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Made in …?: Understanding Rules of Origin
Market Access Division WTO 2014
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Course objectives
Understand why rules of origin are
used in international trade
Know how to distinguish
preferential and non-preferential origin
Be familiar with the main methods used
to design rules of origin
Understand the effects of rules of
origin on trade and investment
Become familiar with the WTO disciplines
on rules of origin
At the end of this online course, you will be expected to:
1 2 3
4 5
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Table of contents
What are rules of origin? Why are rules of origin used in international trade? What is preferential and what is non-preferential origin?
Why do rules of origin matter? What is their impact on trade and investment?
How can rules of origin be designed?
WTO rules: the Agreement on Rules of Origin and the Ministerial Decision on rules of origin for least-developed countries
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WHAT ARE RULES OF ORIGIN? WHY ARE THEY NEEDED IN INTERNATIONAL TRADE? WHAT IS PREFERENTIAL AND WHAT IS NON-PREFERENTIAL ORIGIN?
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What is origin?
• According to the Dictionary, origin is the fact of being born from a
particular ancestor or, more generally it is the act or fact of
beginning from something; source or cause; starting point.
• For a person, origin is commonly thought to be your nationality.
That may be determined by your place of birth, by the origin or
your parents, by your marriage with someone or by your
prolonged residency in a given country. Your origin (nationality)
grants certain benefits like being able to live, work , access social
security or run for elected posts.
• The origin of goods is similar: it is the “nationality” of a good, or
the country where a good was obtained or where it was
manufactured. …Depending on the country of origin of a good,
some benefits may apply, such as being imported without paying
any import duties (“duty free”).
Rules of Origin are the rules that determine where a good
was obtained or manufactured, that is, its
economic nationality. They set the conditions under
which a good may be considered as having
“originated” in a country.
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Cotton: grown in Malawi
Fabric: weaved in South Africa
Dyeing: South Africa
Printing: South Africa
Yarn: from Pakistan
Buttons: from India
Cut to parts in South Africa
Assembly: Malawi
Licenses: USA
Cotton pyjamas
Many countries may participate in the manufacturing process of a good, but
there must be only one country of origin.
A RULE is needed to
identify that country.
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When are rules of origin used?
Rules of Origin are used in international trade every time the treatment of an imported item varies depending on where it was produced; that is, every time there
needs to be a distinction based on the country of origin.
Most commonly, this happens at the importation of a good, to determine which tariff rate should apply.
However, certain countries may also apply other trade policy measures which require the
utilization of rules of origin for their implementation.
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Import duties
0%
0%
16%
8%
0%
Boy’s pyjamas HS6207.22
NAFTA
US-Jordan FTA
MFN
US-Country X FTA
US GSP (AGOA)
Certificate of Origin
The import duties (tariffs) that a product will pay when it is imported
often depend on the origin of the good. If the good is deemed to
originate in a preferential country, it could be imported duty free. If it originates in a non-preferential
country, it may have to pay import duties to be imported. The certificate of origin is what attests of the origin of a good. Based on it, customs will
assess which duties apply.
Imports from Mexico, Jordan and Lesotho are imported duty free (import duty = 0%). Imports
from Country X pay reduced duties because tariff reduction in an agreement could be “progressive”
or because the rates in the agreement were reduced but not eliminated.
Countries with which the USA does not have an Agreement, such as
Pakistan, pay the “regular” import duties.
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Preferential / Non-Preferential Treatment
PREFERENTIAL Treatment: trade agreements facilitate trade among countries by reducing or eliminating customs
duties. Because they create preferential relations, such agreements are in principle against the WTO’s Most Favoured
Nation principle, but Articles XXIV of the GATT and the “Enabling Clause” authorize Members to conclude such
agreements. Preferential trade agreements have several forms or names:
• “Reciprocal” Trade Regimes: all parties reduce tariffs with respect to each other (“regional trade agreements” in
WTO talk)
– Free Trade Agreements, Free Trade Zones, Economic Partnership Agreement, Customs Unions, etc.
– Bilateral Agreements (EU-Chile, US-Korea) or Regional Agreements (e.g. NAFTA, COMESA, MERCOSUR,
ASEAN, GCC, EU-ACP EPAs, etc.)
• “Non-Reciprocal” or “Unilateral” Trade Regimes: only one of the parties reduces or eliminates its tariffs with
respect to imports from the other parties, while the others continue to maintain tariffs (“preferential trade
agreements” in WTO talk)
– Developed or developing countries’ “General System of Preferences”, GSP (e.g. US African Opportunity and
Growth Act (AGOA) for Sub-Saharan African countries, EU “Everything But Arms (EBA)”, China’s preferences
for least developed countries, etc.
NON PREFERENTIAL Treatment: trade among Members of the WTO is usually conducted on the basis of the “Most
Favoured Nation” principle. In respect to import duties, this means that WTO Members must, in the absence of
preferences or exceptions, apply to each other the same import duty for like products.
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Preferential vs. Non-Preferential
• The rules of origin which apply to an international transaction are always that of the IMPORTING country: it is the importing country that sets the conditions for entry of goods in its territory. This is why rules of origin have a direct impact on MARKET ACCCESS conditions.
• ALL preferential trade agreements have rules of origin. In that context, rules of origin ensure that the benefits of an agreement are only given to those products which “originate” in one of the parties to the agreement.
• In fact, accepting NOT TO CHARGE import duties on an imported item is a real benefit! And a concession.. since it means foregoing revenue. And let’s not forget that most Customs authorities report to the … Ministry of Finance!
• The purpose of preferential rules of origin is therefore not so much to determine the “real” origin of a good.. but rather to CONFIRM that a good claiming preferential status actually MEETS the conditions set in the agreement.
Preferential Rules of Origin
(“reciprocal” and “non-reciprocal” or
unilateral trade regimes)
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Preferential vs. Non-Preferential
• Not all countries use non-preferential rules of origin (since no tariff concession is involved).
• Non-preferential rules of origin ARE NOT used to implement trade preferences. Instead, they are used in the context of OTHER TRADE POLICY MEASURES such as quotas, anti-dumping, food and health (sanitary) measures, etc. They are also used to indicate the country of origin on labels (consumer policies) and to collect trade statistics. Not all countries apply non-preferential rules of origin.
Non-Preferential Rules of Origin
(MFN treatment)
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Import Quotas
EUROPEAN UNION High Quality Beef import Quota Allocations 2012-13
Exporting Country Quota 2012-13 Quantity issued % allocated
Argentina 30,000 24,336 81.1
Australia 7,150 6,441 90.1
Uruguay 6,300 6,289 99.8
Brazil 10,000 2,978 29.8
New Zealand 1,300 1,281 98.5
Paraguay 1,000 0 0
United States 11,500 432 3.8
Total 67,250 41,757 62.1
Source: EU Commission
In the European Union, the importation of meat is regulated by a quota. Each country may export meat to the EU until a maximum volume (number of tonnes) is reached. Rules of Origin are needed to track imports and
control the extent to which the quota allocated to each country is being used (distinguishing the meat by country of origin).
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Anti-Dumping
Antidumping duty likely on Chinese, Korean, Thai alloy wheels NEW DELHI: The Indian Government has announced that, following investigations, it is likely to impose an anti-dumping duty on a certain type of aluminium alloy auto wheels imported from China, Thailand and Korea, to protect domestic producers from below-cost imports.
In its preliminary findings, the Directorate General of Anti-dumping and Allied Duties (DGAD) has recommended imposition of duty ranging between USD 1.18 and USD 2.15 per kg on imports of cast aluminium alloy wheels from the three countries, the Commerce Ministry said in a notification.
If a company exports a product at a price lower than the price it normally charges on its own home market, it is said to be “dumping”
the product. The WTO “Anti-dumping Agreement” regulates how governments can or cannot react to dumping, for instance, by
imposing an additional tax on the importation of dumped goods.
Rules of origin will allow customs officers to levy the additional tax only on imported items from specific countries in which dumping was
found, but not on like products from other countries.
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Sanitary inspections, embargoes
If a disease found in meat from Brazil requires the prohibition of such imports, a ban should not
penalize imports from other countries where no disease was found.
Rules of origin will allow a customs officer to know which items may be imported and which may not.
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Trade statistics
TABLE 8. VALUE OF IMPORTS, TOTAL EXPORTS AND BALANCE OF VISIBLE TRADE WITH PRINCIPAL
COUNTRIES FOR YEAR TO DATE
$000 T.T.
COUNTRIES
JANUARY - MARCH 2011
IMPORTS (C.I.F.) EXPORTS (F.O.B.) BALANCE
(1) (2) (3)
COLOMBIA 2,644,073.8 334,960.6 -2,309,113.2
U. S. A. 2,156,776.9 8,447,529.7 6,290,752.8
GABON 1,450,660.0 0.1 -1,450,659.9
BRAZIL 1,339,390.3 465,743.1 -873,647.2
CHINA 442,457.3 68,281.6 -374,175.7
RUSSIAN FEDERATION 405,465.7 0.0 -405,465.7
REST OF THE WORLD 352,623.0 241,211.2 -111,411.9
CANADA 257,346.3 424,964.3 167,618.1
GERMANY 223,709.1 135,109.9 -88,599.2
CARICOM 182,364.6 2,933,838.1 2,751,473.5
UNITED KINGDOM 162,691.4 885,948.6 723,257.1
JAPAN 159,917.5 1,030.1 -158,887.4
THAILAND 119,837.9 3,106.4 -116,731.4
MEXICO 111,226.0 22,339.4 -88,886.6
SPAIN 102,970.7 1,449,636.0 1,346,665.3
KOREA, REPUBLIC OF 93,734.4 4,327.5 -89,406.9
The application of Rules of Origin also allow the compilation of national statistics, which
indicate what is imported (or exported) from various countries.
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Country of origin marking (labels)
Many countries have consumer legislation indicating the information
that should be contained in labels. Country of origin is a very common
item which labels may need to contain.
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Summarizing…
ORIGIN
NON PREFERENTIAL Purpose is to identify the “final” country of
origin
PREFERENTIAL Purpose is to verify that
an imported good conforms with the
conditions set in an RTA
Used for MFN trade
Used for Preferential
trade
Determine Statistics,
Quotas, Anti-dumping, Licences, Labels…
Determine Import duties
(tariffs)
Derive from Regional
Or Preferential Trade
Agreements
Derive from National
legislation (+ WTO
Agreement)
• Rules of Origin are used to determine the country of origin of imported goods so that they receive the appropriate treatment at their importation.
• But the country of origin will also matter for statistics and for consumers! (health and labels)
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Test your knowledge
1. Preferential rules of origin:
a) Are negotiated in the context of regional trade agreements;
b) Are adopted unilaterally by governments which maintain preferential trade schemes for developing or least-developed countries;
c) Aim at ensuring that only goods which meet specific origin criteria can benefit from tariff preferences;
d) All of the above.
2. Non-Preferential rules of origin:
a) Are used to differentiate goods on the basis of their country of origin: such as for anti-dumping, licenses or quotas;
b) Must be complied with for a good to benefit from tariff preferences;
c) Must be applied by all countries that engage in international trade;
d) All of the above.
Select the correct answer.
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Test your knowledge
3. Match the policy instruments on the right with the types of origin on the left.
Free Trade Agreements
Non Preferential Origin
Preferential Origin
Product labeling
MFN tariffs
Duty Free treatment
Anti Dumping duties
Customs Unions
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Test your knowledge - Answers
1. Preferential rules of origin:
d) All of the above.
2. Non-Preferential rules of origin:
d) Are used to differentiate goods on the basis of their country of origin: such as for anti-dumping, licenses or quotas.
3. Match the policy instruments on the right with the types of origin on the left.
Non Preferential Origin: Anti Dumping duties, Product labeling, MFN tariffs
Preferential Origin: Free Trade Agreements, Duty Free treatment, Customs Unions
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HOW DO RULES OF ORIGIN AFFECT BUSINESSES? HOW DO THEY AFFECT INTERNATIONAL TRADE? WHAT IMPACT DO RULES OF ORIGIN HAVE ON INVESTMENT?
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Rules of Origin can…
encourage foreign and domestic investment where
the rules facilitate international trade
influence the ability of firms to benefit from
regional or preferential trade agreements
influence the capacity for firms to integrate
international value chains
encourage or discourage linkages between export
sectors and national industries
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Why do Rules of Origin matter?
• In the context of trade preferences, goods which do not conform with the rules of an agreement will be denied preferential benefits (that is, they will still be imported… but not at reduced or zero duty rates).
• If the conditions set are stringent, rules of origin may require producers to change their suppliers to qualify for regional or preferential trade agreements.
• Adjusting to such requirements is not always easy or doable for firms.
• This means rules of origin could have a significant impact on the cost of producing a good and might therefore affect its competitiveness and trade opportunities.
Because they set the CONDITIONS OF IMPORTATION into national markets, rules of origin affect MARKET ACCESS OPPORTUNITIES.
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Why do Rules of Origin matter?
• In the context of non-preferential trade, rules of origin determine whether a product will be subject to anti-dumping duties, embargoes or sanitary restrictions, licences, etc. They may dictate which country of origin should be indicated in labels.
• If the rules of not clear, exporters and importers may have great difficulty predicting which treatment their goods will receive, making it more difficult to make business plans and decisions. If the rules are complex, companies may need to hire and dedicate staff specifically to understand them and reduce the risks associated with regulatory uncertainty, which increase their costs.
• Rules of origin may also be one of the considerations leading to foreign investment decisions.
Rules of origin create both opportunities and challenges for firms.
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Effect on international trade
• Preferential rules of origin set the conditions that a good must meet to be imported under the benefits of a preferential or regional trade agreement (particularly the ability of a good to be imported duty free).
• If the rules are adapted to the productive and industrial capacity of a country, they will encourage preferential trade. But if the rule is too “strict” (that is, its requirements are difficult or even impossible to comply with for a country), a firm’s ability to export under preferences may be diminished. In this cases, we refer to a low or high “utilization rate” of an agreement (how much trade between two countries actually is done on the basis of a preferential agreement between them).
• There are hundreds of regional and preferential trade agreements, each with its own set of rules of origin. This means that companies need to understand, comply and prove compliance with sometimes very different rules.
• The WTO 2011 World Trade Report contains additional information on how rules of origin may discourage preferential trade flows (Chapter II-B.4., pages 83-85).
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Economic effect
Strict Rules of Origin
Encourages the choice of local or regional suppliers and the use of inputs originating from within from preferential partners.
Can promote local industries and incentivise the emergence of regional supply chains / added value and encourage regional integration.
Can be difficult or costly to comply with if companies cannot find the inputs they need locally.
If cannot be complied with, companies will not always be able to claim the benefits of the agreement (“under utilization”).
Flexible Rules of Origin
Do not restrict the choice of suppliers so have a more moderate impact on trade and business choices.
By allowing to chose inputs globally, more flexible rules can boost the competitiveness of local or regional products.
However, local companies or small firms supplying inputs could find it harder to compete with competitors abroad.
Because the rules are easier to comply with, they may encourage trade and lead to a higher utilization of the benefits of the agreement.
But, what may be strict or flexible for one country
might not be for another…
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Consider this example
PREFERENCES
Country
A
PREFERENCES
The clothing sector accounts for about 60% of exports from
Lesotho. The sector grew rapidly particularly to take
advantage of trade preferences in the EU and the USA. More recently, firms also produce to supply the South
African market.
The cutting and sewing of the garment are done in Lesotho,
where labour costs are low. The cotton fabric used needs to be imported as there is no local
production. So the possibility to import fabrics and the price and quality of the fabrics used have
a direct impact on the competitiveness of exports.
Rule of origin to qualify for preferences in country A is: 40% of the final value of the garment must be added locally. Non-originating materials
(“imported fabrics”) can come from any country.
Rule of origin to qualify for preferences in country B is: 50% of the final value of the garment must be added locally. Non-originating materials
(“imported fabrics”) can come only from country B or an African country.
The rule is flexible and allows producers to buy cheap fabrics and be competitive. However, the exporting sector might have little linkages with other sectors of the economy of Lesotho and local or regional cotton producers may find it hard to compete in supplying fabrics.
The rule is more strict and force local producers to find suppliers in Country B or within Africa. Finding competitive suppliers could be a challenge, which would undermine the competitiveness of final garments. However, local and African producers of cotton would find it easier to integrate into this value chain.
Country
B
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Summarizing…
• Rules of origin are a necessary component of international trade and particularly in the context of preferential trade agreements.
• Because each preferential or regional agreement contains its own rules of origin, there are hundreds of different sets of rules of origin currently being applied in the world.
• If companies wish to export their products duty free, they need to comply with the origin requirements laid out in each individual agreement.
• If the rule is simple, predictable and easy to comply with (that is, no particular adjustment to production is needed), complying with the rule will be easy and the products will become eligible for preferences.
• If, however, the rule is complex and impose adjustments to the supply chain of a company (the way it structures its production), complying with the rule could be difficult or costly. So much so that certain companies may simply not be able to comply with them. In this case, they may export, but will not be able to claim preferences (that is, export duty free).
• Therefore, there should ideally be a match between origin requirements and the productive capacity of the companies and countries. Where there is no match, the rules may influence business choices and have an impact on competitiveness, the utilization of preferential agreements and generally on trade.
• It is in this context that rules of origin create both opportunities and challenges for companies and countries.
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Test your knowledge
1. Preferential rules of origin:
a) Impose procedural requirements, such as a certificate of origin but are a mere formality in international trade;
b) Have been harmonized internationally so the same rules are applied by all nations;
c) Can influence the choice of suppliers and therefore impose adjustments to the way companies structure their businesses;
d) All of the above.
2. Rules of origin have an impact on trade because:
a) They determine the eligibility of products for trade preferences;
b) For firms that wish to claim trade preferences, they may constrain their choice of suppliers and inputs;
c) They may increase production costs by forcing companies to understand and comply with a multiplicity of different rules;
d) All of the above.
Select the correct answer.
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Test your knowledge - Answers
1. Preferential rules of origin:
c) Can influence the choice of suppliers and therefore impose adjustments to the way companies structure their businesses.
2. Non-Preferential rules of origin:
d) All of the above.
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HOW CAN ORIGIN BE DETERMINED? WHAT ARE THE MOST COMMON METHODS USED TO DESIGN RULES OF ORIGIN?
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How are rules of origin designed?
• Rules of origin will set the conditions according to which a product can be considered
to originate in a country. The rule will therefore entail some understanding about how
goods are obtained, produced, manufactured, processed, etc. This is why negotiating or
implementing rules of origin may be a complex exercise: not only does it require some
experience in drafting the rules themselves, but it also entails legal skills and an
understanding about industrial or manufacturing processes.
• Rules of origin derive from national legislation, international agreements (for instance,
regional trade agreements) or from a multilateral agreement (for instance the WTO
Agreement on Rules of Origin or the Kyoto Convention).
• They can be general (and apply to all products) or specific to some sectors or goods
only (product-specific rules). When a rule is specific, it will typically identify goods on
the basis of the Harmonized System.
• The certificate of origin proves or demonstrates the origin of a good (in fact, a good is
not necessarily shipped from its country of production, or the last place of production
is not necessarily where it gained its essential characteristics).
Watch Mr Stefano
Inama, of the
UNCTAD, speak
about the difficulties
in drafting rules of
origin.
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Reminder: HS
• Most commonly known as the Harmonized
System of Nomenclature, of “the HS”.
• International convention elaborated to make it
easier to identify products (goods) and facilitate
international trade.
• Used by more than 200 countries.
• Developed and maintained by the World
Customs Organization (headquartered in
Brussels, Belgium).
• Regularly updated to keep pace with modern
technology and new patterns of trade.
HS Codes are built with sequential codes. The greater the number of digits, the more specifically an item is identified. Example:
Section: Textiles and Textile articles
Chapter 62: Articles of apparel and clothing, not knitted or crocheted
Heading 62.07: Men's or boys' nightshirts, pyjamas, etc.
Line 6207.21 Pyjamas: Of cotton
Line 6207.22 Pyjamas: Of man-made fibres
Line 6207.29 Pyjamas: Of other textile materials
Find out more about the HS and the work of the World Customs Organization.
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Rules of Origin divide goods into 2 main categories depending on how they are produced
(2) “Substantially transformed” Goods
(1) “Wholly Obtained” Goods
and
VALUE TARIFF
CLASSIFICATION MANUFACTURING
PROCESS
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Wholly Obtained Goods
• The origin category of “Wholly obtained goods” covers the cases in which a good is entirely obtained, extracted, or manufactured in a single country without using inputs imported from other countries.
• Attributing origin in these cases is simple because only one country is involved in the production process. In any set of rules of origin, specific provisions describe or enumerate these goods.
• It is mainly used for natural products and for goods made from natural products which are entirely obtained in one country.
• Common examples are products extracted, harvested, hunted or captured in a country: mineral products extracted from a country’s soil, vegetables harvested or gathered in that country; live animals born and raised in that country or captured or fished in that country, products obtained by maritime fishing taken from the sea by a vessel of that country or produced in such a vessel, etc.
• In addition, any good produced in a country exclusively from other wholly obtained goods will also be deemed to have been wholly obtained in that country (for instance sausages from meat obtained in that country or fruit jam from fruits and sugar obtained in that country).
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“Percentage” or “value” criterion
Origin is based on a product characteristics,
such as its final price (“value”), the price and
the proportion of foreign or local inputs
“Tariff classification” criterion
Origin is based only on the tariff classification of a final good and the components used using
the Harmonised System (HS)
“Specific processes” criterion
Origin is based on specific manufacturing
or other specific processes which were necessary to produce
a good
Substantially Transformed Goods
• Substantially transformed goods are those which are produced FROM or WITH imported inputs or those which require processing in different countries. Attributing the origin of a good to a single country can be a complex exercise in these cases because several materials, parts, processes or a large number of countries may be involved.
• The rule of origin will therefore need to clearly identify when exactly a transformation occurs, that is, when the final product resulting from a process is sufficiently different from the inputs used to manufacture it.
• 3 approaches to determine whether substantial transformation has occurred.
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Illustration of substantial transformation
• Chemical fertilizers (SH 3105) are composed mainly of 3 elements: ammonium nitrate, potassium chloride, and ammonium phosphate. The compounds are blended together in different proportions and then granulated or diluted in water and packaged.
• Assume a producer imports these 3 elements from 3 different countries and uses his expertise to blend them. The fertilizer is then exported to another country. Here are illustrations of what the rule of origin could look like:
“Percentage” or “value” criterion
At least 30% of the final value of the good must have been added locally
Non originating materials (imported inputs) must not be more than 70% of final
price
“Tariff classification” criterion
Change of Tariff heading: all materials used (inputs)
must be classified in a tariff heading different from that of the final product (fertilizer).
“Specific processes” criterion
Origin is determined by the place where the
ammonium was obtained or where the blending was
performed
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Additional provisions
• Several other provisions complement and help clarify the basic rules of origin. Several of these provisions can help make the rule of origin more flexible or more strict or restrictive. One important concept is that of “CUMULATION”.
• While, in principle, all processes for origin purposes must have been carried out in a single country to be considered as “originating”, sometimes the rules may accept the use of imported inputs from selected countries. That is, imported inputs would be considered to be domestic for origin purposes.
• Several regional or preferential trade agreements contain this type of flexibility.
• This is a flexibility of great use for many developing countries with a limited productive capacity because it allows producers to import the materials they need without loosing access to trade preferences.
In the EU-CARIFORUM Economic Partnership Agreements, parties to the agreement may source their inputs from any other Caribbean, EU or ACP country, as well as from selected neighbouring countries. In this example, the rule of origin would deem that 55$ in the value of this “Beef Stew” come from Jamaica.
Illustration of “Cumulation”
“Ready made Beef Stew”
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Summarizing…
• Rules of origin will set the conditions according to which a product can be considered to originate in a country. Rules of Origin divide goods into 2 main categories depending on how they are produced:
1. “Wholly obtained goods” (typically those occurring naturally); and,
2. Substantially transformed goods (most other products).
• The rule of origin will identify exactly when a “new” final product was obtained because a substantial transformation or sufficient processing has occurred. The rule does so by:
1. Assessing the value that was added locally or the value which was imported (if that value meets minimum or maximum percentages, the origin will be deemed to have changed);
2. Comparing the tariff classification of the inputs used and that of the final good (if the classification is sufficiently different, the origin will be deemed to have changed);
3. Identifying a very specific industrial process which, if accomplished, will change the origin of the final good.
• Rules can be general or product-specific. Several other provisions complement the rules, making them more flexible or more restrictive.
• Cumulation, for instance, allows to consider imported materials from certain other countries as being obtained locally. It is an important flexibility for developing countries as it allows producers to source the materials they need from firms abroad.
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Test your knowledge
Match the policy instruments on the right with the types of origin on the left.
Animals born and raised in that country
Wholly obtained goods
Substantial Transformation (value added rule)
Change of Tariff Heading (CTH)
Country where refining occurred
Regional content of at least 40%
Substantial Transformation (tariff classification rule)
Substantial Transformation (specific process rule)
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Test your knowledge - Answer
Match the policy instruments on the right with the types of origin on the left.
Wholly obtained goods: Animals born and raised in that country
Substantial Transformation (value added rule): Regional content of at least 40%
Substantial Transformation (tariff classification rule): Change of Tariff Heading (CTH)
Substantial Transformation (specific process rule): Country where refining occurred
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WHAT ARE THE RULES THAT WTO AGREEMENTS CONTAIN WITH RESPECT TO RULES OF ORIGIN? WHAT WORK ARE WTO MEMBERS CURRENTLY UNDERTAKING IN THE AREA OF RULES OF ORIGIN?
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WTO Agreement on Rules of Origin
• In it, Members commit to negotiate common rules of origin for all non-preferential trade purposes. The Agreement does not contain those rules, but rather, launch the negotiations for the harmonization of non-preferential rules of origin.
• Once Members agree these “harmonized rules”, all Members should apply them. However, these negotiations are still ongoing, so, for the moment, there are no common rules of origin at the WTO.
• In the meantime, not all Members apply non-preferential rules of origin. If they do, they must respect some “provisional” obligations contained in the Agreement.
• In the early 1980s, several WTO Members became increasingly concerned with the utilization of rules of origin in the in the context of the application of quotas and of anti-dumping duties. Members decided that WTO disciplines regulating the use of rules of origin would be useful.
• They then adopted the WTO Agreement on Rules of Origin which applies to all WTO Members.
Institutions
The Agreement creates:
A WTO Committee on Rules of Origin (Geneva, Switzerland): open to all WTO Members. It usually meets twice a year
and ensures transparency with respect to rules of origin (reviews notifications). This
is also where the negotiations for the harmonization of rules of origin are
conducted (Article 4:1).
A Technical Committee on Rules of Origin at the World Customs Organization
(Brussels, Belgium). It usually meets once a year to support the harmonization negotiations and to discuss technical
problems related to rules of origin (Article 4:2 and Annex I).
Find more about the work of the WTO on rules of origin in the WTO website.
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Structure of the WTO Agreement
NON PREFERENTIAL Rules of Origin
• Apply MFN trade relations
• Must be “harmonized”: work programme (negotiations) launched (Art. 9)
• Harmonized rules must be applied to all trade policy instruments that require the utilization of rules of origin (Art.1, Art.3)
• Disciplines for the transition period (Art.2)
• Must be notified to the Committee
1. Definition of rules of origin and scope of the Agreement
2. Transitional disciplines
3. Disciplines after negotiations for the harmonization of rules of origin are completed
4. Institutions (Committees)
5. Notification obligations
6. Review of the Agreement
7. Consultations
8. Dispute Settlement
9. Objectives and guidelines of the harmonization of non-preferential rules of origin
Annex I: Technical Committee on Rules of Origin
Annex II: Disciplines regarding Preferential Rules of Origin
PREFERENTIAL Rules of Origin
• Apply to Regional and Preferential trade Agreements
• Need not be harmonized (Annex II)
• Some disciplines apply
• Transparency: notified to the CRO
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“Transitional” Obligations
Article 2 of the Agreement on Rules of Origin sets out a number of obligations which WTO Member governments must respect when applying rules of origin. “Members shall”:
• Clearly define their rules of origin and publish them promptly (see Article X of the GATT).
• Not use rules of origin in a way that restricts, distorts or disrupts international trade and administer their rules in a consistent, uniform, impartial and reasonable manner.
• Not apply rules of origin to import or exports that are more restrictive than the rules applied to domestic products or that are discriminatory.
• Base rules of origin on a positive standard (that is, the rule must say what does confer origin).
• Upon request of an interested party Members must provide Advance Rulings on Origin.
• Not apply changes retroactively.
• Make available an independent mechanism to review decisions related to rules of origin to give interested parties the possibility of asking for a review of decisions if they feel their rights were denied.
• Treat all information confidentially.
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Advance Rulings on Origin
• “Advance rulings” or “Binding Origin Information” or “Binding Origin Ruling” gives companies or an exporter to ask the competent authorities (typically, customs) what rules of origin would apply to an import. On the basis of the description of the products, customs inform the exporter which rules of origin would apply and what the country of origin would be. With that information in hand, companies, importers and exporters can make decisions about where to source their products and inputs and can foresee which import duties, licences, quotas, taxes, etc. would apply at the moment of importation.
• Advance rulings are a very effective trade facilitation tool.
• The WTO Agreement on Rules of Origin requires all WTO Members to offer advance rulings (Article 2(h) and Annex II, article 3(d)). The recent WTO Agreement on Trade Facilitation reiterates that obligation for all Members.
Find more on advance rulings on origin at the WCO website
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What other work does the WTO undertake with respect to Rules of Origin?
• In addition to the work that Members undertake in the WTO Committee on Rules of Origin related to notifications and to their work for the harmonization of non-preferential rules of origin, Members adopted, in December 2013, a Ministerial Decision on rules of Origin for LDCs.
• The Decision is actually a set of recommendations about ways in which preferential rules of origin could be reformed to help make it easier for LDC exports to qualify for preferential market access in developed or developing countries.
• The Decision recognizes that each country granting preferences to LDCs has its own method of determining rules of origin, but it invites Members to draw upon the elements in the decision to reform preferential schemes for LDCs.
• The objective is that rules of origin for the LDCs should be simple and transparent and that the rules should take into account the productive and industrial capacities of LDCs. In other words, that they should be flexible enough and only request processes which are likely to be undertaken in an LDC.
• The implementation of the Decision is reviewed annually in the WTO Committee on Rules of Origin.
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Summarizing…
PREFERENTIAL ROO
• “Contractual “relations (regional and preferential trade agreements).
• There is no mandate to harmonize preferential rules.
• However, these rules are also subject to some disciplines (Annex II).
• A recent Ministerial Decision calls for the simplification of rules of origin applied to LDCs so that they can more easily take advantage of existing trade preferences.
NON PREFERENTIAL ROO
• MFN trade relations.
• Must be Harmonized: work programme to harmonize non-preferential rules of origin (Art. 9).
• Once harmonized, the rules must be applied by all WTO Members to all trade policy instruments (Art.1, Art.3).
• The negotiations still ongoing, so, for the moment, there are no common rules of origin at the WTO.
• Some disciplines apply meanwhile (Art.2).
Creates a Committee on Rules of Origin at the WTO (CRO) and a Technical Committee on Rules of Origin at the World Customs Organization (TCRO).
Covers trade in goods only
All WTO Members must notify all their rules of origin to the WTO: non-preferential and preferential.
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Test your knowledge
1. The objective of the WTO Agreement on Rules of Origin is to:
a) Encourage greater predictability and transparency with respect to rules of origin;
b) Launch negotiations for the adoption of common non-preferential rules of origin by all WTO Members;
c) Establish minimum requirements with relation to rules of origin that must be respected by WTO Members;
d) All of the above.
2. The WTO Committee on Rules of Origin:
a) Ensures the implementation of the WTO Agreement on Rules of Origin;
b) Reviews Members’ notifications regarding preferential and non-preferential rules of origin;
c) Reviews the implementation of the WTO Ministerial Decision on rules of origin for LDCs;
d) All of the above.
Select the correct answer.
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Test your knowledge - Answers
1. The objective of the WTO Agreement on Rules of Origin is to:
d) All of the above.
2. The WTO Committee on Rules of Origin:
d) All of the above.
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“Take Away” Rules of Origin determine the economic nationality of goods. They set the conditions under which a good may be
imported.
Preferential rules of origin set the criteria for the importation of goods under trade preferences (e.g. regional trade agreements or preferential trade agreements). If a good meets the rule, it qualifies for duty-free treatment. If it does not, it may still be imported, but not under the preferences. If the rule is complex or impose adjustments to a firm, complying with the rule could be difficult, costly or even impossible. If trade cannot occur under preferences, rules of origin may lead to the “under utilization” or a “low utilization” of regional or preferential trade agreements.
Non-Preferential rules of origin are not applied by all countries, but are used to implement other trade policy instruments such as anti-dumping, quotas, licences, SPS measures, labeling, etc.
The WTO Agreement on Rules of Origin requires WTO Members to negotiate common rules of origin for non-preferential purposes. These negotiations are conducted by the Committee on Rules of Origin and are still ongoing. Therefore, WTO Members do not have to apply common rules of origin for the time being. However, the Agreement requires each Member to respect minimum standards such as transparency, non-discrimination and impartiality.
Rules of origin create both opportunities and challenges for companies but the stringency of a rule depends on each product, each firm. What might work in the context of one country may prove unreasonable in another. This depends largely on the productive or industrial capacity of countries and the ability of firms to buy the inputs, components and materials they need locally or regionally.
Rules of Origin divide goods into 2 main categories depending on how they are produced: “wholly obtained goods” (typically those occurring naturally); and, substantially transformed goods (most other products). The rules are complemented by other important provisions, such as those on “cumulation”.
The negotiation and design of rules of origin may entail a difficult exercise as it requires a good knowledge about specific sectors and their industrial processes as well as good understanding about how local firms structure their production, which materials they use and where they source them from.
