The Link Between Rules of Origin and Export Credit insurance

The link between rules of origin and export credit insurance The notion of rules of origin has great relevance even outside the general context of the WTO Agreement.

Insurance Companies and Export Credit Agencies, for instance, require applicants for an insurance policy to comply with rules of origin set by them and adopted on a case by case basis. Even though general principle and classification methods are the same used and referred to in the Agreement, insurance companies, usually, apply rules of origin drawn up in an independent way according to their institutional purpose.

Rules of origin are adopted by ECAs and insurance companies to define the maximum percentage of foreign content (or the minimum percentage of domestic
content) on which they base the granting of their financial services. Therefore, the product’s origin is a remarkable decisive element for the exporter.

Entrepreneurs who apply for an insurance policy are requested to accept the rules of origin that are stated in a different and autonomous way by each Export Credit Agency and insurance company.

Rules of origin are, thus, an important factor in determining both the tariffs that are imposed on specific goods and whether quantitative and other trade restrictive measures may be applied to imported goods. Their application is also fundamental as criteria to apply for an insurance policy. Consequently the manner in which these rules are formulated and applied may have a relevant impact on the entrepreneur’s decisions.

Considering rules of origin may provide for either discriminatory trade measure or higher percentage of risk not insured, they have a significant impact on the strategic planning of firms. In the first case, exporters analyse the different rules, quantify their costs, treat them as a factor of production in determining where to source their investments, purchase their raw materials, produce or purchase intermediate materials and assemble the final products. In the second case, the entrepreneur decision on if and to whom apply (which agency and in which country) for a credit insurance is influenced by rules of origin and the percentage of cover granted.

In order to apply for an insurance policy, the nationality of the good is the guideline to determine the percentage of risk that will be covered. Since a high
percentage of foreign content leaves most part of the risks on him, the entrepreneur has to consider:
• the method used to determine the origin of products
• the percentage of domestic content necessary to be provided by the insurance cover
• the percentage of foreign content accepted in the insurance policy
• the exceptions to the rule related to particular originating countries
• the reduction of the risk coverage due to the presence of higher foreign content
• the amount of the reduction of risk coverage

In addition, it becomes important for him to know the percentage of cover granted by each Export Credit Agency for all types of risks (political or commercial) if local costs are covered and within which limits, and the nationality requirements to provide insurance cover. It is obvious that the adoption of rules of origin by ECAs and insurance companies has relevant influence on the producer’s and exporter’s decision-making; as more local industrial processes and materials are employed in the manufacture of a product, the percentage of risk covered increases.

Origin rules play also an important role with regards to the exporter’s need of financial resources: funds available at more convenient terms in another country can be obtained thanks to insurance cover or guarantee provided by that country’s export credit insurance company. Rules of origin encourage enterprises to diversify their economic efforts and to carry out more industrial processes within their territory and, whenever possible, to use local materials.

The decision to acquire inputs or to apply for an insurance policy in another country involves the evaluation of transaction costs. The final resolution will depend on an accurate analysis of costs and benefits related to each option. Hence, knowing which origin rules are in force in other countries becomes an important instrument for the entrepreneur to be more efficient and thus more competitive on the market place.