origin of a good is indicated in the customs declaration (the customs declaration shows whether or not the inputs were imported under preferences and the respective proof of origin submitted for customs clearance is indicated in the import declaration).

Inputs used under full cumulation may be imported without preferences with the consequence that origin relevant inputs for the use of full cumulation must be indicated separately (i.e. with the suppliers’ declaration). Therefore, an information system must be established between the economic operators in the preferential area to ensure that the information on previous origin conferring manufacturing operations provided by former producers will be delivered to the further producers in the manufacturing chain (in the European origin system there is a special form, a so-called suppliers’ declaration, which can be used to forward origin relevant information of previous manufacturing processes, i.e. manufacturing processes and added value inputs made in previous manufacturing stages which may be counted as origin conferring elements).

Accumulation/cumulation systems always need a legal framework in order to trace back the originating status of inputs benefitting from accumulation/cumulation and to administer and control the origin of such inputs.

The legal wording of the provisions for cumulation/accumulation is varying heavily in the various rules of origin models of the different preferential trade arrangements. It is perhaps one of the origin topics which is worded in the most heterogeneous way, despite the fact that there are only two distinctive types of cumulation/accumulation possibilities. In certain origin jurisdictions, cumulation/accumulation is stipulated in a specific article (called specifically cumulation/accumulation or cumulative rule of origin or cumulative treatment), whereas in other cases it is paraphrased in a general manner (sometimes found in the definitions or in the general requirements for origin determination, i.e. the requirement of "wholly obtained" and "sufficient transformation" requirement).

Hereafter, there are four explanations on the types of cumulation found in the European, the NAFTA, the ASEAN and the TPP contexts.