Newswise — Complex, inconsistent and often conflicting rules on product origins are undercutting free-trade agreements affecting the United States and 20 other Pacific Rim economies, according to a study by a USC Marshall School of Business team.
The USC Marshall team of MBA students presented its findings in two different sessions this week in Sydney to ABAC, the business advisory council of Asia-Pacific Economic Cooperation, or APEC. APEC is holding its annual summit of economic ministers and leaders in Sydney, hosted by Australian Prime Minister John Howard and focused on issues of trade and climate change.
Problems with the "Rules of Origin" provisions in trade agreements often lead frustrated companies to give up trying to qualify for tariff relief, the USC Marshall team found. Instead, the companies end up paying steep import fees that the agreements were intended to eliminate, or the companies avoid doing business in countries with particularly problematic rules. Both outcomes reduce economic opportunities throughout the Pacific Rim.
The student team spent months meticulously cataloguing and analyzing 48 Rules of Origin provisions in 25 agreements ranging from NAFTA and the ASEAN compact to bilateral agreements among the United States, Mexico, Canada, Australia, Peru, Chile, Japan, Korea, China and other Pacific Rim countries. The Rules of Origin set out how a company certifies that its product came largely from qualifying local sources and parts. The free-trade agreements typically eliminate import tariffs that otherwise add 20 to 30 percent or more to the product's costs.
The group also interviewed dozens of business and economic leaders in the United States and 12 other Pacific Rim countries, with particular focus on the auto and food industries. Other team findings include:
"¢ Companies are incurring "huge expenses" trying to comply with Rules of Origin. One company spent hundreds of thousands of dollars in initial consulting fees and thousands more each month to comply with certification requirements. Those costs and related barriers keep many small and mid-sized companies from benefiting from these trade agreements. "¢ Confusion and costs are worsened when companies try to comply with multiple trade agreements, which often are inconsistent or even in conflict with each other. "¢ Customs officials need better training and consistency. For instance, a company importing tractor tires faced wildly different treatment in different countries. In one country, its tires paid no tariff in one port, and a substantial one in another. Customs officials in a second country misclassified the tires for aviation, and slapped on a steep tariff, while a third country also misclassified the tires, but imposed no tariff. "¢ The Rules of Origin can be made more consistent across these and future agreements without harming local economies. "¢ Companies should help their suppliers provide the documentation needed to meet the trade rules. Suppliers are often badly equipped to document their products' origins, complicating the larger company's efforts to meet trade rules. "¢ Companies should designate employees to work specifically on complying with Rules of Origin.
ABAC business leaders will use the team's findings in advising their nations' economic and political leaders during this week's summit and beyond.
Sean Haran led the USC Marshall student team, which also included May (Wei) Li, Joseph Difilippo, Andrew Schulman, Crystal (Chia-Ying) Ban, Yue Hu, Su Lee, Sylvia (Shengsheng) Zhang, Justin Campbell, Danielle Evans, Sahil Parmar, Aaron Seligman, and Julie Mulkerin.
USC Marshall professors Carl W. Voigt and Ravi Kumar joined the team during the Sydney presentation, while Assistant Professor of Clinical Dennis Schorr also advised the team during its work.
A photo of the student team is available on request.
About the USC Marshall School of Business Based at the crossroads of the Pacific Rim, in Los Angeles at the University of Southern California, the USC Marshall School of Business is dedicated to training global leaders to make a difference. USC Marshall is the best place to learn the art and science of business.
The school's complete array of programs annually serve more than 5,000 undergraduate, graduate, professional and executive-education students, who attend classes at the main University Park campus in Los Angeles, and in satellite facilities in Irvine and North San Diego County.
In conjunction with Jiao Tong University in Shanghai, USC Marshall also operates a Global Executive MBA program in China. For more information, go to http://www.marshall.usc.edu
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