No-drawback rule

Definition and principle

The no-drawback rule (prohibition of drawback or remission of duties) is a provision found in many free trade agreements that prohibits exporters from benefiting both from preferential treatment on export (reduced duties for the buyer) and from a drawback (refund or exemption) of customs duties paid on non-originating materials imported and incorporated into the exported product.

Legal framework

The no-drawback rule is provided for in the origin protocols of most "old generation" EU free trade agreements. It appears notably in Mediterranean agreements and the PEM convention. However, some recent agreements (EU-Japan, EU-Canada/CETA) do not include this prohibition, which constitutes a significant advantage. The relevant article is generally entitled "Prohibition of drawback of, or exemption from, customs duties" in origin protocols.

Practical operation

• If a manufacturer in the EU imports non-originating materials paying customs duties, and transforms them into a product exported with a preferential proof of origin, they cannot claim a refund of the duties paid on those materials
• This rule aims to avoid a double advantage: duty reduction on import in the partner country AND duty refund in the exporting country
• Suspensive regimes (inward processing) are generally affected by this rule

Strategic implications

• The absence of a no-drawback rule in recent agreements (CETA, JEFTA) is a major competitive advantage for companies using materials imported from third countries
• Companies must assess the financial impact of this rule in their sourcing strategy and customs regime selection
• The coexistence of agreements with and without no-drawback rules complicates trade flow management