Chapter 2 ASEAN
Chapter 10: Rules of Origin
CHAPTER 10
RULES OF ORIGIN
OVERVIEW OF RULES
1. BACKGROUND OF RULES
Rules of origin are used to determine the “nationality” of goods traded in international commerce.
Yet, no internationally agreed upon rules of origin exist. Each country or jurisdiction that
administers a regional trade agreement has established its own rules of origin. Rules of origin are
divided into two categories: (1) rules relating to preferential treatment and (2) rules relating to
non-preferential treatment. The former has two additional subsets: (1) rules on general preferential
treatment for developing countries, and (2) rules relating to regional trade agreements (see Figure
II-10-1).
Figure II-10-1 Types of Rules of Origin
Rules relating to non-preferential treatment;
Rules on general preferential treatment (GSP)
Rules relating to preferential treatment (for developing countries,
including LDC)
Rules relating to regional trade agreements
Rules of origin relating to non-preferential treatment are, except for the application of
preferential tariffs, used as follows: (1) for selecting items in enforcing trade-related measures that
specify exporting countries (e.g., quantitative restrictions); (2) for compiling trade statistics; and
(3) for determining the country of origin in marking the origin of certain goods. (Some countries
have purpose-oriented sets of rules whose contents are different; several kinds of rules of origin in
one country may therefore exist.).
In contrast, preferential rules of origin are used for giving preferential treatment to imported
goods. These rules are applied upon importation by developed countries to determine whether
particular products are exported from countries that are subject to preferential treatment under the
generalized system of preferences. In addition, in regional groupings such as the NAFTA and the
EEA, preferential rules of origin are used for giving preferential treatment to goods, originating
within the region (See “Rules of Origin” in Chapter 1 “Issues on Trade in Goods”, Part III).
With respect to trade policy, rules of origin should play a neutral role. However, they sometimes
are used for protectionist ends: origin rules that are too restrictive or that are enforced arbitrarily can
expand improperly the coverage of trade restrictions.
In general, rules of origin have not been adequately addressed at the international level. For many
years, the GATT contained no specific provisions on rules of origin other than Article IX, which
deals with marking requirements (i.e., “marks of origin”). Aside from the GATT, the International
Convention on Simplification and Harmonization of Customs Procedures (the Kyoto Convention),
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Part II: WTO Rules and Major Cases
concluded under the Customs Cooperation Council (commonly called the “World Customs
Organization” or “WCO”), contains an Annex on rules of origin. In 1999, the WCO amended the
Kyoto Convention for the first time in around 25 years; Japan accepted the amendments in 2001.
The Specific Annex on rules of origin in the amended Kyoto Convention, however, was only
subjected to the minimum necessary review on the grounds that a further review would be
undertaken once the WTO completed its work on harmonization of rules of origin. As acceptance of
Specific Annexes, including the one on rules of origin, is voluntary, the Annexes have little binding
power as international rules.
The application of rules of origin should properly be a technical and neutral matter. But because
no common international standards exist, rules are increasingly being formulated and administered
in an arbitrary manner to achieve protectionism policy objectives. To remedy the trade problems
this has caused, countries are in the process of formulating harmonized non -preferential rules of
origin under the terms outlined in the Agreement on Rules of Origin, based on the Uruguay Round
Agreement on Rules of Origin.
2. LEGAL FRAMEWORK
Agreement on Rules of Origin provides a work program for harmonizing rules of origin and
applying them to all non-preferential measures, including MFN treatment, anti-dumping and
countervailing duties, marking requirements under Article IX of the GATT, and government
procurement. It also establishes disciplines that individual countries must observe in in stituting or
operating rules of origin and provides for the framework for harmonizing rules and dispute
settlement procedures.
(1) PRINCIPLES
Rules of origin:
must apply equally for all purposes of non-preferential treatment;
must be objective, understandable, and predictable;
must not be used directly or indirectly as instruments to pursue trade policy objectives; and
must not, in and of themselves, have a restrictive, distorting, or disruptive influence on
international trade, etc.
(2) FRAMEWORK OF HARMONIZATION PROGRAM
The WTO undertakes the harmonization program in conjunction with the WCO (the WTO
Committee on Rules of Origin and the WCO Technical Committee on Rules of Origin).
The WCO Technical Committee is required to submit its results on the technical aspects of the
operation and status of the Agreement. The WTO Committee will review the results from the
perspective of overall coherence.
(3) SCHEDULE OF HARMONIZATION PROGRAM
The harmonization program shall begin as soon as possible after the Agreement takes effect and
be completed within three years of initiation. (This program is still ongoing, as mentioned in the
section on “Harmonization of the Rules of Origin Relating to Non-Preferential Treatment,”
below.)
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Chapter 10: Rules of Origin
Harmonization shall, in principle, follow the chapters and sections of the Harmonized System
nomenclature and the WTO Committee shall request the interpretations and opinions resulting
from the harmonization work conducted by the WCO Technical Committee. The WCO Technical
Committee is required to submit its results within specific time frames. (The work conducted by
the WCO Technical Committee has already been completed, as discussed in the section below).
The WTO Committee shall regularly review the work of the WCO Technical Committee and,
when all work has been completed, will consider the results in terms of their overall coherence.
The WTO Ministerial Conference will adopt the results as an integral part of the Agreement.
(4) DISCIPLINES APPLICABLE TO PREFERENTIAL RULES OF ORIGIN
The Agreement exempts the rules of origin used in the application of preferential tariffs from
harmonization. The Agreement, however, does set down a number of disciplines in Annex II that
are applicable to preferential regimes. Thus, according to the Agreement, pref erential rules of
origin:
should clearly define requirements for conferring origin;
should be based on a positive standard;
should be published in accordance with GATT Article X:1; and
should not be applied retroactively.
In preferential treatment systems for least developed countries (LDCs), the countries providing
preferential treatment individually implement their own rules of origin. There has been a movement
among LDCs toward establishing unified rules. At the 9th WTO Ministerial Conference held in Bali,
Indonesia, in December 2013, guidelines for preferential rules of origin for LDCs making the
verification of LDC products easier and improving the application of preferential treatment were
agreed upon as a ministerial decision. The guidelines are intended to simplify and increase the
transparency of rules of origin; they are not binding.
At the 10th Ministerial Conference in Nairobi, Kenya, in December 2015, agreement was
reached on a ministerial decision setting out detailed directions for specific issues, based on the
guidelines as agreed at the 9th Ministerial Conference. In addition, it was decided that the WTO
Committee on Rules of Origin will annually review each country’s status of implementation of the
agreement (see Chapter 5 “Tariffs”, Part II).
3. HARMONIZATION OF THE RULES OF ORIGIN RELATING TO
NON-PREFERENTIAL TREATMENT
Work on the harmonization of rules of origin formally began in July 1995. At present, negotiators
are considering: (1) rules of origin in the context of individual items; and, ( 2) general provisions
containing general rules (overall architecture) that will be applied widely to various items.
Although the Agreement on Rules of Origin specified a deadline of three years for the
harmonization program (i.e., July 1998), this program is still ongoing.
Using the HS Code, negotiators are considering rules of origin relating to individual items, based
on the following three standards: (1) “Wholly Obtained Criteria”, which applies to goods that are
produced only in one specific country (i.e., natural resources such as minerals); (2) “Minimal
Operation Criteria”, for simple processing that is negligible in origin determination; and (3)
“Substantial Transformation Criteria”, in which more than two countries are involved in the
production of goods and their origin will be conferred upon the country where the last substantial
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transformation has occurred. In light of the Substantial Transformation Criteria, the Agreement
allows members to introduce a “Change in Tariff Classification Criteria” and, as supplementary
criteria for the “Change in Tariff Classification Criteria”, the “Ad Valorem Criteria” and the
“Manufacturing or Processing Operations Criteria”, in order to determine whether the Substantial
Transformation has occurred.
Figure II-10-2 Schematic of rules of origin for which harmonization work is under way
Wholly
Rules of
Obtained
Origin
Criteria
Definitions of goods that are to be considered as being wholly obtained *The consideration work has mostly
in one country been completed except for
e.g., natural resources such as minerals definitions of scrap and live fish.
Substantial
Transformation Change in Tariff Classification Criteria
Criteria
Determining whether or not the last substantial
Conferring origin when more transformation has occurred based on whether the tariff *Currently
than two countries are involved classification has changed. The classification level at under
in the production of goods; which the change requires to have occurred differs by consideration in
origin conferred upon the goods parallel with the
country where the last e.g., a change at the 2-digit, 4-digit, or 6-digit level of Supplementary
substantial transformation has the HS code Criteria
occurred
Supplementary Ad Valorem
Criteria Criteria
Criteria used when Conferring origin to the country where
whether or not the last certain added value of goods occurs
substantial
transformation has
occurred cannot be
determined based on
whether the tariff
classification has
changed
Manufacturing or Processing Operations
Criteria
Conferring origin to the country where
prescribed processing is conducted for the
goods
Minimal Operation
Criteria
Definitions of minimal operations or processes that do not confer origin to a good by *Currently under
themselves even if they satisfy the Wholly Obtained Criteria or the Substantial consideration within the
Transformation Criteria framework of general rules
The procedures call for the WCO to perform technical studies on individual items. When the
WCO reaches a consensus on an item, it is referred to the WTO for endorsement, and is considered
formally agreed upon only after this endorsement is obtained. Should the technical arguments be
exhausted and the WCO still be unable to reach a consensus, the item is referred to the WTO for
decision. The WTO then becomes the forum for consideration, studying the item in light of the
sensitivities and concerns of individual countries. The technical studies undertaken by the WCO
have been completed since the 17 th meeting held in May 1999. The items on which the WCO could
not reach consensus are being discussed by the WTO.
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Discussions on rules of origin under the WTO are taking place not on individual HS items, but by
issues based on common problems with respect to each HS Chapter. (There are 486 total issues,) At
the writing of this report, agreement has been reached covering approximately 70% of the total
issues.
Since July 2002, the General Council, which supervises the Committee for Rules of Origin, has
taken the lead in discussing the 94 core unresolved issues. The 94 core issues include issues which
Japan considers important and Japan will need to assume an active part in the discussions. Japan is
particularly interested in the following two issues, which will have a vast impact on the
harmonization of rules of origin. Regarding rules about machinery, the Chairperson of the
Committee on Rules of Origin proposed double-rule: importing countries may choose either
“added-value criteria or change in tariff classification, as a compromise at a meeting in 2006 to
solve the conflict. Since then, discussion about the proposal continued but a conclusion has not yet
been reached. The Chairperson reported the situation to the General Council in July 2007 and
agreed to seek guidance from the General Council while suspending the discussion about the
implications of the Harmonized Rules of Origin on other WTO agreements and the double rule for
machinery. Meanwhile discussions about general provisions and technical matters to be considered
will continue at the Committee on Rules of Origin. These matters have been discussed in the
meetings held since 2008.
(1) IMPLICATIONS OF HARMONIZED RULES OF ORIGIN ON OTHER WTO
AGREEMENTS
It is unclear how harmonized rules will affect other WTO agreements and many Members,
therefore, are unable to be flexible on individual issues in the process of the harmonization work
program. Discussions occurred to develop a uniform understanding on the impact that Harmonized
Rules of Origin will have on other WTO agreements, but the fact is as said above.
(2) ADOPTION OF VALUE-ADDED RULE
The discussions consider the potential for adopting value-added rules as one measure to be used
in determining “last substantial transformation,” the criteria for many items, particularly in the
machinery sector. This raises the potential for origin to be changed due to changes in foreign
exchange rates, materials costs, labor costs, etc., which would be problematic in terms of
predictability, transparency and consistency required in the preamble to the Rules of Origin
Agreement. Japan objects to the adoption of the rules, but the fact remains as stated above.
With the implementation of the Agreement, the WTO and the WCO began harmonizing
non-preferential rules of origin. The completion of this harmonizing process should resolve the
majority of the problems that may arise under such non-preferential rules of origin. In cooperation
with other countries, Japan should continue to contribute positively to the developmental process
for harmonizing non-preferential rules of origin. However, there remains concern over preferential
legislation, applying the current rules during the transition period leading up to harmonization and
over preferential rules of origin which are excluded from the harmonization process. The latter is of
particular concern given the recent trend towards negotiating free trade agreements. With respect to
preferential rules of origin, each Member is required to notify its rules to the WTO and maintain
their consistency with Annex II of the Agreement. In addition, the Trade Policy Review Body and
the Committee on Regional Trade Agreements reviews rules of origin issues to ensure compliance.
(See “Part I: Problems of Trade Policies and Measures in Individual Countries and Regions” in
regard to the regulations of respective countries and the issues these present.)
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4. ECONOMIC ASPECTS AND SIGNIFICANCE
Rules of origin are an important factor in determining the tariffs to be imposed on specific goods
and whether quantitative and other trade restrictive measures may be applied to imported goods.
Consequently, the manner in which these rules are formulated and applied can have an enormous
impact on the flow of trade and investment. A country’s manipulation of origin rules can
substantially affect direct investment, parts procurement, and other business activities of companies
seeking to establish origin in that country.
Furthermore, at a time when increasing numbers of companies are globalizing their parts
procurement and production networks, the significant differences in national rules of origin can
work to disrupt the free flow of trade. Unnecessary complications and confusion arise when the
same product may have several different countries of origin depending on the country for which it is
destined. Needless to say, this greatly diminishes the exporter’s predictability of trade. In addition,
a change in the rules of origin of a particular country may force globalized producers to add certain
manufacturing processes in that country, with substantial resulting costs.
Recently, given an increased push by several countries to pursue FTA’s throughout the world,
concern is mounting over the so-called ‘spaghetti bowl phenomenon’ where varying rules of origin
and tariff schedules based on origin apply to different arrangement. In light of this, Japan should
strive for reciprocal consistency of rules of origin in FTA negotiations. Howev er, we have to note
that the differences in national rules of origin are attributed to the fact that negotiations were based
on the problems particular to each concerned party. It is also notable that the rules of origin defined
in each country reflect conditions for receiving preferential treatment and are not the same as the
ones defined in countries which receive non-preferential treatment. Under this situation,
discussions initiated by the chemical industry in APEC to seek a common understanding on
desirable product-specific rules of origin on chemical products may be notable.
Properly formulated and applied, rules of origin should have a neutral effect on trade. Arbitrary
formulation and application, however, will result in a country expanding its trad e restrictive
measures and increase the likelihood that such measures will distort trade (see “US–Textile
Products”, below). As a result of reducing tariffs in broad sectors during several Rounds and
strengthening disciplines in anti-dumping sectors and others, rules of origin may be used as hidden
trade restrictive measures. Establishing fair, neutral and common international rules in this area is
an urgent issue.
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