What is the primary function of the 'Rules of Origin' in a Free Trade Agreement (FTA)?
- To determine the geographical indication of agricultural products
- To prevent 'trade deflection' by ensuring that only goods substantially produced within the FTA zone receive preferential tariff treatment
- To establish the official language used in all customs documentation
- To mandate the use of specific shipping routes for transporting goods between member nations
Answer: To prevent 'trade deflection' by ensuring that only goods substantially produced within the FTA zone receive preferential tariff treatment
Without strict Rules of Origin, a non-member country (e.g., China) could simply route its exports through the FTA member with the lowest external tariff (e.g., a small ASEAN nation), slap on a minor label, and bypass the high tariffs of the destination country (e.g., India). Rules of Origin mandate a minimum percentage of local value addition or a specific change in tariff classification to prove the good genuinely originated within the FTA.