Rules of Origin: Conceptual Explorations and Lessons from the Generalized System of Preferences

8/22/2019 Rules of Origin: Conceptual Explorations and Lessons from the Generalized System of Preferences

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December 2006

ERDECONOMICS AND RESEARCH DEPARTMENT

Working PapeSERIESNo.

89

Teruo Ujiie

Rules of Origin: ConceptualExplorations and Lessons

from the Generalized Systemof Preferences

Rules of Origin: ConceptualExplorations and Lessons

from the Generalized Systemof Preferences


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ERD Wrking Paper N. 89

Rulesof oRigin:

ConCeptual exploRationsand lessons

fRomthe geneRalized systemof pRefeRenCes

teRuo ujiie

deCembeR 2006

Teruo Ujiie is Trade Specialist at the Ofce o the Chie Economist, Economics and Research Department,

Asian Development Bank.


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Asian Development Bank6 ADB Avenue, Mandaluyong City1550 Metro Manila, Philippines

www.adb.org/economics

2006 by Asian Development BankDecember 2006

ISSN 1655-5252

The views expressed in this paper

are those o the author(s) and do notnecessarily reect the views or policies

o the Asian Development Bank.


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FoREWoRD

The ERD Working Paper Series is a orum or ongoing and recently completedresearch and policy studies undertaken in the Asian Development Bank or onits behal. The Series is a quick-disseminating, inormal publication meant tostimulate discussion and elicit eedback. Papers published under this Series

could subsequently be revised or publication as articles in proessional journalsor chapters in books.


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CoNtENts

Abbreviations vii

Abstract ix

I. INTRODUCTION 1

II. SINIICANCE O RUES O ORIIN IN INTERNATIONA TRADEII. SINIICANCE O RUES O ORIIN IN INTERNATIONA TRADE 2

III. WAT ARE RUES O ORIIN AND W ARE RUES O ORIIN IMPORTANTIII. WAT ARE RUES O ORIIN AND W ARE RUES O ORIIN IMPORTANT 4

I. ORIIN CRITERIA ARIOUS TECNIUES AND METODS TO DETERMINEI. ORIIN CRITERIA ARIOUS TECNIUES AND METODS TO DETERMINETE COUNTR O ORIIN 5

A. Substantial TransormationA. Substantial Transormation 5 B. Pros and Cons o the Two Major Origin Criteria 8

. SP RUES O ORIINORIIN O TA RUES O ORIIN. SP RUES O ORIINORIIN O TA RUES O ORIIN 9

A. SP Rules o Origin in eneral A. SP Rules o Origin in eneral 9

B. SP Rules o Origin in Detail 11 C. TA JapanSingapore Case 14 D. Selected TA Rules o Origin in Asia 15

I. ARMONIATION WOR ON NONPREERENTIA RUES OORIINI. ARMONIATION WOR ON NONPREERENTIA RUES OORIINAT WTO AND WCO 15

A. Substantial Transormation Requirement under the

Nonpreerential and SP Rules o Origin o Major Trading Nations 16 B. International Agreements on Rules o Origin and Status

o armonization Work at WTO and WCO 17

II. CONCUSION 1II. CONCUSION 18

Appendix 1Appendix 19 Reerences 22


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ABBREVIAtIoNs

ATA ASEAN ree Trade Agreement

APEC Asia Pacifc Economic Cooperation

ASEAN Association o Southeast Asian Nations

CI cost, insurance, and reight

DDA Doha Development Agenda

ETA European ree Trade Area

EP export processing zone

EU European Union

DI oreign direct investment

OB ree on board

TA ree trade agreement

ATT eneral Agreement on Taris and Trade

SP generalized system o preerences

S harmonized system

MN most-avored-nation

NATA North American ree Trade Agreement

NT national treatment

R quantitative restriction

SME small and medium enterprise

UNCTAD United Nations Conerence on Trade and Development

WCO World Customs Organization

WTO World Trade Organization


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ABstRACt

Customs valuation, commodity classifcation system, and rules o originare the three basic customs laws. Rules to determine a country o origin, ornationality o a country o production o goods, are called rules o origin.They are widely used in international trade in the application o dierent taris,

trade remedy measures, tari quotas, and trade statistics. With the globalizationo economic activities resulting in outsourcing o materials as well as the globalprolieration o ree trade agreements, rules o origin have become one o the

major trade issues among both public and private sectors. Rules o origin otenresult in the so-called spaghetti-bowl eect. Since there is no agreement onproduct-specifc harmonized rules o origin, international tradeboth preerentialand nonpreerentialis governed by dierent national laws. This paper intends

to describe key conceptual aspects o rules o origin, ocusing on lessons learnedon origin criteria under the eneralized System o Preerences as well as romthe eorts o the World Customs Organization and World Trade Organization toharmonize dierent origin rules.


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I. INtRoDUCtIoN

A country o origin means the nationality o a country o production o goods. The rules to

determine a county o origin as a whole are called rules o origin. Rules o origintogether withcustoms valuation (assessment o value on imported goods or customs purposes) and nomenclature(commodity classifcation system)are the three basic customs laws on substance. In addition

to these three customs laws, a set o customs clearance procedures is required to collect customsduties. In general, customs procedures in the context o trade acilitation are under negotiationsin the ongoing World Trade Organizations (WTO) Doha Development Agenda (DDA) or Doha Round(Ujiie 2006).

While there are international agreements on these three customs areas, only rules o originlack detailed rules.1 An Agreement on Rules o Origin was agreed upon at the Uruguay Round(19861994), however, it basically describes a set o principles and a uture work program or

establishing harmonized product-specifc rules o origin. As the WTO has not approved yet the dratharmonized rules o origin developed by the World Customs Organization (WCO), rules o origin are,at present, administered by national laws, adding to the complications.

Rules o origin are widely used in international trade or application o dierent tarisdepending on a country o origin, trade remedy measures (e.g., antidumping duty action),quantitative restrictions and tari quotas by country, trade statistics and so on. With the ever-

growing globalization o economic activities resulting in outsourcing o materials as a regularprivate sector practice, rules o origin have become one o the major trade issues among both

public and private sectors. In addition, rules o origin play a key role in regulating preerentialtradea result o the global prolieration o ree trade agreements (TAs)which causes the so-

called spaghetti-bowl eect.

On substance o rules o origin, no origin dispute arises when a product is defned as awholly obtained product. owever, when a product is produced with the combination o imported

and domestic materials, it causes an origin issue. Theoretically, the country o origin is conerredi an imported input is substantially transormed. While the substantial transormation conceptmay be acceptable, the question is how to interpret the concept in practice, and apply it to an

enormous number o dierent tradable goods. There are basically three interpretations on substantialtransormation (i) manuacturing process criterion including change in harmonized system (S)heading, (ii) percentage or value-added criterion, and (iii) combination o the frst two criteria.Since each criterion has its own pros and cons, these origin criteria are not harmonized but they

coexist.

1 In the case o customs valuation, the WTOs Customs aluation Agreement (ofcial title Agreement on Implementation o

Article II o the eneral Agreement on Taris and Trade 1994) sets out detailed rules and procedures. This agreementwas established at the Tokyo Round (19731979), and elaborated at the Uruguay Round (19861994). In the case o

commodity classifcation, the WCOs armonized System or S (ofcial title the International Convention on armonized

Commodity Description and Coding System), put into orce in 1988, provides or the basis or nomenclature.


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At present, both preerential and nonpreerential rules o origin (except or TAs) are administered

by national laws. These national laws dier signifcantly rom one trading nation to another. Ruleso origin under the eneralized System o Preerences (SP), in operation or more than 35 years(since the early 1970s), provide a good basis or TA rules o origin. Cumulative rules o origin,

donor country content rule, and tough rules on textiles and clothing are peculiar in SP rules oorigin. igh level o similarities is ound between SP rules o origin and TA rules o origin, asdescribed in the actual case below.

This paper intends to describe in simple terms what rules o origin are, what kinds o rules oorigin exist; why are rules o origin important; any relevant agreements at the international level,such as WTO or WCO; and what are the major techniques used to determine a country o origin.While TAs prolierate, many papers recommend that rules o origin should be simplifed.2 This paper

ocuses on origin criteria, key conceptual aspects. and lessons learned rom the SP rules o originparticularly to show policy options in uture TAs.

II. sIGNIFICANCE oF RULEs oF oRIGIN IN INtERNAtIoNAL tRADE

Rules o origin have become one o the major trade issues among trading nations and tradingcommunities worldwide. While reasons or this could be closely linked to each other, the ollowingactors are pointed out.

(i) the general rend i reduce c f ding buine in inernainal rade.Thanks to the series o eneral Agreement on Taris and Trade (ATT) multilateral tradenegotiations, trade liberalization measures (i.e., reduction or elimination o customsduties) have been implemented, and according to WTO, the average tari rate is 4%.

enerally speaking, taris are not regarded as major barriers to trade although high-tariitems and tari escalation still exist or certain sensitive products. Instead, business andtrading communitiesin particular, small and medium enterprises (SMEs)pay greaterattention to trade acilitation measures, such as establishment or harmonization o

customs procedures. In act, an Asia Pacifc Economic Cooperation (APEC) study showsthat trade acilitation eorts will produce more ruits than trade liberalization.3 Customsprocedures cover not only export/import clearance procedures, but also certifcationo rules o origin requirements. Excessive and burdensome government documentation

requirements would undermine the benefts rom trade liberalization measures.

(ii) Lack f inernainal unifrmiy and harmnizain and prliferain f FtA. Originrequirements vary rom country to country. rom an exporters point o view, they are

burdensome and unnecessarily restrictive. In some cases, a single importing country usesdierent sets o rules o origin. This is particularly true in the context o the prolierationo TAs where rules o origin play a key role in granting reduced or eliminated rate o

2 See or example Part 3 (Routes or Asias Trade) o the Asian Development Outlook 2006(ADB 2006, 275 and 279). Itargues that preerential rules o origin are discriminatory, complex, and inconsistent. It urther states that There is

little hope that rules o origin in preerential agreements will ever be harmonized.3 The APEC study on the impact o trade liberalization in APEC conducted in 1997 estimated that trade acilitation

programs would generate gains o about 0.26% o real gross domestic product to APEC economies, almost double the

expected gains rom tari liberalization; and that the savings in import prices would be between 12% o importprices or developing countries in the APEC region.

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duty or products covered by an TA. This act also means that manuacturers change theproportion o domestic and imported materials they use to meet specifc rules o originin dierent markets, causing additional production costs.

(iii) Rule f rigin a rade plicy inrumen. Rules o origin are supposed to be technicaland neutral rules to determine the country o origin o goods. owever, rules o originare requently used as a trade policy instrument in some importing countries in the ormo preerential trade agreements and arrangements, such as SP and TAs.4 In order to

protect national interest, rules o origin tend to dier rom one TA to another, reectingdierent trade patterns and structures on a bilateral basis.

(iv) ouurcing, a cmmn buine pracice. Recent increased developments o globalizationin economic activities, led not only by large frms, but also by many SMEs, make it moredifcult to determine the country o origin o goods as they source materials, parts,and components rom many oreign countries in order to make their own products more

competitive at international markets. This trend o globalization and outsourcing will beexpected to urther grow through trade liberalization measures under the ongoing DDAas well as TAs.

(v) Epanin f freign direc invemen (FDI) and epr prceing zne (EPZ).Exports are regarded as an engine or economic growth. Many developing countriesoer tax incentives to EPs to attract DI. Rapid growth o DI in developing countriescreates a production base or exports to enjoy preerential tari treatment under SP

and TAs. In order to beneft rom such treatment, goods produced at EPs must meetthe requirements or rules o origin.

(vi) Circumvenin f rade remedy meaure. Some companies tend to circumvent traderemedy measures (e.g., anti-dumping and countervailing duties) by simply transerringtheir actories to third countries that are not subject to these trade remedy measures,

or to the importing country that has imposed such measures and is supplying essentialparts and components. Since trade remedy measures are taken against specifc exportingcountries, rules o origin play a key role in determining the country o origin o the goodsin question. Determination by the importing authorities is vital or such companies towaive payment o additional customs duties. Measure-imposing countries may wish to

create special origin rules to avoid such circumvention practices, which could lead toanother trade policy instrument.

(vii) Minr rule amendmen require a big perain change. Authorities oten issuetechnical amendments o rules o origin. Even i such amendments are minor, it couldrequire considerable modifcation o present production operations. There are instanceswhere the combination o use o domestic and imported materials should be changed to

meet the new origin rules.

4 See or example the green paper o Commission o the European Communities (2003, 7) on the uture o rules o origin

in preerential trade arrangements, which states that the preerential rules o origin are an instrument o commercial

policy . and that preerential origin rules also serve the objective o supporting sustainable development andintegrating the developing countries into world trade.

erD Working paper series no. 89

section ii

significance of rules of origin in international traDe


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III. WHAt ARE RULEs oF oRIGIN AND WHY ARE RULEs oF oRIGIN IMPoRtANt?

Perhaps the defnition o rules o origin stipulated in Article 1 o the WTO Agreement onRules o Origin may answer these questions. It states that the term rules o origin is defned asthose laws, regulations and administrative determinations o general application by any Member

to determine the country o origin o goods provided such rules o origin are not related tocontractual or autonomous trade regimes leading to the granting o tari preerences going beyondthe application o paragraph 1 o Article I o ATT 1994 (WTO 2002).

There are two interesting terms in this Article, namely general application and contractualor autonomous trade regimes. It means that there are two dierent sets o rules o origin oneset o rules o origin is applicable to the contractual and autonomous trade regimes or preerential

trade; and the other set is or general application or nonpreerential trade, i.e., trade on a most-avored-nation (MN) basis. The WTO rules o origin are government public laws and regulations ogeneral application to determine the country o origin o tradable goods.

Normally, a trading nation provides three dierent rates o customs duty or the same imported

goods depending on the country o origin. irstly, a statutory rate, the highest o all (e.g., 30%), isapplied to trade with non-WTO members, nonparty/benefciary under preerential trade agreements,or to trade with countries with no trade agreement that commits MN treatment. Secondly, a

concessional rate or MN rate, which is lower than the statutory rate (e.g., 10%), is applicable totrade with WTO members and with countries where there is a trade agreement that commits MNtreatment. astly, a preerential rate, which is the lowest, oten, zero rate o duty, is applicable

to trade under a preerential trade regime. The basic unction o rules o origin is to apply theappropriate rate o customs duty.

Nonpreerential rules o origin, determining the country o origin o goods, are used or the

ollowing purposes (Article 1 o the Agreement on Rules o Origin)

(i) MN taris and national treatment (NT)

(ii) trade remedy measures (antidumping and countervailing duties and general saeguardsmeasures)

(iii) quantitative restrictions (Rs) and tari quotas (Ts)

(iv) origin marking requirement

(v) government procurement

(vi) trade statistics

Simply because nonpreerential rules o origin are or general application, they should be applied

in an impartial, transparent, predictable, consistent, and neutral manner so that nonpreerentialrules o origin themselves do not create unnecessary obstacles to trade.

On the other hand, preerential rules o origin provide preerential tari treatment to a limited

number o parties under a particular preerential trade regime. or this reason, the main purposeis to ensure that the benefts o preerential tari treatment are confned to products originatingin the parties. Products that originate in third countries, and pass in transit through, or undergoonly a minor or superfcial process in the parties, should not thereore beneft rom preerential

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tari. In this sense, preerential rules o origin are a condition and a requirement to enjoy special

benefts, i.e., reduced or eliminated rates o duty.

As mentioned earlier, there are two types o preerential regimes. One is contractual or an

international agreement that is reciprocal. TAs such as the North American ree Trade Agreement

(NATA) and ASEAN ree Trade Agreement (ATA) are good examples. The other type is autonomous ornonreciprocal in nature. The SP, being a unilateral preerential tari measure oered by developedcountries (i.e., preerence-giving countries) to eligible products originating in preerence-receiving

countries, is a good example.

IV. oRIGIN CRItERIA: VARIoUs tECHNIQUEs AND MEtHoDs to DEtERMINEtHE CoUNtRY oF oRIGIN

The core o rules o origin on substance is origin criteria that determine the country o origin

o the goods in question. or the purpose o rules o origin, all tradable goods can be divided intotwo categories (i) wholly produced good or 100% made in a particular producing country; and (ii) aproduct with imported materials and/or origin-unknown materials. I and when a product or export is

wholly obtained or produced in a single country, no one can deny that this country has the countryo origin. To begin with, there must be a list o wholly obtained products (Appendix 1). 5

owever, determining the country o origin becomes difcult due to globalization o economicactivities, the trend o outsourcing, and using various inputs supplied by many oreign countries

and o domestic origin. The question arises as to how to determine the country o origin or suchproduction processes where a number o dierent parts and components rom various oreigncountries are provided. The established concept is that the country o origin title is given to the

country where the last substantial transormation or sufcient working or processing has beencarried out. The thing is how to interpret the concept into practice.

A. subanial tranfrmain

There are basically three methods to defne the concept o substantial transormation.

1. Prce Crierin

As a general rule, imported inputs are considered to have undergone substantial transormationi the fnished products all under a tari heading o a commodity classifcation system (normallythe S) dierent rom that o any inputs used in the manuacturing process. In other words, achange in an S heading must take place when imported materials or origin-unknown materials

are used.6

It is best and ideal i product-specifc process requirements or all tradable goods that coner

substantial transormation are described in detail. owever, it is almost impossible to identiyand work out processes that are economically justifed to coner the country o origin or an

5 In addition, there is another list o examples that is regarded as minor or superfcial processing (minimal processing

list), such as simple cutting, bottling, and simple mixing. I a processing alls under the list, it does not coner thecountry o origin o the good in question (Appendix 2).

6 It is let to policymakers whether the S heading level (4-digit) or subheading level (6-digit) is used to coner

substantial transormation. I the S subheading level is used, it is easier or manuacturers to meet the requirementthan the S heading level.


section iV

origin criteria: Various techniques anD methoDs to Determine

the country of origin


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enormous number o tradable goods. Instead, this criterion relies on the S, a leading commodity

classifcation system.7 This is the second best approach since all tradable goods are classifedunder a nomenclature or commodity classifcation system that has been widely known and usedamong authorities and trading communities. The S is designed to classiy any product rom raw,

intermediate, to fnished orm in the same chapter. In other words, when a process is urther made,a new S heading is given. S chapter 18 (Cocoa and coca preparations) and iron and steel aregood examples in this sense.

Example (A) S Chapter 18 (Cocoa and cocoa preparations), having six heading positions

eading Number 18.01 Cocoa beans (raw orm)

18.02 Cocoa shells (-ditto-)

18.03 Cocoa paste (intermediate orm)

18.04 Cocoa butter (-ditto-)

18.05 Cocoa powder (-ditto-)

18.06 Chocolate, etc. (fnal orm)

Example (B) Iron and steel

Iron ores S 25.01

Pig iron 72.01

Ingot 72.06

Bars 72.11; 72.13; 72.14, etc.

Sheets 72.08; 72.09; 72.10, etc

I cocoa beans (S eading 18.01) are imported rom Country A into Country B, and cocoapowder (S eading 18.05) is produced in Country B, substantial transormation has taken placein Country B as there is a change in S heading rom 18.01 to 18.05. Country B gains the countryo origin. Similarly, iron ores (S eading 25.01) are imported rom Country C into Country D, and

ingot (S eading 72.06) is produced in Country D, substantial transormation has taken place asthere is a change in S heading rom 25.01 to 72.06. Country D gains the country o origin.

The ollowing is an extreme example, where all materials to produce wooden chairs are imported,

and substantial transormation has taken place as all S headings o the imported materials changed.The country o origin is given to the manuacturing country o wooden chairs.

7 The ofcial title o the armonized System is the International Convention on armonized Commodity Description and

Coding System, developed by the WCO and put into orce in 1988. The S is a systematic commodity classifcationsystem, and all the tradable goods are classifed in 96 chapters at 2-digit level; more than 1,240 headings at 4-digit

level; and more than 5,000 precise codes or subheadings at 6-digit level. S chapters 124 cover agricultural productswhile chapters 2597 cover industrial and manuactured products. Any signatory has the discretion to urther divide

S, or example, at 8-digit or 10-digit level, amounting to some 12,000 to 15,000 tari lines. The international trade

coverage o S accounts or more than 95%. The S has been revised a couple o times to cope with new trade patternsand appearance o new products in markets.

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Example (C) inished products Wooden chairs alling under S eading 94.03

(Imported materials used in production)

Sawn wood S 44.07

arnishes 32.09

eather (bovine) 41.04

Nails (iron and steel) 73.18

lues 35.06

While S is a practical tool, it is not designed or origin purposes. There are instances where

insufcient processing involves a change in S heading (Example D),8 and where sufcient processingdoes not result in a change in S heading (Example E). A separate list o these exceptions mightbe required.

Example (D) Simple assembling process involves a change in S heading

Imported parts and components clock movement (S 91.09) and clock case (S 91.12)

inished product clocks (S eading 91.03)

While this assembly involves a change in S heading, the country o origin is not given tothe assembling country since the process is not considered as substantial transormation.

Example (E) Substantial transormation process does not involve a change in S heading

Imported materials rough/unworked diamond (S eading 71.02)

inished product cut/worked diamond (S eading 71.02)

While the cutting process does not involve a change in S heading, the country o origin is

given to the country that carried out the cutting process since the cutting process is the mostvalue-adding process and is thereore regarded as substantial transormation.

8 ere is another example on an agricultural product. Minor processing involves a change in S headingImported materials resh vegetables S eading 07.01

inished products dried vegetables S eading 07.12While this drying process involved a change in S heading, the country o origin is not granted to the country that

underwent the drying process since the process is considered as minor and not as substantial transormation. In this

case, the rules o origin require that dried vegetables must be produced rom originating vegetables in the producingcountry.


section iV

origin criteria: Various techniques anD methoDs to Determine

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. Percenage Crierin

As a general rule, under the percentage criterion, imported inputs (i.e., materials, parts, andcomponents) are considered to have undergone substantial transormation i a given percentage ovalue is added to the imported inputs used or manuacture o the fnished product.

There are two ways to describe this criterion. One is to state the maximum percentage allowanceo value o imported inputs in the production. or example, the value o the imported inputs doesnot exceed 40% o the value o the product obtained. In this case, imported inputs can be used

up to 40% o the value o the fnished product and domestic inputs must be more than 60%.

The other way is to state the minimum percentage requirement o domestic inputs in theproduction. or example, the value o domestic materials and the direct cost o processing in the

producing country must not be less than 40% o the value o the product obtained. In other words,imported inputs can be used up to 60%.

In both ways, the denominator (i.e., value o the product obtained) that policymakers canchoose is either ex-actory cost; ex-actory price; ree on board (OB) price; or cost, insurance, and

reight (CI) price.9 I the maximum allowable imported input method is used as the numeratorand CI price is used as the denominator, more imported inputs can be used since CI has the

largest fgure among these prices. Similarly, it is let to policymakers to establish a given numeratorpercentage.

. third Crierin

Third criterion, based on the two criteria above, includes the ollowing combination o the

two criteria above; use o either o the two criteria above at importers choice; use o either o thetwo criteria plus additional technical test.

B. Pr and Cn f he tw Majr origin CrieriaThe origin criterion could be more accurately and objectively defned in the process criterion

than in percentage criterion as the necessary process to coner substantial transormation is clearlydescribed. In other words, it is not necessary to consider various cost elements in production in thiscriterion. The key point is to examine what was imported and what was produced in terms o the Sclassifcation. As a result, less dispute cases between customs authorities and trading communities

could be expected. owever, criticisms against the process criterion are as ollows

(i) it requires too much detailed description o the process on a product-specifc basis, whichcould be complicated

(ii) it needs a couple o lists o exceptions (e.g., list o wholly obtained products, list o

minimal processes)(iii) a sound knowledge on S is a precondition

9 Broadly speaking, an ex-actory cost consists o materials and direct cost o production (e.g., labor and electricity).

When a proft is added to the ex-actory cost, it becomes an ex-actory price. When costs o inland transport and

insurance rom the actory to the side o a cargo vessel are added to the ex-actory price, it becomes an OB price.When ocean reight and insurance are added to OB, it becomes a CI price.

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On the other hand, in the case o percentage criterion, requirements or substantial transormation

are defned in a simple manner. It does not require long descriptions nor lists o exceptions. Whenall necessary elements are known, it is a matter o calculation to determine whether substantialtransormation has taken place or not. owever, the percentage criterion is criticized as ollows

(i) there is no clear logic nor economically justifed rationale to determine whether substantialtransormation has taken place as it simply provides a given percentage, such as 40%,50%, and so on

(ii) it does not cope with border-line cases; or example, i the requirement that importedinputs can be used up to 40% is provided, goods with 41% imported inputs cannot begiven the country o origin

(iii) the case above oten occurs simply because o daily uctuations o exchange rates orthe currencies o material-supplying oreign countries, which is beyond manuacturerscontrol

(iv) experience shows that there are always disputes between customs authorities and

business communities about various cost elements to be included or excluded rom thenumerator

(v) advanced bookkeeping is a precondition

V. GsP RULEs oF oRIGINoRIGIN oF FtA RULEs oF oRIGIN

A. GsP Rule f origin in General

The SP, one o the remarkable achievements o the United Nations Conerence on Trade and

Development (UNCTAD), was introduced in the early 1970s with three main objectives, namely to(i) increase export earnings, (ii) promote industrialization, and (iii) accelerate the rate o economic

growth in avor o more than 160 developing countries. The SP is a tari preerence schemeoered by developed countries to eligible products originating in designated preerence-receiving

countries. Since SP oers reduced or eliminated rate o duty or eligible products originating ina particular group o developing countries that are ATT-contracting parties in most cases, thisdierential treatment in taris is directly against the MN principle, the basic ATT rule specifedin its Article I (eneral Most-avoured-Nation Treatment).10 As a result, SP was implemented as

a temporary, unilateral, and autonomous measure by developed countries. Respective preerence-giving countries had to obtain a waiver rom ATT.

The SP rules o origin have played a key role in implementing the SP schemes or more than35 years (UNCTAD 1999).11 In the absence o any international agreement on product-specifc ruleso origin or nonpreerential trade (i.e., MN trade), it is worth looking into SP rules o origin. In

10 The enabling clause o the ATTs ramework Agreement, adopted at the Tokyo Round, (ofcial title The Dierential

and More avorable Treatment, Reciprocity and uller Participation o Developing Countries) allows SP as the exceptionto Article I o ATT. Since then, preerence-giving countries did not require to get a waiver rom the ATT Contracting

Parties when extending their scheme.11 owever, SP rules o origin in each scheme dier substantially rom one scheme to another. As an agreement on

rules o origin at UNCTAD in 1970 remains as guidelines, the prospective preerence-giving countries took appropriate

domestic actions to implement their rules o origin, taking ully into account the agreement. Ater the 35-year operationo the SP system, the basic structure o rules o origin remains the same (UNCTAD 1970).

erD Working paper series no. 89 9

section V

gsp rules of originorigin of fta rules of origin


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addition, it should be pointed out that SP rules o origin are one o the leading origins o TA

rules o origin as both SP and TAs are under the preerential tari regime. In other words, TArules o origin are based on and inspired by the experiences in SP and other preerential rules oorigin.

At the beginning, it should be noted that, reecting dierent national interests o the preerence-giving countries (including protection o domestic industries) resulting in dierent product coveragein each SP scheme, individual SP rules o origin dier rom one scheme to another (Appendix 3).

This is true in the case o each TA rules o origin as reerred to below.

or example, SP schemes o the European ree Trade Area (ETA), European Union (EU), andJapan use the process criterion while those o Australia, Canada, New ealand, and United States

(US) use the percentage criterion. Strictly speaking, rules o origin in each scheme have dierentdefnitions and requirements.

One more point to note is that even the SP schemes o EU and Japan use a percentage

criterion or certain products, such as processed oods, chemicals, and machinery. Since it mayrequire a number o dierent inputs to produce these products, it is almost impossible to identiy allpossible inputs and impractical to speciy necessary processes to coner the origin (see Box 1).

box 1

main elementsin gsp Rulesof oRigin

A. Origin Criteria

(i) ist o wholly produced goods

(ii) ist o minimal processes that do not coner the country o origin

(iii) Process criterion

(iii) Percentage criterion

B. Direct Consignment

C. Documentary Evidence

(i) Combined declaration and certifcate o origin (orm A)

(ii) Consignment o a small value

(iii) erifcation o orm A

(iv) Exhibition and airs

D. Sanctions

E. Mutual Cooperation between Preerence-giving and Preerence-receiving Countries

. Special acilities in avor o Preerence-receiving Countries

(i) Cumulative rules o origin (cumulation)

(ii) Donor country content rule

10 December 2006


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18/41

Normally, these elements are covered by TA rules o origin. While there are three core elements

in SP rules o origin, namely origin criteria, direct consignment and documentary evidence, theollowing are important supplements to the previous section.

B. GsP Rule f origin in Deail

1. Prce Crierin

Double processing requirement or textiles and clothing. enerally speaking, the textiles and

clothing sector is very sensitive in all preerence-giving countries.12 In addition to the change inS heading, an extra tough requirement is imposed to protect this sensitive domestic industry.or example, making cotton jackets involves the ollowing our key processes, which are generallyrequired in the entire textile industry, except or the knitting industry.13

Example () Cotton Jackets

irst Process obtain raw cotton (fber) S eading 52.01 (raw cotton)

Second process make cotton yarn 52.05 (cotton yarn)

Third process make cotton abrics 52.08 (cotton abrics)

ourth process make cotton jackets 62.03 (cotton jackets)

The point is that i Country A produces cotton abrics or exports to EU or Japan under SPwith imported materials, the imported materials must be raw cotton to meet the double processingrequirement because it involves double processing, i.e., raw cotton to cotton yarn (rom S 52.01

to S 52.05) and cotton yarn to cotton abrics (rom S 52.05 to S 52.08). I Country B producescotton abrics rom imported cotton yarn, it does not meet the double processing requirement as

it involves only one processing.The case o knitted articles is tricky as it involves only three key processes.

Example () Woolen knitted sweater

irst process obtain raw wool S eading 51.01 (raw wool)

Second process make woolen yarn 51.09 (woolen yarn)

Third process make knitted woolen sweater 61.10 (knitted woolen sweater)

Simply because the stage o abric in a knitted article is already in its fnished orm, unlikethe case o cotton jackets, its production involves only three steps. I imported materials are

used to produce a knitted sweater, to meet the double processing requirement, raw wool must be

imported.12 In act, the SP scheme o the US does not cover entire textiles and clothing articles with the exception o handloom

articles. In the case o the SP schemes o EU and Japan, this sector is generally covered, but subject to the tough

extra requirement, i.e., double processing requirement.13 It should be noted that processes, such as dying, washing, and printing, are not regarded as a key process in the

context o the double process requirement.


section V



19/41

. Direc Cnignmen Rule

As a rule, originating products must be transported directly rom the exporting preerence-receiving country to the preerence-giving country o destination, in order to ensure that theoriginating goods are not manipulated, substituted, urther processed, or entered into commerce

in any intervening third country. While direct consignment, not direct shipment is required, incase the goods in question pass though a third country, a through bill o lading (which describesthe port o origin and the port o fnal destination) or a certifcate by the customs authorities o

the country o transit is acceptable.14

. Dcumenary Evidence

Claims or SP treatment must be supported by appropriate documentary evidence as to originand consignment. In the case o SP, a special orm called Combined Declaration and Certifcateo Origin orm A must be used.15 orm A must be issued by the designated issuing authorities in

preerence-receiving countries. Some preerence-giving countries do not require orm A since in

some preerence-receiving countries it is not easy to obtain orm A rom an issuing authority.

. Cumulaive Rule f origin (Cumulain)

As a general rule, origin rules have to be met by a single preerence-receiving country. owever,

cumulative rules o origin or cumulation are an exception to this general rule.

The concept o cumulation is to treat a group o countries (e.g., all preerence-receivingcountries under a particular SP scheme or all members to a regional grouping such as Association

o Southeast Nations (ASEAN) as a single entity in determining the country o origin. The eectis that all processes under the process criterion or value-added activities under the percentagecriterion, perormed by more than one eligible member o such a grouping, can be added, making

it easier to meet the SP rules o origin requirements.

There are a couple o policy options on cumulative rules o origin. One is that the acility maybe provided on a global basis (i.e., global cumulation) or on a regional basis such as ASEAN (i.e.,

regional cumulation). The other is to provide the acility either ully or partially. Under the ullcumulation, all inputs by all the recipients concerned can be added together. On the other hand, inthe case o the partial cumulation, only parts and components that have the origin status amongthe recipients concerned can be added together. I the partial cumulation is provided to ASEAN

and a particular imported part to assemble an automobile does not coner the country o originwithin any o ASEAN, the input o this part cannot be accumulated. The best option in avor odeveloping countries is thereore a ull and global cumulation.

14 A certifcate by customs authorities in transit must show that the goods in question have remained under customscontrol in the country o transit or warehousing and have not entered into commerce or have been delivered or home

use there, and have not undergone operations other than unloading, reloading, and any other operation required to

keep them in a good condition. In practice, it is not easy to obtain this certifcate rom the customs authoritiesconcerned. UNCTAD advises traders to obtain a through bill o lading instead.

15 There are a couple o strict specifcations or orm A the combined declaration and certifcate o origin orm A shouldmeasure 210 x 297 mm; the paper used must be writing paper not containing mechanical pulp and weighing not less

than 25 grams per square meter; it should preerably have a green machine-turned background making any alsifcation

by chemical or mechanical means apparent to the eye. east developed countries normally buy the orms rom developedcountries as there is no such a printing acility at home.

1 December 2006


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With regard to the cumulation acility in TAs, how are the concepts o ull or partial cumulation,

and the global or regional cumulation treated Since SP is a unilateral measure, preerence-givingcountries can choose a cumulation acility. owever, an TA is an international agreement (justlike a treaty) to bind member countries on an equal ooting. In practice an TA has an option to

choose ull or partial cumulation.

. Dnr Cunry Cnen Rule

This rule treats inputs rom a preerence-giving country as inputs originating in the preerence-receiving country that produces the fnal product or the purpose o determining the country o

origin o the fnished product, subject to re-export to that preerence-giving country. Some SPschemes do not provide this acility.

When discussing this acility in the 1960s, potential SP recipients had a negative view. A

number o developing countries, having gotten independence politically, also wanted economicindependence. According to them, this acility might establish vertical lines o trade or verticalintegration. It should be noted that this acility does not have any meaning in the context o an

TA as this concept is incorporated in the cumulation concept.

Example () shows the eect o both cumulative rules o origin and donor country contentrule.

Example () Manuacture o Product X in ASEAN State

(i) Materials $/unit

rom own domestic 10

rom Case I - ASEAN State ; Case IIEU 20

rom Japan 30

(ii) abor cost 15

(iii) Other direct costs 8

(iv) Packing costs (or export) 2

(v) Proft 15

Total (ex-actory price/per unit) $100

In this hypothetical example, i the origin criterion under a particular SP scheme requiresthat imported materials can be used up to 40% o the ex-actory price o the product under thenormal rules, it does not qualiy or SP treatment as the total imported contents are 50% (20%rom ASEAN State [Case I] and 30% rom Japan) o the ex-actory price o $100/unit.

owever, i the cumulative rules o origin are granted to the regional grouping o ASEAN bythat SP scheme, the total imported contents are 30% rom Japan (inputs o 20% rom ASEAN State [Case I] can be regarded as ASEAN X origin) and within the limit o 40%; thus, qualifed or SP

treatment. I the current operation is based on Case II (20% rom EU) and other conditions are thesame, and i the manuacturer can fnd a supplier or the materials provided currently by EU romany other ASEAN State (i.e., Case I), it qualifes or SP or the same reason above. This is a case

or a regional cumulation. In a way, the regional cumulation will acilitate regional cooperation


section V



21/41

1 December 2006


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and integration by changing sources rom nonregional grouping to designated regional grouping

members (i.e., non-ASEAN to ASEAN states in this case).

I the operation is based on Case II, the total imported inputs are 50% (20% rom EU and

30% rom Japan) o the ex-actory price o $100/unit. This operation does not qualiy or SP as

the imported materials exceed the maximum allowable imported inputs o 40%. owever, i theproduct is or export to Japan whose scheme allows the donor country content rule, it qualifes orJapans SP as 30% o the Japanese inputs are regarded as ASEAN X inputs and the total inputs

go down to 20%, which is within the maximum allowable imported inputs o 40%.

C. FtA: Japansingapre Cae

In the preceding paragraphs, key elements o SP rules o origin were examined. uestionsarise as to how they are introduced in TA rules o origin and what are the elements used at an

TA. To illustrate, Box 2 below is a ramework o rules o origin in the JapanSingapore economicpartnership agreement, the frst TA entered into by Japan eective 30 November 2002 (Ministryo oreign Aairs o Japan 2006).

box 2

fRamewoRkof Rulesof oRigin

Chapter 3 Rules o Origin

Article 22 Defnitions under Chapter 3

Article 23 Originating oods (list o wholly obtained goods and origin criteria

substantial transormation requirements when imported inputs are used undereither process or percentage criterion)

Article 24 Accumulation (cumulation)Article 25 De Minimis

Article 26 Insufcient Operations (list o minimal processes that do not coner the

country o origin)

Article 27 Consignment Criteria (direct consignment rule)

Article 28 Unassembled or Disassembled oods

Article 29 Claim or Preerential Tari Treatment (documentary evidence)

Article 30 Denial o Preerential Tari Treatment

Article 31 Certifcate o Origin

Article 32 Advance RulingsArticle 33 Assistance or Checking o Certifcate o Origin

Article 34 Joint Committee on Rules o Origin

Annex II A Product-specifc Rules (detailed requirements)


22/41


As seen rom the above, the main elements o SP rules o origin are ound in this TA, such

as origin criteria, direct consignment, documentary evidence, cumulation, and mutual cooperationwhile the wording is slightly dierent.

D. seleced FtA Rule f origin in AiaThere are several TAs in operation in Asia and a number o negotiations toward TAs are

ongoing. The negative eect o the spaghetti-bowl can be ound by reerring only to a coupleo TAs in the region. Perhaps, Singapore, member to ASEAN, is a good example in this context.Singapore is not only a member to ATA, but also has concluded TAs with its major trading nations,

such as Australia, Japan, New ealand, and US (APEC 1997).

Origin criterion under ASEAN ATA is solely based on the 40% domestic content rule, supportedby the regional cumulation among 10 member states o ASEAN. In the case o the TA with Japan,

as mentioned earlier, its origin criterion ollows Japans SP rules o origin. Origin criterion underthe SingaporeAustralia TA is based on the 50% domestic content rule. The SingaporeNew ealandollows the 40% domestic content rule. It should be noted that SP rules o origin o Australia and

New ealand also use a percentage criterion.

The SingaporeUS TA chiey ollows those rules o origin under NATA. While NATA originrules are comprehensive, specifc, and detailed, its origin criteria are either (i) change in tariheading (either at 4, 6, or 8-digit level depending on goods produced) or a number o products;

(ii) substantial process (assemble process plus manuacture o major part) or color televisions andother products;16 (iii) assemble process plus percentage criterion (e.g., 50% domestic content) orwatch movements and others; (iv) manuacture o major part plus percentage criterion or ootwear

and other products; or (v) percentage criterion or automobiles (USTR 2006).

The Singapore case clearly implies that more dierent origin rules will appear in the nearuture, creating not only more administrative costs both public and private sector, but also more

burdens especially or newcomers entering various markets. This is a major concern among themanuacturing and trading communities.

VI. HARMoNIZAtIoN WoRK oN NoNPREFERENtIAL RULEs oF oRIGINAt Wto AND WCo

This section briey addresses the current nonpreerential and SP rules o origin on substantialtransormation in major trading nations (ermulst, Waer, and Bougeois 1994), two internationalagreements on rules o origin agreed at WTO and WCO, and the status o harmonization work onnonpreerential rules o origin.

16 or example, in the case o more than 15-inch color television sets (S 8528.10), in addition to the change in S

headings or selected parts, essential parts (e.g., television picture tubes) must be originating in the NATA region inorder to qualiy or the NATA origin.

section Vi

harmonization Work on nonpreferential rules of origin at Wto anD Wco


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1 December 2006


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A. subanial tranfrmain Requiremen under he Nnpreferenial andGsP Rule f origin f Majr trading Nain

1. Eurpean Unin

oods whose production involved more than one country shall be deemed to originate in thecountry where they underwent their last, substantial, economically justifed processing or working

in an undertaking equipped or that purpose, and resulting in the manuacture o a new productor representing an important stage o manuacture. This basic concept is interpreted into processcriterion, percentage criterion, or combination o these two criteria in determining the country oorigin. The importance o the EU nonpreerential rules o origin lay down specifc rules on a product-

specifc basis reecting the EUs interest such as radios, televisions, tape recorders, integratedcircuits, photocopiers, and textiles and clothing.

In the case o SP, rules o origin are based mainly on the process criterion, supported by

the percentage criterion or certain products.17

. Japan

The country o origin is given to the country where the last substantial process or operationresulting in the manuacture o new characteristics took place. Japan has a shortlist o product-

specifc rules on selected products. Japans nonpreerential rules o origin are solely based on theprocess criterion.

Japan basically applies identical SP origin rules o EU.

. Unied sae

The USs nonpreerential rules o origin are based on a case law (i.e., court judge ruling) and

nowhere defned in a statutory law. owever, the established interpretation by the court is that Itoccurs when, as a result o manuacturing process, a new and dierent article emerges, having a

distinctive name, character, or use, which is dierent rom that originally possessed by the articleor material beore being subject to the manuacturing process. It is, thereore, prudent to obtaina binding advance ruling that the product in question is conerred the country o origin rom the

customs service o the US beore exportation.

In the case o SP rules o origin, the US applies the percentage criterion. The cost or valueo materials produced in the preerence-receiving country and the cost or value o any article

incorporated in the eligible article that has resulted rom substantial transormation o any importedmaterials into a new and dierent article o commerce, plus the direct cost o processing operationsperormed in the preerence-receiving country must not be less than 35% o the appraised value o

the merchandise in the US. In short, a minimum 35% local content rule is observed.

17 Until 1 May 2005 when the EU consisted o 15 member states, there were 14 dierent sets o preerential rules oorigin, and SP rules o origin was just one o them.


24/41


B. Inernainal Agreemen n Rule f origin and sau fHarmnizain Wrk a Wto and WCo

As seen rom the above, national nonpreerential rules to coner origin substantially dierrom one major trading nation to another. As a result, a particular process that meets particular

rules o origin may not meet other rules o origin. This is actually a big headache or business andtrading communities that preer a process meeting one rules o origin should also meet other ruleso origin. To this end, harmonization eorts have been made at WCO and WTO.

1. WCo

At WCO, the International Convention on the Simplifcation and armonization o CustomsProcedures o 1974, providing international standards on customs procedures and various techniques,was amended and the revised convention was put into orce on 1 ebruary 2006 (CCC 1973 andWCO 1999). This revised convention has a number o annexes, and Specifc Annex is or rules o

origin.

Annex provides three origin criteria, namely (i) change in S heading, (ii) specifc process,and (iii) percentage criterion. owever, it is let to members to select a particular criterion. Inaddition, it lacks product-specifc detailed origin rules, reecting the ongoing eorts at WTO todevelop harmonized rules o origin.

. Wto

While ATT o 1947 contains the terms origin and originating, there are no precise and

detailed provisions pertaining to the determination o a country o origin and other elements oorigin rules.

The Agreement on Rules o Origin, as Annex 1A to the WTO Agreement, was established as a

result o the Uruguay Round in 1994. It basically provides a set o principles over rules o origin(e.g., airness, neutrality, predictability, consistency, uniormity, reasonableness, and transparency)as well as uture work program or harmonization o nonpreerential rules o origin. armonization

work is done by WTO on policy aspects and by WCO on technical aspects by establishing a committeein each organization. When this process is completed, the outcomes (i.e., detailed product-specifcorigin rules) will be annexed to the Agreement on Rules o Origin as an integral part thereo.

WCO, ater several years work, submitted a drat o armonized Rules o Origin to WTO or itsconsideration and adoption. The drat armonized Rules o Origin consists o Defnitions, eneralRules, and two appendixes. Appendix 1 sets out rules or wholly obtained products while Appendix 2provides or precise product-specifc rules o origin or goods. To date, 94 core policy issues relating

to product-specifc rules under Appendix 2 remain unsolved at WTO. They represent highly protected

products mostly by industrialized countries, such as certain agricultural products, textiles and clothingarticles, and engineering products. WTO mainly argued about the so-called implementation issue

as to whether the armonized Rules o Origin should be applied on a mandatory basis to other WTOinstruments, in particular, the Anti-Dumping Agreement (Imagawa and ermulst 2005).

In developing product-specifc detailed rules and in interpreting substantial transormation

requirements, WCO ollowed the respective provisions o the Agreement on Rules o Origin (Article

section Vi

harmonization Work on nonpreferential rules of origin at Wto anD Wco


25/41

18 December 2006


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9.2) change in tari classifcation based on S as a general rule; and ad valorem percentage

and/or manuacturing or processing operations as supplementary criteria. WCO also developed twolists o wholly obtained products that coner the origin, and minimal operations or processesthat do not coner the origin.

VII. CoNCLUsIoN

Despite the great eorts by WCO and WTO to harmonize nonpreerential rules o origin, detailedproduct-specifc origin rules have not yet been adopted. or the time being, the situation wherea particular process that meets particular rules o origin in an importing country does not meet

rules o origin in other importing countries will continue. Thanks to the series o multilateral tradenegotiations or trade liberalization under the auspices o ATT/WTO, the average taris are nowmuch lower. owever, the lack o uniormity in rules o origin would cause unnecessary delay andcost, not only to customs authorities, but also to business and trading communities. This situation

must be changed.

The establishment o a single set o rules o origin brings about a number o benefts to

public and private sectors. It will certainly reduce the time and costs required thus acilitatingtrade. It will equally contribute to the international trading system by strengthening certainty,predictability, and consistency o origin determination. It will also reduce number o trade disputecases by implementing a single set o origin rules.

The WTO should be encouraged to act on the remaining 94 drat product-specifc rules developedby WCO, and to adopt the armonized Rules o Origin as a whole hopeully during DDA. In the eventthat WTO adopts the armonized Rules o Origin, TA negotiating countries should be invited to

apply them to their respective TA rules o origin as ar as possible so that the spaghetti bowleect could be minimized, also paving the way to harmonization o SP rules o origin.


26/41

APPENDIx 1

LIst oF WHoLLY oBtAINED PRoDUCts

All preerence-giving countries1,2

accept the ollowing categories o goods as wholly obtainedin a preerence-receiving country

(a) Mineral products extracted rom its soil or rom its sea bed

(b) egetable products harvested there

(c) ive animals born and raised there

(d) Products obtained there rom live animals

(e) Products obtained rom hunting or fshing conducted there

() Products obtained rom sea fshing and other products taken rom the sea by its vessel3

(g) Products made on board its actory ships exclusively rom products reerred to in () above

(h) Used articles collected there ft only or the recovery o raw materials

(i) Waste and scrap resulting rom manuacturing operations conducted there

(j) Products obtained there exclusively rom products specifed in (a) to (i) above4

Source UNCTAD (1999).

1 Australia in general accepts the products in the list above as wholly obtained, although these have not been specifedin its legislation.

2 The US, while not including a list o wholly obtained products in its legislation, recognizes the products listed aboveas examples that are likely to meet the USs percentage criterion.

3 Many preerence-giving countries apply restrictive defnitions o the term its vessels and its actory ships.4 Such as iron sheets, bars produced rom iron ore, cotton abrics woven rom raw cotton, recovery o lead rom used

motor car batteries, and recovery o metal rom metal shavings.


appenDix


27/41

APPENDIx

LIst oF MINIMAL PRoCEssEs tHAt Most PREFERENCE-GIVING CoUNtRIEsDo Not CoNsIDER As oRIGIN-CoNFERRING EVENts1

(a) Operations to endure the preservation o products in good condition during transport andstorage (ventilation, spreading out, drying, chilling, placing in salt, sulur dioxide or other

aqueous solutions, removal o damaged parts, and like operations

(b) Simple operations consisting o removal o dust, shiting or screening, sorting, classiying,matching (including the making-up o sets o articles), washing, painting, cutting up

(c) Changes o packing and breaking-up and assembly o consignments, simple placing in bottles,akes, bags, cases, boxes, fxing on cards or boards, etc., and all other simple packingoperations

(d) Afxing o marks, labels, and other like distinguishing signs on products or their packaging

(e) Simple mixing o products, whether or not o dierent kinds, where one or more components othe mixture do not meet the conditions laid down in the rules to enable them to be consideredas originating products

() Simple assembly o parts and products to constitute complete products

(g) A combination o two or more operations specifed in (a) to () above

(h) Slaughter o animals2

Source UNCTAD (1999).

1 This list is applied by all preerence-giving countries using the process criterion. Australia, Canada, New ealand, and

US regard this list as only an indication o processes that are unlikely to enable the fnished product to be accepted

as an originating product.2 Japan does not regard slaughter as minimal process.

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APPENDIx

sUMMARY

oF

PRINCIPA

L

PERCENtAGE

CRItERIoN

RULEs,

CUMULAtIoN,

ANDD

oNoR

CoUNtRY

CoNtENt

RUL

E

pRefeRenCe-giving

CountRies

pRinCipal

peRCentag

e

CRiteRion

Rules

sCope

of

Cumulation

donoR

CountRy

Content

Rule

n

umeRatoR

denominatoR

peRCentage

level

full

oR

paRtial

global

oR

egional

Australia

aborandmaterialsfromp

reference-

re

ceivingcountryandother

preference-receivingcountryandAustralia

Ex-factorycost

Minimum5

0%

ull

lobal

es

New

ealand

Expenditureonmaterialsandcomponents

originatinginthepreference-receiving

co

untry,andotherpreference-receiving

co

untryandNew

ealand

Ex-factorycost

Minimum5

0%

ull

lobal

es

Canada

alueofimportedinputs

Ex-factoryprice

Maximum6

0%

for

DCs;maximum

40%

forothers

ull

lobal

es

EuropeanUnion

Customsvalueofimported

in

putsortheearliestascertainableprice

paidinthecaseofmaterialsofunknown,

undeterminedorigin

Ex-factoryprice

Maximum4

0%

or50%

ull

Regional

No

Europeanree

TradeArea

(s

amewithEU)

Ex-factoryprice

(samewithEU)

Partial

Regional

No

Japan

(s

amewithEU)

OBprice

(samewithEU)

ull

Regional

es

US

Costofmaterialsproducedinthe

preference-receivingcountryplusthe

directcostofprocessingcarriedoutthere

Ex-factorypriceor

appraisedvalueby

UScustoms

Minimum3

5%

ull

Regional

No


appenDix


29/41

REFERENCEs

ADB. 2006.Asian Development Outlook 2006. Asian Development Bank, Manila.

Asia-Pacifc Economic Cooperation. 1997. Compendium on Rules o Origin. Subcommittee on Customs Procedures,

Committee on Trade and Investment, APEC, Singapore.

CCC. 1973. The International Convention on the Simplifcation and Harmonization o Customs Procedures (yoto

Convention). Customs Cooperation Council, Brussels.

Imagawa, ., and E. ermulst. 2005. The Agreement on Rules o Origin. In P. . J. Macrory, A. E. Appleton,

and M. . Plummer, eds., The World Trade Organization: Legal, Economic and Political Analysis. New ork

Springer erlag.

The Ministry o oreign Aairs o Japan. 2006. Agreement between Japan and the Republic o Singapore or

a New-Age Economic Partnership. Available http//www.moa.go.jp.

Ofce o the United States Trade Representative (USTR). 2006. North American ree Trade Agreement.

Available http//www.nata-sec-alena.org.

Ujiie, T. 2006. Trade acilitation. ERD Working Paper Series No. 78, Economics and Research Department,

Asian Development Bank, Manila.

UNCTAD. 1970. Report o the Third Working roup on SP Rules o Origin, Special Committee on Preerences,TD/B/AC. 5/38 and TD/B/AC. 5/W.I/14, eneva.

. 1999. Digest o GSP Rules o Origin. UNCTAD Technical Cooperation Project on Market Access, Trade

aws and Preerences, United Nations Conerence on Trade and Development, eneva.

ermulst, E., P. Waer, and J. Bougeois. 1994. Rules o Origin in International Trade: A Comparative Study. Ann

Arbor, MI The University o Michigan Press.

WCO. 1999. The International Convention on the Simplifcation and armonization o Customs Procedures, as

amended (Revised yoto Convention). World Customs Organization, Brussels.

WTO. 2002. The egal Texts, the Results o the Uruguay Round o Multilateral Trade Negotiations. World Trade

Organization, eneva.

December 2006


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23

PUBLICATIONS FROM THE

ECONOMICS AND RESEARCH DEPARTMENT

ERD WORKING PAPER SERIES (WPS)

(Published in-house; Available through ADB Office of External Relations; Free of Charge)

No. 1 Capitalizing on Globalization

Barry Eichengreen, January 2002No. 2 Policy-based Lending and Poverty Reduction:

An Overview of Processes, Assessmentand Options

Richard Bolt and Manabu Fujimura, January2002

No. 3 The Automotive Supply Chain: Global Trends

and Asian PerspectivesFrancisco Veloso and Rajiv Kumar, January 2002

No. 4 International Competitiveness of Asian Firms:

An Analytical Framework

Rajiv Kumar and Doren Chadee, February 2002No. 5 The International Competitiveness of Asian

Economies in the Apparel Commodity Chain

Gary Gereffi, February 2002No. 6 Monetary and Financial Cooperation in East

AsiaThe Chiang Mai Initiative and Beyond

Pradumna B. Rana, February 2002No. 7 Probing Beneath Cross-national Averages: Poverty,

Inequality, and Growth in the Philippines

Arsenio M. Balisacan and Ernesto M. Pernia,March 2002

No. 8 Poverty, Growth, and Inequality in Thailand

Anil B. Deolalikar, April 2002No. 9 Microfinance in Northeast Thailand: Who Benefits

and How Much?

Brett E. Coleman, April 2002No. 10 Poverty Reduction and the Role of Institutions in

Developing Asia

Anil B. Deolalikar, Alex B. Brilliantes, Jr.,Raghav Gaiha, Ernesto M. Pernia, Mary Raceliswith the assistance of Marita Concepcion Castro-Guevara, Liza L. Lim, Pilipinas F. Quising, May2002

No. 11 The European Social Model: Lessons for

Developing Countries

Assar Lindbeck, May 2002No. 12 Costs and Benefits of a Common Currency for

ASEAN

Srinivasa Madhur, May 2002No. 13 Monetary Cooperation in East Asia: A Survey

Raul Fabella, May 2002No. 14 Toward A Political Economy Approach

to Policy-based Lending

George Abonyi, May 2002No. 15 A Framework for Establishing Priorities in a

Country Poverty Reduction Strategy

Ron Duncan and Steve Pollard, June 2002No. 16 The Role of Infrastructure in Land-use Dynamics

and Rice Production in Viet Nams Mekong River

Delta

Christopher Edmonds, July 2002No. 17 Effect of Decentralization Strategy on

Macroeconomic Stability in Thailand

Kanokpan Lao-Araya, August 2002No. 18 Poverty and Patterns of Growth

Rana Hasan and M. G. Quibria, August 2002No. 19 Why are Some Countries Richer than Others?

A Reassessment of Mankiw-Romer-Weils Test of

the Neoclassical Growth Model

Jesus Felipe and John McCombie, August 2002No. 20 Modernization and Son Preference in Peoples

Republic of China

Robin Burgess and Juzhong Zhuang, September2002

No. 21 The Doha Agenda and Development: A View fromthe Uruguay Round

J. Michael Finger, September 2002No. 22 Conceptual Issues in the Role of Education

Decentralization in Promoting Effective Schooling in

Asian Developing CountriesJere R. Behrman, Anil B. Deolalikar, and Lee-Ying Son, September 2002

No. 23 Promoting Effective Schooling through EducationDecentralization in Bangladesh, Indonesia, andPhilippines

Jere R. Behrman, Anil B. Deolalikar, and Lee-Ying Son, September 2002

No. 24 Financial Opening under the WTO Agreement in

Selected Asian Countries: Progress and Issues

Yun-Hwan Kim, September 2002No. 25 Revisiting Growth and Poverty Reduction in

Indonesia: What Do Subnational Data Show?

Arsenio M. Balisacan, Ernesto M. Pernia,and Abuzar Asra, October 2002

No. 26 Causes of the 1997 Asian Financial Crisis: What

Can an Early Warning System Model Tell Us?

Juzhong Zhuang and J. Malcolm Dowling,October 2002

No. 27 Digital Divide: Determinants and Policies withSpecial Reference to Asia

M. G. Quibria, Shamsun N. Ahmed, TedTschang, and Mari-Len Reyes-Macasaquit, October2002

No. 28 Regional Cooperation in Asia: Long-term Progress,

Recent Retrogression, and the Way Forward

Ramgopal Agarwala and Brahm Prakash,October 2002

No. 29 How can Cambodia, Lao PDR, Myanmar, and VietNam Cope with Revenue Lost Due to AFTA TariffReductions?

Kanokpan Lao-Araya, November 2002No. 30 Asian Regionalism and Its Effects on Trade in the

1980s and 1990s

Ramon Clarete, Christopher Edmonds, andJessica Seddon Wallack, November 2002

No. 31 New Economy and the Effects of Industrial

Structures on International Equity MarketCorrelations

Cyn-Young Park and Jaejoon Woo, December2002

No. 32 Leading Indicators of Business Cycles in Malaysiaand the Philippines

Wenda Zhang and Juzhong Zhuang, December2002

No. 33 Technological Spillovers from Foreign DirectInvestmentA Survey

Emma Xiaoqin Fan, December 2002


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No. 34 Economic Openness and Regional Development in

the Philippines

Ernesto M. Pernia and Pilipinas F. Quising,January 2003

No. 35 Bond Market Development in East Asia:Issues and Challenges

Raul Fabella and Srinivasa Madhur, January2003

No. 36 Environment Statistics in Central Asia: Progressand Prospects

Robert Ballance and Bishnu D. Pant, March

2003No. 37 Electricity Demand in the Peoples Republic ofChina: Investment Requirement andEnvironmental Impact

Bo Q. Lin, March 2003No. 38 Foreign Direct Investment in Developing Asia:

Trends, Effects, and Likely Issues for theForthcoming WTO Negotiations

Douglas H. Brooks, Emma Xiaoqin Fan,and Lea R. Sumulong, April 2003

No. 39 The Political Economy of Good Governance for

Poverty Alleviation Policies

Narayan Lakshman, April 2003No. 40 The Puzzle of Social Capital

A Critical Review

M. G. Quibria, May 2003No. 41 Industrial Structure, Technical Change, and the

Role of Government in Development of theElectronics and Information Industry inTaipei,China

Yeo Lin, May 2003No. 42 Economic Growth and Poverty Reduction

in Viet Nam

Arsenio M. Balisacan, Ernesto M. Pernia, andGemma Esther B. Estrada, June 2003

No. 43 Why Has Income Inequality in ThailandIncreased? An Analysis Using 1975-1998 Surveys

Taizo Motonishi, June 2003No. 44 Welfare Impacts of Electricity Generation Sector

Reform in the Philippines

Natsuko Toba, June 2003No. 45 A Review of Commitment Savings Products in

Developing Countries

Nava Ashraf, Nathalie Gons, Dean S. Karlan,

and Wesley Yin, July 2003No. 46 Local Government Finance, Private Resources,and Local Credit Markets in Asia

Roberto de Vera and Yun-Hwan Kim, October2003

No. 47 Excess Investment and Efficiency Loss DuringReforms: The Case of Provincial-level Fixed-AssetInvestment in Peoples Republic of China

Duo Qin and Haiyan Song, October 2003No. 48 Is Export-led Growth Passe? Implications for

Developing Asia

Jesus Felipe, December 2003No. 49 Changing Bank Lending Behavior and Corporate

Financing in AsiaSome Research Issues

Emma Xiaoqin Fan and Akiko Terada-Hagiwara,December 2003

No. 50 Is Peoples Republic of Chinas Rising Services

Sector Leading to Cost Disease?Duo Qin, March 2004

No. 51 Poverty Estimates in India: Some Key Issues

Savita Sharma, May 2004No. 52 Restructuring and Regulatory Reform in the Power

Sector: Review of Experience and Issues

Peter Choynowski, May 2004No. 53 Competitiveness, Income Distribution, and Growth

in the Philippines: What Does the Long-runEvidence Show?

Jesus Felipe and Grace C. Sipin, June 2004

No. 54 Practices of Poverty Measurement and Poverty

Profile of Bangladesh

Faizuddin Ahmed, August 2004No. 55 Experience of Asian Asset Management

Companies: Do They Increase Moral Hazard?Evidence from Thailand

Akiko Terada-Hagiwara and Gloria Pasadilla,September 2004

No. 56 Viet Nam: Foreign Direct Investment andPostcrisis Regional Integration

Vittorio Leproux and Douglas H. Brooks,

September 2004No. 57 Practices of Poverty Measurement and PovertyProfile of Nepal

Devendra Chhetry, September 2004No. 58 Monetary Poverty Estimates in Sri Lanka:

Selected Issues

Neranjana Gunetilleke and DinushkaSenanayake, October 2004

No. 59 Labor Market Distortions, Rural-Urban Inequality,and the Opening of Peoples Republic of ChinasEconomy

Thomas Hertel and Fan Zhai, November 2004No. 60 Measuring Competitiveness in the Worlds Smallest

Economies: Introducingthe SSMECIGaneshan Wignaraja and David Joiner, November2004

No. 61 Foreign Exchange Reserves, Exchange Rate

Regimes, and Monetary Policy: Issues in AsiaAkiko Terada-Hagiwara, January 2005

No. 62 A Small Macroeconometric Model of the Philippine

Economy

Geoffrey Ducanes, Marie Anne Cagas, Duo Qin,Pilipinas Quising, and Nedelyn Magtibay-Ramos,January 2005

No. 63 Developing the Market for Local Currency Bondsby Foreign Issuers: Lessons from Asia

Tobias Hoschka, February 2005No. 64 Empirical Assessment of Sustainability and

Feasibility of Government Debt: The PhilippinesCase

Duo Qin, Marie Anne Cagas, Geoffrey Ducanes,Nedelyn Magtibay-Ramos, and Pilipinas Quising,February 2005

No. 65 Poverty and Foreign Aid

Evidence from Cross-Country DataAbuzar Asra, Gemma Estrada, Yangseom Kim,and M. G. Quibria, March 2005

No. 66 Measuring Efficiency of Macro Systems: AnApplication to Millennium Development Goal

Attainment

Ajay Tandon, March 2005No. 67 Banks and Corporate Debt Market Development

Paul Dickie and Emma Xiaoqin Fan, April 2005No. 68 Local Currency FinancingThe Next Frontier for

MDBs?

Tobias C. Hoschka, April 2005No. 69 Export or Domestic-Led Growth in Asia?

Jesus Felipe and Joseph Lim, May 2005No. 70 Policy Reform in Viet Nam and the Asian

Development Banks State-owned EnterpriseReform and Corporate Governance Program Loan

George Abonyi, August 2005No. 71 Policy Reform in Thailand and the Asian

Development Banks Agricultural Sector Program

LoanGeorge Abonyi, September 2005

No. 72 Can the Poor Benefit from the Doha Agenda? TheCase of Indonesia

Douglas H. Brooks and Guntur Sugiyarto,October 2005

No. 73 Impacts of the Doha Development Agenda on

Peoples Republic of China: The Role ofComplementary Education Reforms


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No. 11 Shadow Exchange Rates for Project EconomicAnalysis: Toward Improving Practice at the AsianDevelopment Bank

Anneli Lagman-Martin, February 2004No. 12 Improving the Relevance and Feasibility of

Agriculture and Rural Development Operational

Designs: How Economic Analyses Can Help

Richard Bolt, September 2005No. 13 Assessing the Use of Project Distribution and

Poverty Impact Analyses at the Asian DevelopmentBankFranklin D. De Guzman, October 2005

No. 14 Assessing Aid for a Sector Development Plan:Economic Analysis of a Sector Loan

David Dole, November 2005No. 15 Debt Management Analysis of Nepals Public Debt

Sungsup Ra, Changyong Rhee, and Joon-HoHahm, December 2005

No. 16 Evaluating Microfinance Program Innovation with

Randomized Control Trials: An Example fromGroup Versus Individual Lending

Xavier Gin, Tomoko Harigaya,Dean Karlan, andBinh T. Nguyen, March 2006

No. 17 Setting User Charges for Urban Water Supply: ACase Study of the Metropolitan Cebu Water

District in the Philippines

David Dole and Edna Balucan, June 2006No. 18 Forecasting Inflation and GDP Growth: Automatic

Leading Indicator (ALI) Method versus MacroEconometric Structural Models (MESMs)

Marie Anne Cagas, Geoffrey Ducanes, NedelynMagtibay-Ramos, Duo Qin and Pilipinas Quising,July 2006

ERD TECHNICAL NOTE SERIES (TNS)

(Published in-house; Available through ADB Office of External Relations; Free of Charge)

No. 1 Contingency Calculations for EnvironmentalImpacts with Unknown Monetary ValuesDavid Dole, February 2002

No. 2 Integrating Risk into ADBs Economic Analysisof Projects

Nigel Rayner, Anneli Lagman-Martin,and Keith Ward, June 2002

No. 3 Measuring Willingness to Pay for Electricity

Peter Choynowski, July 2002No. 4 Economic Issues in the Design and Analysis of a

Wastewater Treatment Project

David Dole, July 2002No. 5 An Analysis and Case Study of the Role of

Environmental Economics at the AsianDevelopment Bank

David Dole and Piya Abeygunawardena,September 2002

No. 6 Economic Analysis of Health Projects: A Case Studyin Cambodia

Erik Bloom and Peter Choynowski, May 2003No. 7 Strengthening the Economic Analysis of Natural

Resource Management Projects

Keith Ward, September 2003No. 8 Testing Savings Product Innovations Using an

Experimental Methodology

Nava Ashraf, Dean S. Karlan, and Wesley Yin,November 2003

No. 9 Setting User Charges for Public Services: Policies

and Practice at the Asian Development Bank

David Dole, December 2003No. 10 Beyond Cost Recovery: Setting User Charges for

Financial, Economic, and Social Goals

David Dole and Ian Bartlett, January 2004

Fan Zhai and Thomas Hertel, October 2005No. 74 Growth and Trade Horizons for Asia: Long-term

Forecasts for Regional Integration

David Roland-Holst, Jean-Pierre Verbiest, andFan Zhai, November 2005

No. 75 Macroeconomic Impact of HIV/AIDS in the Asianand Pacific Region

Ajay Tandon, November 2005No. 76 Policy Reform in Indonesia and the Asian

Development Banks Financial Sector Governance

Reforms Program Loan

George Abonyi, December 2005No. 77 Dynamics of Manufacturing Competitiveness inSouth Asia: ANalysis through Export Data

Hans-Peter Brunner and Massimiliano Cal,December 2005

No. 78 Trade Facilitation

Teruo Ujiie, January 2006No. 79 An Assessment of Cross-country Fiscal

Consolidation

Bruno Carrasco and Seung Mo Choi,February 2006

No. 80 Central Asia: Mapping Future Prospects to 2015

Malcolm Dowling and Ganeshan Wignaraja,April 2006

No. 81 A Small Macroeconometric Model of the PeoplesRepublic of ChinaDuo Qin, Marie Anne Cagas, Geoffrey Ducanes,

Nedelyn Magtibay-Ramos, Pilipinas Quising, Xin-Hua He, Rui Liu, and Shi-Guo Liu, June 2006

No. 82 Institutions and Policies for Growth and Poverty

Reduction: The Role of Private Sector DevelopmentRana Hasan, Devashish Mitra, and MehmetUlubasoglu, July 2006

No. 83 Preferential Trade Agreements in Asia:Alternative Scenarios of Hub and Spoke

Fan Zhai, October 2006No. 84 Income Disparity and Economic Growth: Evidence

from Peoples Republic of China

Duo Qin, Marie Anne Cagas, Geoffrey Ducanes,Xinhua He, Rui Liu, and Shiguo Liu, October 2006

No. 85 Macroeconomic Effects of Fiscal Policies: EmpiricalEvidence from Bangladesh, Peoples Republic of

China, Indonesia, and Philippines

Geoffrey Ducanes, Marie Anne Cagas, Duo Qin,Pilipinas Quising, and Mohammad AbdurRazzaque, November 2006

No. 86 Economic Growth, Technological Change, andPatterns of Food and Agricultural Trade in Asia

Thomas W. Hertel, Carlos E. Ludena, and AllaGolub, November 2006

No. 87 Expanding Access to Basic Services in Asia and the

Pacific Region: PublicPrivate Partnerships forPoverty Reduction

Adrian T. P. Panggabean, November 2006No. 88 Income Volatility and Social Protection in

Developing Asia

Vandana Sipahimalani-Rao, November 2006

No. 89 Rules of Origin: Conceptual Explorations andLessons from the Generalized System ofPreferences

Teruo Ujiie, December 2006


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No. 1 Is Growth Good Enough for the Poor?

Ernesto M. Pernia, October 2001No. 2 Indias Economic Reforms

What Has Been Accomplished?What Remains to Be Done?

Arvind Panagariya, November 2001No. 3 Unequal Benefits of Growth in Viet Nam

Indu Bhushan, Erik Bloom, and Nguyen MinhThang, January 2002

No. 4 Is Volatility Built into Todays World Economy?

J. Malcolm Dowling and J.P. Verbiest,February 2002

No. 5 What Else Besides Growth Matters to PovertyReduction? Philippines

Arsenio M. Balisacan and Ernesto M. Pernia,February 2002

No. 6 Achieving the Twin Objectives of Efficiency and

Equity: Contracting Health Services in Cambodia

Indu Bhushan, Sheryl Keller, and Brad Schwartz,March 2002

No. 7 Causes of the 1997 Asian Financial Crisis: WhatCan an Early Warning System Model Tell Us?

Juzhong Zhuang and Malcolm Dowling,June 2002

No. 8 The Role of Preferential Trading Arrangementsin Asia

Christopher Edmonds and Jean-Pierre Verbiest,July 2002

No. 9 The Doha Round: A Development Perspective

Jean-Pierre Verbiest, Jeffrey Liang, and LeaSumulong, July 2002

No. 10 Is Economic Openness Good for RegionalDevelopment and Poverty Reduction? The

PhilippinesE. M. Pernia and Pilipinas Quising, October2002

No. 11 Implications of a US Dollar Depreciation for AsianDeveloping Countries

Emma Fan, July 2002No. 12 Dangers of Deflation

D. Brooks and Pilipinas Quising,December 2002

No. 13 Infrastructure and Poverty Reduction

What is the Connection?

Ifzal Ali and Ernesto Pernia, January 2003No. 14 Infrastructure and Poverty Reduction

Making Markets Work for the Poor

Xianbin Yao, May 2003No. 15 SARS: Economic Impacts and Implications

Emma Xiaoqin Fan, May 2003No. 16 Emerging Tax Issues: Implications of Globalization

and Technology

Kanokpan Lao Araya, May 2003No. 17 Pro-Poor Growth: What is It and Why is It

Important?

Ernesto M. Pernia, May 2003No. 18 PublicPrivate Partnership for Competitiveness

Jesus Felipe, June 2003

No. 19 Reviving Asian Economic Growth Requires FurtherReforms

Ifzal Ali, June 2003No. 20 The Millennium Development Goals and Poverty:

Are We Counting the Worlds Poor Right?

M. G. Quibria, July 2003No. 21 Trade and Poverty: What are the Connections?

Douglas H. Brooks, July 2003No. 22 Adapting Education to the Global Economy

Olivier Dupriez, September 2003No. 23 Avian Flu: An Economic Assessment for Selected

Developing Countries in Asia

Jean-Pierre Verbiest and Charissa

Documents

Rules of Origin: Conceptual Explorations and Lessons from the Generalized System of Preferences