RULES OF ORIGIN
Anait: Definition
Slide 3: During the Uruguay Round, participating countries recognized the
need to provide transparency to regulations and practices regarding Rules of
Origin.
Slide 4: The main purpose was to prevent unnecessary obstacles to the flow
of international trade. The Agreement established a Harmonization Work
Programme (HWP) to harmonize Non-Preferential Rules of Origin.
The main goal is to bring about further liberalization and expansion of
world trade.
Rules of origin are the criteria needed to determine the national source of a
product. Their importance is derived from the fact that duties and restrictions in
several cases depend upon the source of imports.
There is wide variation in the practice of governments with regard to the rules of
origin. While the requirement of substantial transformation is universally
recognized, some governments apply the criterion of change of tariff
classification, others the ad valorem percentage criterion and yet others the
criterion of manufacturing or processing operation. In a globalizing world it has
become even more important that a degree of harmonization is achieved in these
practices of Members in implementing such a requirement.
Slide 5: Where are rules of origin used?
Rules of origin are used:
— to implement measures and instruments of commercial policy such as antidumping duties and safeguard measures;
— to determine whether imported products shall receive most-favoured-nation
(MFN) treatment or preferential treatment;
— for the purpose of trade statistics;
— for the application of labelling and marking requirements; and
— for government procurement.
Sofia: History of ROR
Slide 6: The first attempt to harmonize rules of origin was launched by the
International Chamber of Commerce (ICC) in 1953, with a resolution to the
Contracting Parties recommending the adoption of a uniform definition for
determining the nationality of manufactured goods. The abstract principle of
“substantial transformation” was proposed as a guiding definition for the
determination of origin. Whereas some countries were in favour of a standard
international definition of origin with uniform rules for origin determination,
others considered origin to be “inescapably bound up with national economic
policies” which they considered to be different in each country (this split in
opinions continues to exist to this day), and a consensus could not be reached
amongst GATT Contracting Parties to envisage a possible harmonization of the
rules in the field of origin.
Although the members of the United Nations Conference on Trade and
Development (UNCTAD) had recognized that there was a need to examine rules
of origin at the multilateral and systemic levels, the second attempt to harmonize
preferential rules of origin, initiated during the discussions on the establishment
of the General System of Preferences (GSP) in the 1960s, was unsuccessful, with
the consequence that the preference-giving countries opted to retain their own
origin systems.
The Kyoto Convention: The First Guidelines on Rules of Origin on an
International Scale
Slide 7: More successful was the further attempt to harmonize rules of
origin with the inclusion of guidelines on rules of origin in the International
Convention on the Simplification and Harmonization of Customs Procedures
(commonly known as the Kyoto Convention).
The International Convention on the Simplification and Harmonization of
Customs Procedures (commonly known as the Kyoto Convention) was negotiated
under the auspices of the Customs Cooperation Council in Brussels. The
Convention laid down common principles with the aim of simplifying and
harmonizing Customs procedures. To achieve this objective, standards and
recommended practices are set out in the Annexes to the Convention, without
preventing Contracting Parties from granting greater facilities than those
provided in the Convention. Consequently, each Contracting Party is
recommended to grant such greater facilities as extensively as possible.
Elli: Rules of Origin are included into the Multilateral Trading System of
the World Trade Organization
Slide 8: Amid fears that rules of origin might unfairly restrict imports they
have increasingly become the subject of complaints, and more and more countries
were of the opinion that rules of origin should be subjected to some form of
GATT discipline. In 1980, disputes between Japan and other East Asian countries
and their major trading partners lead Japan to propose that the harmonization of
preferential and non-preferential rules of origin be carried out within the Uruguay
Round of Multilateral Trade Negotiations. Those disputes derived from different
views on the application of rules of origin in conjunction with anti-dumping
proceedings. The United States supported the idea. However, European countries
were reluctant to address preferential rules of origin as part of the same exercise.
Despite the divergent views on this issue, rules of origin were included into the
Uruguay Round negotiations with a compromise that only non-preferential rules
of origin should be discussed.
Preferential rules of origin were included into a non-binding Common
Declaration imposing a number of general exhortations with broad commitments,
in the hope of creating a more transparent, rule of law-like system for applications
of preferential rules of origin (i.e., trying to make preferential rules of origin clear,
have them based on positive standards, have them published in accordance with
GATT rules, assert that changes should not be applied retroactively, and to
guarantee judicial review mechanisms).
The results of the discussions on rules of origin within the Uruguay Round
talks were compiled into the “Agreement on Rules of Origin” and were annexed
to the Marrakech Agreement establishing the World Trade Organization which
entered into force in 1995. The principle of the single undertaking in WTO
requires that all WTO members undertake to implement the whole legal
framework of the WTO, without having the possibility to opt out certain aspects.
All members are, thus, bound to apply the Agreement on Rules of Origin. The
WTO Agreement on Rules of Origin seeks to harmonize all non-preferential rules
of origin used by WTO members into a single set of international rules.
Negotiations on the harmonization of non-preferential rules of origin are
underway. However, until they are finalized each country continues to apply its
own non-preferential rules of origin.
Slide 9: The WTO Agreement on Rules of Origin does not foresee the
harmonization of preferential rules of origin, and each country continues to be
free to shape its own preferential rules of origin in its preferential trade relations.
Anait: No specific provision in GATT
Slide 10: GATT has no specific rules governing the determination of the
country of origin of goods in international commerce. Each contracting party was
free to determine its own origin rules, and could even maintain several different
rules of origin depending on the purpose of the particular regulation. The
draftsmen of the General Agreement stated that the rules of origin should be left:
“...within the province of each importing country to determine, in accordance
with the provisions of its law, for the purpose of applying the most-favourednation provisions (and for other GATT purposes), whether goods do in fact
originate in a particular country”.
Article VIII:1(c) of the General Agreement, dealing with fees and
formalities connected with importation and exportation, states that “the
contracting parties also recognize the need for minimizing the incidence and
complexity of import and export formalities and for decreasing and simplifying
import and export documentation requirements” and the Interpretative Note 2 to
this Article states that it would be consistent if, “on the importation of products
from the territory of a contracting party into the territory of another contracting
party, the production of certificates of origin should only be required to the extent
that is strictly indispensable”.
Sofia: Legal Framework
Slide 11: The Agreement reached in the Uruguay Round provides a
programme for the harmonization of rules of origin for application to all nonpreferential commercial policy instruments, including most-favoured-nation
treatment, anti-dumping and countervailing duties, marking requirements under
Article IX of the GATT, and government procurement. It also establishes
disciplines that individual countries must observe in instituting or operating rules
of origin and provides for the framework for the harmonization of rules and
dispute settlement procedures.
(a) Principles of Rules of origin:
(i) must apply equally for all purposes of non-preferential treatment ;
(ii) must be objective, understandable, and predictable;
(iii) must not be used directly or indirectly as instruments to pursue trade
objectives;
(iv) must not, in and of themselves, have a restrictive, distorting, or disruptive
influence on international trade; etc.
Types of Rules of origin
Slide 12: Article 1 of the Rules of Origin Agreement defines rules of origin
as those laws, regulations and administrative determinations of general
application applied to determine the country of origin of goods except those
related to the granting of tariff preferences.
A distinction should be made between non-preferential and preferential
rules of origin.
Non-preferential rules of origin
Non-preferential rules of origin are those which apply in the absence of any
trade preference — that is, when trade is conducted on a most-favoured nation
basis. Not all countries apply specific legislation related to non-preferential rules
of origin. However, some trade policy measures such as quotas, anti-dumping or
“made in” labels may require a determination of origin and, therefore, the
application of non-preferential rules.
The non-preferential rules of origin are used for the implementation of an
array of trade policy measures which are listed under paragraph 2 of Article 1 of
the WTO Agreement on Rules of Origin:
- Application of Most-Favoured Nation-Treatment; - Anti-Dumping and
Countervailing Duties;
- Safeguard Measures;
- Origin Marking Requirements;
- Quantitative Restrictions or Tariff Quotas; - Government Procurement; and
- Trade Statistics.
With respect to non-preferential rules of origin, the Agreement on Rules
of Origin provides for a work programme on the harmonisation of these rules. In
fact, the negotiations on the harmonisation of non-preferential rules of origin have
been stalled since 2007.
Ellina: Preferential rules of origin
Slide 13: Preferential rules or origin are those which apply in reciprocal
trade preferences (i.e. regional trade agreements or customs unions) or in nonreciprocal trade preferences (i.e. preferences in favour of developing countries or
least-developed countries).
The rules of origin which apply under reciprocal trade preferences or
regional trade agreements must conform with the general disciplines of Annex II
of the Agreement on Rules of Origin. In addition, the GATT and the Agreement
on Trade Facilitation contain some provisions related to origin requirements. The
rationale for preferential rules of origin in free trade agreements is to ensure that
concessionary market access is limited to the beneficiary parties of a free trade
agreement, i.e. that only goods originating in participating countries of a free
trade agreement will enjoy preferential treatment.
How to determine the origin?
Slide 14: When applying preferential rules of origin, there are 2 basic criteria for
determining an ‘originating product’. Goods may be either wholly obtained or
they should undergo a substantial transformation.
Wholly Obtained
Wholly obtained goods are derived from the ground, the sea and from animals of
a single country without using inputs imported from other countries. Examples
include minerals, animals born and raised in a given country, plants, flowers,
fruits and vegetables whether fresh or frozen.
Substantial Transformation
Substantial Transformation occurs when goods are produced from imported
inputs. There are 3 approaches for determining when substantial transformation
occurs:
Slide 15:
1. Change in Tariff Heading. When the criterion of a change in tariff classification
is used, a good is considered substantially transformed when the good is classified
in a heading or subheading (depending on the product specific rule) different from
all non-originating materials used.
2. Value Added. When the criterion of value added (ad valorem percentages) is
used, regardless a change in its classification, a good is considered substantially
transformed when the value added of a good increases up to a specified level
expressed by an ad valorem percentage.
A value added criterion can be expressed in two ways:
● minimum requirement of originating content. E.g. if a product specific rule
stipulates that at least 80% of the value of the ex-works price should be
originating material, then the remaining 20% used may be non-originating
material.
● maximum allowance for non-originating materials.E.g. if a country
produces leather shoes and the product specific rule for leather shoes
allows a maximum of 10% of the value of the ex-works (factory) price to
be non-originating, then leather shoes should be composed of at least 90%
of originating material, while the remaining 10% may be non-originating
material
3. Technical Requirement
When the criterion of specific manufacturing or processing operations (technical
requirement) is used, regardless a change in its classification, a good is considered
substantially transformed when the good has undergone specified manufacturing
operations or processing
Anait: US – Textiles Rules of Origin (2003)
Slide 16: To date, there has only been one dispute before a panel dealing
with rules of origin. In US – Textiles Rules of Origin (2003), India claimed that
the US applied rules of origin on textiles and certain other products that were
inconsistent with several obligations under Article 2 of the Agreement on Rules
of Origin. The panel in US – Textiles Rules of Origin (2003) noted that Article 2
does not provide what WTO Members must do, but rather what they should not
do,and that:
Slide 17: “By setting out what Members cannot do, these provisions leave
for Members themselves discretion to decide what, within those bounds, they can
do. In this regard, it is common ground between the parties that Article 2 does
not prevent Members from determining the criteria which confer origin, changing
those criteria over time, or applying different criteria to different goods.”
Slide 18: At the Hong Kong Ministerial Conference in December 2005,
WTO Members adopted the Decision on Measures in Favour of Least Developed
Countries (LDCs), whereby developed- and developing-country Members
committed to ensuring transparent and simple application of preferential rules of
origin to imports from least-developed countries. Building on this Decision WTO
Members took at the Bali Ministerial Conference in December 2013 agreedon
guidelines providing elements to be considered by Members in determining the
criteria to confer ‘origin’ when imports from least- developed countries are
concerned. Clarifying furthermore as to whether or not a product has originated
from a least-developed country, the Nairobi Ministerial Conference in December
2015 set forth in detail the requirements to be considered by developed- and
developing-country Members to assess ‘sufficient or substantial transformation’.
In order to ensure timely implementation, the Ministerial Decision mandates
Members to inform the Committee on Rules of Origin on the efforts taken to
implement the decision. In October 2018, the Committee on Rules of Origin
informed the General Council that almost all preference-granting Members had
submitted their preferential rules of origin and that Members now had access to
detailed and standardised information on the origin requirements of most
preferences for LDCs.
Slide 19: Note that the United Nations 2030 Agenda for Sustainable
Development expressly recognises the realisation of timely implementation of
duty-free and quota-free access for all least-developed countries, including by
ensuring transparency and simplicity of the preferential rules of origin applicable
to imports from least-developed countries, as one of the goals to strengthen the
means of implementation and revitalisation of the global partnership for
sustainable development.
To date, no WTO Member has been found in dispute settlement
proceedings to have acted inconsistently with the obligations under the
Agreement on Rules of Origin.
Sofia: Example: The Case of the Apple iPhone
Slide 20: A 2012 analysis of Apple’s iPhone 4 manufacturing process
provides a case study of how electronics and other products are produced in the
global manufacturing environment. Most of Apple’s iPhones are assembled in
China by Foxconn, a Taiwanese contract manufacturer that handles all sourcing
and logistics. The gross export value of the product (factory gate price) was
$194.04, but the value-added of assembly costs in China was $6.54 (around 3%
of the total value). Even though China’s contribution to the iPhone’s value was
relatively small at the time of the 2012 analysis, the product is considered a
product of China according to CBP regulations, because the product was last
“substantially transformed” in China (Figure 1).
Slide 21: FIGURE 1: VALUE-ADDED BY COUNTY PER IPHONE 4 IN
2012
Ellina: Conclusion
Slide 22: Rules of origin are central components of trade policy.
Preferential rules of origin are especially important for ensuring that only goods
qualified to receive benefits under an FTA or preference receive those benefits.
Non-preferential rules are essential for making sure that goods coming from
countries that enjoy MFN status are assessed the proper tariffs, and are also key
to supporting other trade laws, such as country of origin labeling.