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Background Note
The Agreement on Rules of Origin of the WTO
Less-Advantaged Countries' Interests
What is the status of the harmonization negotiations ?
Crucial areas, problems and issues in the harmonization negotiations
1. What are rules of origin? Rules of origin are a complex set of dynamic and interrelated criteria and principles according to which a country of origin is assigned to a traded product. Therefore, on the basis of a particular rule or sometimes a combination of rules, the origin of a good or product, for example, a car, is defined. The WTO Agreement on Rules of Origin applies exclusively to non-preferential rules trade (note 1). The Agreement was adopted at Marrakesh as part of the final results of the Uruguay Round of Multilateral Trade Negotiations (MTN). It came into force on January 1st, 1995.
2. Scope of WTO Rules of Origin. Rules of origin are the point of intersection of different and vital trade policy instruments. Article 1.2 of the Agreement on Rules of Origin, which defines the parameters and the scope of its application, illustrates this point. This scope includes all rules of origin used in "non-preferential commercial policy instruments, such as in the application of: most-favoured nation treatment under Articles I, II, III, XI and XIII of GATT 1994; anti-dumping and countervailing duties under Article VI of GATT 1994; safeguard measures under Article XIX of GATT 1994; origin making requirements under Article IX of GATT 1994; and any discriminatory quantitative restrictions or tariff quotas [as well as] rules of origin used in government procurement and trade statistics".
II. Less-Advantaged Countries' interests
3. Many developing countries have been adversely affected by changes of rules of origin by industrial countries, particularly regarding textiles. Thus, developing countries have a crucial interest in the harmonization of rules of origin, and in fact several of them have been strong supporters of this work. However, at present, only a few developing countries take an active interest or participate in the negotiations. These countries are India on textiles; Colombia and the Philippines on coffee, agricultural products, rules of origin for environmental protection, and textiles; Morocco on fisheries; Hong Kong and Singapore on watches. Apart from Morocco, no other African country takes an interest in matters pertaining to rules of origin, except for Nigeria which chaired the Committee on Rules of Origin in the first two years of the WTO (1995-1996). This situation needs to be urgently corrected in the light of the importance of the subject matter and the new deadline of November 1999 (see 15 below) to complete the Harmonization Negotiations.
4. Perhaps because of this, the interest of developing countries on the subject has been on the increase. This has been reflected in the different and varied proposals that have been made on origin determination in the sector of textiles. Several developing countries, including India, the Dominican Republic, Honduras, El Salvador, have requested the Secretariat to undertake analysis to assess the impact of the different proposals for rules of origin in the textile sector on Members' rights and obligations under the various WTO agreements. However, this request has met some opposition from several industrial country Members, who argue that this would put the Secretariat in a position of interpreting the agreements, which should be the responsibility of Committee Members.
5. What about preferential rules of origin? There is no work programme at the WTO that includes preferential rules of origin. However, Annex II of the WTO Agreement on Rules of Origin, contains the Common Declaration with Regard to Preferential Rules of Origin. In sum, in this Declaration, the general principles and requirements applicable to non-preferential rules also apply to the preferential rules.
III. Rationale and general uses
6. Rules of origin are a vital and indispensable aspect of the multilateral trading system. There are a variety of reasons why countries need to attach a country of origin to a good. Some of these reasons are consistent with the open and non-discriminatory fundamental principles of the trading system, other reasons are based on narrower definitions of domestic trade interests. For whatever reason, expert knowledge and use of rules of origin constitute an essential requirement for the trade policy specialist to function in the multilateral trading system.
7. Why are countries interested in shaping the structure of rules for the determination of the origin of a good and why do countries want to know the origin of a good? There are several reasons chief of which are the following:
(i) Preferential tariffs. The trade policy of countries and particular regional trading arrangements are sometimes discriminatory. Knowledge of the origin of a good makes it possible to discriminate between and amongst imports so as to accord preferential treatment according to special trading arrangements such as in regional trading areas;
(ii) Application of anti-dumping and countervailing duties. In circumstances where goods are being dumped by one country in the market of another, knowledge of the origin makes focused and targeted anti-dumping actions and the application of countervailing duties, possible;
(iii) Trade statistics and the maintenance of quota systems. Assignation of origin facilitates the compilation of trade statistics and trends either for a country or for a region. On the basis of reliably compiled trade figures, trade authorities are able to maintain quota systems, in the event that such systems exist. Restrictive quotas may be imposed for any number of reasons, from trade defence purposes to reasons of environmental protection under Multilateral Environmental Agreements (MEAs) such as CITES - Convention on International Trade in Endangered Species of Wild Fauna and Flora;
(iv) Trade promotion. Rules of origin are used to promote exports of goods from countries that have established a long tradition of excellence in particular sectors. In these cases, countries become very protective of trade names and marks and strongly resist their dilution, counterfeiting or opportunistic use by other countries to promote their own sales. For example, much is made of Swiss watches, chocolates and pharmaceuticals, French wines, American computers and high technology, German and Japanese automobiles, Colombian coffee, etc. There are countless examples of excellent products from many countries;
(v) Environmental reasons. Increasingly, marking requirements, themselves the result of the application of rules to determine origin, are being used for environmental reasons. Some of these reasons promote environmental objectives. Others actually seek to manipulate and misuse origin rules for the purpose of dumping hazardous wastes or over-exploiting and thereby endangering plant and animal species. For instance, hazardous and toxic waste which emanate in one country, may be semi-processed in another country and is thereupon conferred the origin of that second country, and not the origin of the country from which it was first generated. In contrast, strict origin rules applied via quota measures have been used to protect the over-exploitation of endangered species;
(vi) Circumvention. Although patently illegal and an unfair trading practice, some countries, in a bid to evade quotas, engage in the practice of manipulating and misusing origin rules to flood and dump under-priced goods in the markets of other countries.
8. What are the aims of the WTO Agreement on Rules of Origin? The aims of the Agreement are simple namely, to harmonize and clarify rules of origin, and to ensure that rules of origin do not create unnecessary obstacles to trade. Although the aims are simple, the undertaking and task themselves are complex. According to this task, every good that is traded must be assigned a country of origin. To this end, all the traded products as contained in the Harmonized Commodity Description and Coding System (HS) must be governed by rules that ensure that they are conferred with a country origin.
9. In accordance with Article 4 of the Agreement, the Harmonization Negotiations are being conducted in two bodies. First, the Geneva-based Committee on Rules of Origin (CRO) at the WTO. The Market Access Division of the WTO Secretariat services the meetings of the Committee. The second body is the Brussels-based Technical Committee on Rules of Origin (TCRO). The TCRO is serviced by the Origin Project which operates under the auspices of the World Customs Organization (WCO). In practice, the Technical Committee undertakes the examination of technical/customs aspects of the negotiations for origin-conferring processes. The results of this exercise are forwarded from Brussels to Geneva as the interpretations and opinions of the TCRO (Article 9.3(a)). These results include issues and product sectors where the origin rules have been agreed to in the TCRO and those on which there have been no agreement. At the Committee in Geneva, the interpretations and opinions of the WCO Technical Committee on which there have been agreement are noted, and negotiations are undertaken with a view to resolving those issues, principles and product sectors on which there have been no agreement.
10. What are the objectives of the negotiations to harmonize the non-preferential rules of origin? The objectives of the Harmonization Work Programme (HWP) are contained both in the preambular provisions of the Agreement and in Article 9. In the preambular provisions several objectives are listed such as:
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furthering the objectives of GATT 1994;
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facilitating the flow of international trade through clear and predictable rules of origin;
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ensuring that rules of origin do not create unnecessary obstacles to trade;
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ensuring that rules of origin neither nullify nor impair the rights of Members;
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achieving transparency of laws, regulations and practices regarding rules of origin;
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recognising the availability of a consultation mechanism and procedures for the resolution of disputes that arise under the Agreement; and,
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harmonising and clarifying rules of origin.
11. However, preambular provisions, although indicative of the purpose, objectives and principles of an agreement, are not binding relative to the operative provisions of an agreement. To this end, Article 9 provides for objectives to be implemented. In summary, rules of origin should:
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be equally applied for all purposes;
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be clear and predictable (so that it can be easily implemented by customs officers who normally apply these rules);
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not create complexities in application, and should also not create restrictive, distorting or disruptive effects on international trade;
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be coherent and administered uniformly, consistently, reasonably and impartially; and,
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every good should have a country of origin. This origin should be either the country where the good was wholly obtained or, if more than one country is involved, the country where the last substantial transformation was effected;
12. What is the format and structure of the negotiations for the harmonization of non-preferential rules of origin (Harmonization Negotiations)? Pursuant to Article 9.2c (i) to (iii), the Harmonization Negotiations are divided into three basic stages as follows:
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definitions of Goods that are considered as being wholly obtained in one country, and Minimal Operations and Processes which in themselves do not confer origin;
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substantial transformation via the medium of Change in Tariff Classification of the HS as an origin-conferring process;
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substantial transformation via Supplementary Criteria, such as ad valorem percentage and/or manufacturing or processing operations, in those instances when the exclusive use of the HS nomenclature does not allow for the expression of substantial transformation; and, then
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the finalisation of the results for overall coherence of the results of harmonization (Article 9.3(b).
V. What is the status of the harmonization negotiations ?
13. The status of the negotiations are reflected in an omnibus document which designated the Integrated Negotiating Text (INT). Essentially, this text is a binder containing those issues, principles, and product sectors whose origin rules have been agreed. This INT is available from the Market Access Division of the WTO Secretariat. The Committee on Rules of Origin submitted a report to the First Ministerial Conference of the WTO in Singapore in 1996. According to Article 9.2(a), the Harmonization Negotiations is to be completed within three years of initiation. The negotiations were initiated in 20 July, 1995, and were therefore to be completed by 20 July 1998.
14. The complexity and difficulties encountered in the HWP made it difficult to meet the target date of 20 July 1998, for the completion of the Harmonization Negotiations. This started becoming clear about six months before the July deadline. A major stumbling bloc was on rules of origin for textiles and clothing, specifically on whether a tariff shift constituted substantial enough transformation to confer origin; in case it did not, countries will have to develop additional rules to determine what activity does.
15. At its meeting of 19 June 1998, the Committee on Rules of Origin concluded that the three-year deadline foreseen in Articles 9.2(c) and 9.3 of the Agreement could not be met. However, a new deadline, November 1999 was agreed, as was an outline of the general guidelines on how the work on the rules of origin harmonization was to proceed in order to be able to meet the new target date. (G/RO/25). This was communicated by the CRO to the Council for Trade in Goods and to the TCRO in Brussels (G/RO/24).
16. The new work programme will include focussing on areas of difficulty (outlined on paragraph 17 below), including: the analysis of the implications of the harmonized rules of origin on other WTO agreements, discussion on product-specific rules, outstanding issues on product-specific rules, definitions, etc.
VI. Crucial areas, problems and issues in the harmonization negociations
17. Why do the negotiations for the harmonization of rules of origin pose such enormous challenges? These negotiations seem to be both a result, as well as a major challenge, under conditions of globalization - the growing integration of the markets for goods, services and intellectual property. A concomitant feature of globalization is the multi-country processing of goods, a situation in which the inputs for the final product of a good, for example, a car, may be sourced from no less than five or six countries. Under these conditions, and there are yet more complex examples, what then is the origin of the car? The dilemma is that even as goods are hardly made in one country anymore because of globalization and diversification, the multilateral trade policy community is working to harmonize rules for the determination of origin according to which every good must be assigned the origin of one country.
18. The status of the Harmonization Negotiations show several areas of difficulties. These include:
(a) Architecture and General rules;
(b) definitions of goods that are wholly obtained in one country in particular as they related to products taken from the sea outside of a country (either on the high seas or in outer space);
(c) the need for further refinement of the definitions of minimal operations and processes which do not in themselves confer origin; and,
(d) product-specific rules for particular product sectors.
19. At the core of the difficulties in the Harmonization Negotiations is the determination of rules of origin in product-specific sectors. These sectors include, agriculture, mineral products, chemicals, leather, wood and paper, textiles, footwear, ceramics, precious stones, steel, metals, articles of metal, machinery, electronics, transportation equipment, scientific equipment, clocks and watches, musical instruments, etc.
20. To summarize, origin can be conferred on a product either on the basis of a change in HS tariff classification or on the basis of a substantial transformation of the product. When a change in tariff classification cannot be used to confer origin, the fundamental difficulty has been, and remains, what is substantial transformation? Do such processes as assembly, disassembly, bleaching, drying, cutting and sewing, blending, packing and packaging, colouring, etc, constitute substantial transformation? The answers seem to be a function of the national trade interests, covering the full spectrum of global trade, stretching from liberalization and market access, to protection.
Note 1 : Rules of origin are defined in the Agreement on Rules of Origin as, "... those laws, regulations, and administrative determinations of general application applied by any Member to determine the country of origin of goods provided such rules of origin are not related to contractual or autonomous trade regimes leading to the granting of tariff preferences going beyond the application of paragraph 1 of Article 1 of GATT 1994". (Article 1.1 of the Agreement on Rules of Origin). (return to text)
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