WTO

Agreement
on Rules of
Origin

Presented By

Asham Cheema 09020241003

Vishal Singla 09020241048
Deepika Singh 09020241056
 
Introduction:

“Rules of origin” are the criteria used to define where a product was made. They are an
essential part of trade rules due to the following policies discriminate between exporting
countries:




Quotas
Preferential tariffs
Anti-dumping actions
Countervailing duty

Rules of origin are also used to compile trade statistics, and for “made in ...” labels that
are attached to products. This is complicated by globalization and the way a product can
be processed in several countries before it is ready for the market.

The Rules of Origin Agreement requires WTO members to ensure that their rules of

origin are transparent; that they do not have restricting, distorting or disruptive effects on
international trade; that they are administered in a consistent, uniform, impartial and
reasonable manner; and that they are based on a positive standard (in other words, they
should state what does confer origin rather than what does not).

For the longer term, the agreement aims for common (“harmonized”) rules of origin among
all WTO members, except in some kinds of preferential trade — for example, countries
setting up a free trade area are allowed to use different rules of origin for products traded
under their free trade agreement. The agreement establishes a harmonization work
programme, based upon a set of principles, including making rules of origin objective,
understandable and predictable.

Rule of origin in the context of international trade



Classification of “Rules of Origin”
There are two types of rules of origin:
Preferential
Non-Preferential.
Non-preferential rules of origin are used to distinguish
foreign products from domestic products when a country
does not want to provide the former with the same
treatment granted to the latter. In some countries, for
example, public procurement either excludes foreign
on-Preftial
NPre
on-

ntie
Pref
N
products or reserves certain transactions to domestic products, or grants a margin of
preference to them.
According to WTO Agreement, signed in Marrakech in 1994, “the general notion of
rules of origin shall include all rules of origin used in non-preferential commercial policy
instruments, such as in the application of most-favored-nation treatment, anti-dumping and
countervailing duties, safeguard measures, and any discriminatory quantitative restrictions
or tariff quotas”.
Hence, non-preferential rules are important for several reasons including the
application of tariffs, quotas, antidumping and agreements on textiles and clothing.
Preferential rules of origin are used to determine which goods may enter a country under a
preferential treatment. They define if goods are eligible for special treatment under a
trading arrangement between two or more countries, such as the free trade areas, bilateral
and regional integration agreements. According to the agreements, certain products
benefit from duty-free or duty-reduced entry into the nations granting special treatment,
provided that they originate from specific countries. If the product is judged as “not
originated” from that country because, for example, it has not undergone substantial
transformation or has had little value added there, the applicable tariff rate would usually
be the most favored- nation rate

The WTO Agreement on Rules of Origin is applied only to non-preferential rules of

origin. It is not applicable to the process of determination of the country of origin for
preferential trade, for which the origin is determined on the basis of the provisions
prescribed by a country for the particular system of preferences4. Recognizing that some
Members applied preferential rules of origin, distinct from non-preferential ones, a
“Common Declaration with Regard to Rules of Origin” has been added to the main
document. In this Declaration, members agree to apply many of the same general
principles for rules of origin to those rules, which they use to administer preferential
arrangements (either in free trade areas or within GSP) and to notify these rules. However,
they do not accept to apply harmonized rules for preferential purposes.
For the aims of this Common Declaration, “preferential rules of origin shall be
defined as those laws, regulations and administrative determinations of general application
applied by any Member to determine whether goods qualify for preferential treatment
under contractual or autonomous trade regimes leading to the granting of tariff
preferences going beyond the application of paragraph 1 of Article I of GATT 1994”.
Within this context, the main purpose of rules of origin is to ensure that benefits
arising from preferential tariff treatment under the Generalized System of Preferences
(GSP) or any other preferential arrangement is limited to products that have been
produced or manufactured in the preference-receiving country.
Therefore, rules of origin are crucial instruments both to identify the nationality of a
given good and to determine whether and which commercial arrangements have to be
applied. They are also a tool of trade policy to differentiate between priority partner states.

The differences between the two regimes are the mirror image of deliberate
different trade policy objectives and the rationale for this differentiation has been
underlined in the framework of the EU rules of origin by the European Court of
Justice(ECJ) in the S.R. Industries v. Administration des douanes case.

Global harmonization of rules of origin

In 1953 the International Chamber of Commerce made the first attempt to harmonize rules
of origin: it submitted a resolution to the contracting parties recommending the adoption of
a uniform definition for determining the nationality of manufactured goods. In the 1970’s
another effort was made with the Kyoto Convention. It came into force the 25 September
1974, with the aim of attaining a harmonized scheme of custom procedures. .
The use of the rules of origin to implement trade restrictive and trade distortive
policies finally lead to the inclusion of “rules of origin” as a topic of the Uruguay Round
multilateral trade negotiations. The WTO Agreement on Rules of Origin was part of the
outcomes of the Uruguay Round: it sought to harmonize the non-preferential rules of origin
used by signatory countries into a single set of international rules. By drafting the rules in a
multilateral context where all countries are represented and the adopted rulesare used for
all non-preferential purposes, the possibility for a single country to draw uprules in
politically motivated ways has thus been limited.

A specific program was set up, and two new institutions were created to reach this
purpose. The first one was the Geneva-based Committee on Rules of Origin (CRO) at the
WTO, the second body was the Brussels-based Technical Committee on Rules of Origin
(TCRO) of the World Custom Organization. The Harmonization Work Programme (HWP),
which was launched on 20 July 1995, was scheduled for completion within three years of
its initiation, i.e. by July 1998. However, due to the complexity of the issues, the work
slowed down in between.
Negotiation difficulties can be attributed to problems such as:
1) The definition of goods which are wholly obtained in one country, in particular when
they are related to products extracted from international territories, as in high seas or  outer
space;
2) The need for further refinement of the definitions of minimal operations and processes
which do not by themselves confer origin: processes like assembly, disassembly,
bleaching, drying, cutting and sewing, blending, packing and packaging, coloring must be
classified and ordered in the definition of “substantial transformation”.

3) The need of product-specific rules for particular product sectors.

In order to achieve harmonization, committees are working on a detailed uniform
definition for determining when goods are wholly obtained in one country, on a list of
minimal operations or processes that do not by themselves confer origin to a good and
finally on the definition of last substantial transformation. The determination of the last
transformation will depend on the change in the tariff classification method through the use
of the harmonized system combined, when necessary, with tests of value-added and
others specific methods.
As of May 2000, progress had been made with respect to the measurable general
rules but the TCRO is still unable to complete the work owing to the divergence of views
over the method of application for the primary and residual rules. The work is currentlyin
progress.

Criteria for defining the origin

The determination of origin does not present special difficulties when the product is
“wholly obtained or produced” in one State. But it has become increasingly complex as a
result of the globalization of the world trade and the activity of pan national companies.
Producers may source the components from different countries or may manufacture
product in subsequent stages in different countries. In this case problems arise in
determining the spot of production.

A product originates in a particular country either if it is “wholly obtained and produced” In

its customs territory or if it has undergone “substantial transformation”.
The substantial transformation method states that a good originates from the last country
where it emerged from a given process with a distinctive name, character or use. It
requires that the product has been transformed into a new and different article. It means
that exporter, importer or producers are requested to furnish a great deal of factual
information to prove substantial processing. What is to be determined is whether the
change, manufacturing or processing is of such a substantial nature to justify the
conclusion that the article is a product of the country where this change took place. A
change of use is usually considered as a determinant factor if the processing or
manufacturing transforms the product from one that is suitable to one use to one
applicable for another use or for multiple uses. A processing operation that merely
completes an article normally does not constitute a change in use sufficient to substantially
transform the article.
Substantial transformation can be basically defined
according to three criteria:
 Value-Added Criterion
 Process Criterion
 Change in Tariff Classification criterion

The value-added or ad valorem percentage test: it

defines the degree of transformation required to confer
origin to the good in terms of minimum percentage of value that must come from the
originating country or of maximum amount of value that can come from the use of
imported parts and materials. If the floor percentage is not reached or the ceiling
percentage exceeded, the last production process will not confer origin. The value of the
goods exported is normally calculated using the cost of manufacture and the price at
exportation the value of the constituent materials might be established from commercial
records or documents.
Two problems arise:
 Border-line cases determining a slight difference above or below the prescribed
percentage, because a product failed to meet origin requirements.
 Elements such as the cost of manufacturing or the total cost of the products are
usually difficult to assess and may have different interpretations in the country of
exportation and in that of importation.

This criterion is applied by Australia, Canada, New Zealand and the United States and
also by Bulgaria, the Czech Republic, Hungary, Poland, the Russian Federation and
Slovakia. The group of countries has fully harmonized the criterion applied.

The specified process tests of origin: it confers origin to the product based on the
results of tests it must undergo. This criterion is applied by the European Community,
Japan, Norway and Switzerland.

The change in tariff classification method: it is the most widely applied criterion. It
determines the origin of a good by specifying the change in tariff classification of the
“Harmonized System of Tariff Nomenclature” (HS) required to conferring origin on a good.
As a general rule, imported materials, parts or components are considered to have
undergone substantial transformation when the product obtained is classified in a heading
of the HS at the four-digit level which is different from those in which the non-originating
inputs used in the process are classified. However, since sometimes the CTH rule is not
able to determine the origin of a product, preference-giving countries have drafted a list,
the Single List, of working or processing to be carried out in non-originating inputs in order
that the final products may obtain originating status

National legislations
In the United States, Section 304 of the US Tariff Act of 1930 requires that all
foreign products imported into the country have to be marked with their foreign origin.
When two or more countries participate in the production of a good, local customs apply
the rule of the last substantial transformation issued in 1996.
As for the EU legislation, rules of origin are treated in Commission Regulation No.
2454/93, which lays down provisions for the implementation of Council Regulation2913/92
establishing the European Community Custom Code (ECCC), as modified by Regulation
No. 12/97 and by Regulation No. 46/9915. The Customs Code defines substantial
transformation in broad terms. Since this criterion is vague and leaves wide discretion to
national custom authorities, additional tests are used to define it more precisely:

A technical test, prescribing that the product must undergo specific processing
operations in the originating state and determined on a case by case basis. For example, it
may be stated that the product has been substantially transformed if it has one properties
that it did not have before;

A domestic content test, requiring a minimum percentage of local value added in

the originating State or setting the maximum percentage of value originating in on-member
States;

A change in tariff classification, requiring the product to change its tariff heading
under the Harmonized Commodity Description System in the originating State. in such
cases a significant qualitative change in its characteristics is essential to determine a
change in the origin. In assembly operations, the importance of the transformation has to
be assessed within the entire production process. The assembly can be more than simple,
but not substantial, or it can be the decisive stage of the process which gives the product
its specific character: in this case the assembly confers origin

The EU also applies very detailed rules of origin to several products

categories:textiles, clothes, meat, grape juice, wine, vermouth, leather clothes, shoes, ball
bearings,tape-records, magnetic discs, television sets, integrated circuits, copier
machines, watchbands, and ceramic articles.
Within the context of the EU legislation, it has to be underlined that theirrevocable
fixing of the exchange rates of the currencies of the 11 Member Statesparticipating in
Monetary Union and the use of the Euro have raised some importantissues. First, it is no
longer possible to consider European Countries as units separatelyidentified; moreover,
the previous zone calculation method of the indices of eachcountry’s rules of origin system
cannot be directly applied. Therefore, the index of theEuro zone is now treated as
representing one country.
On the contrary, the advent of the Euro has not modified an effect of the currentEU
rules on the percentage of goods origination from another EC Member State, to
beincluded in the cover of the insurance contract. The rules set out in the Council
Decision82/854/EEC of 10 December 1982 apply regardless of the currency of the
contract orfinancing.
In Japan, local customs apply the change tariff method: origin is conferred on
thebasis of a change in tariff heading in the nomenclature between non-originating
inputsand processed goods
In Switzerland, the Federal Government legislation defines a product as “made
inSwitzerland” when there is a tariff shift in the harmonized system nomenclature
betweenforeign inputs and finished products, or the value-added in Switzerland reaches
50%, orwhen product-specific rules are fulfilled.
.
Nafta has centered its analysis on the tariff-classification and in some instances on
the value-added criteria, trying to achieve a more objective approach

Rules of origin and the impact on the world trading system

The lack of harmonization in rules of origin regulation is still providing countries
with the opportunity and incentive to use their rules of origin to implement protectionism in
trade policy and to accord disparate treatment to similar goods.
In the increasingly globalize nature of production, there is no single correct
definition of origin. Nowadays, the origin is determined according to the way rules of origin
are formulated and applied. It means that countries, using Rules of Origin in a results-
oriented manner as a trade policy tool, can control the degree of preferential treatment in
international trade. Rules of origin may, for example, be utilized to restrict the import from
particular sources.
As a consequence of the increasing number of free trade area agreements, it is
also important to consider the link between rules of origin and regional free trade areas. In
a free trade area, tariffs and quotas are eliminated on goods originating from and traded
between member countries. In a custom union the same principle applies with the added
element of the determination of a common external tariff applied to goods originating from
non-member countries.
Sometimes rules of origin generate distortions since they encourage countries to
use local factors of production in order to facilitate the determination of origin and tobenefit
from preferential measures addressed to them. In this way, local inputs may bepreferred
even when it is economically more efficient to import them. Rules of originencourage
countries to diversify their economic processes and produce within theirnational territory
and to use whenever possible local materials in the manufacture ofproducts. Sometimes,
however, it would be more efficient for a country to import certainmaterials or to carry out
specific industrial processes abroad because of cheaper or ofhigher quality. Nevertheless,
the benefits deriving from the national origin of the goodsmake countries move into the
opposite direction.

United States — Rules of Origin for Textiles and Apparel Products

Dispute-DS243

Short title: US — Textiles Rules of Origin

Complainant: India

Respondent: United States of America

Third Parties: Bangladesh; China; European Union;

Pakistan; Philippines
Agreements cited: Rules of Origin: Art. 2
(as cited in request for consultations)

Request for Consultations received: 11 January 2002

Panel Report circulated: 20 June 2003
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Milestones in the case
Summary of the Case

Complaint by India.

On 11 January 2002, India requested consultations with the United States in respect of its
rules of origin applicable to imports of textiles and apparel products as set out in Section
334 of the Uruguay Round Agreements Act, Section 405 of the Trade and Development
Act of 2000 and the customs regulations implementing these provisions.

India argued that, prior to the abovementioned Section 334, the rule of origin applicable to
textiles and apparel products was the “substantial transformation” rule. India considered
that Section 334 changed the system by identifying specific processing operations which
would confer origin to the various types of textiles and apparel products. In India’s view,
these changes appear to have been made to protect the United States textiles and
clothing industry from import competition. India indicated that the changes introduced by
Section 334 had already been challenged by the European Communities on the grounds
that they were incompatible with the United States’ obligations under the Agreement on
Rules of Origin and other WTO Agreements (WT/DS151). India explained that that dispute
was settled through a procès-verbal whereby the United States agreed to introduce
legislation amending Section 334. According to India, the changes introduced by the
amending legislation, i.e. Section 405, were aimed at taking account of the particular
export interests of the European Communities.

India is of the view that the changes introduced by Sections 334 and 405 have resulted in
extraordinary complex rules under which the criteria that confer origin vary between similar
products and processing operations. India argued that the structure of the changes, the
circumstances under which they were adopted and their effect on the conditions of
competition for textiles and apparel products suggest that they serve trade policy
purposes. On those grounds, India questioned the compatibility of those changes with
paragraphs (b), (c), (d) and (e) of Article 2 of the Agreement on Rules of Origin.

On 7 May 2002, India requested the establishment of a panel. At its meeting on 22 May
2002, the DSB deferred the establishment of a panel.

Panel and Appellate Body proceedings

Further to a second request by India, the DSB established a panel at its meeting on 24
June 2002. EC, Pakistan and the Philippines reserved their third party rights. On 3 July
2002, Bangladesh reserved its third party rights. On 4 July 2002, China reserved its third
party rights. On 10 October 2002, the Panel was composed. On 9 April 2003, the
Chairman of the Panel informed the DSB that due to the complexity of the matter, the
Panel would not be able to complete its work in six months. The Panel expects to issue its
final report to the parties in early May 2003.

On 20 June 2003, the Panel Report was circulated to Members. The Panel found that:

 ROA Art. 2(b) (trade objectives): The Panel rejected India's claim and concluded
that although the objectives of protecting the domestic industry against import
competition and of favouring imports from one Member over imports from another
may in principle be considered to constitute "trade objectives" in pursuit of which
rules of origin may not be used, India had failed to establish that US rules of origin
were being administered to pursue trade objectives in violation of Art. 2(b).

 ROA Art. 2(c), first sentence (restrictive, distorting or disruptive effects): The Panel
rejected India's claim on the grounds that for there to be a violation of Art. 2(c), it
must be proved that there is a causal link between the challenged rules of origin
itself and the prohibited effects, and that it would not always and necessarily be
sufficient for a complaining party to show that the challenged rules of origin
adversely affect one Member's trading as it may favourably affect the trade of other
Members. The Panel concluded that India had not provided enough relevant
evidence that the US measures created "restrictive", "distorting" or "disruptive"
effects on international trade.
 ROA Art. 2(c), second sentence (fulfilment of certain conditions): The Panel
rejected India's claim, noting that distinctions maintained in order to define the
product coverage of particular rules of origin were distinct from conditions of the
kind referred to in Article 2(c), second sentence (which prohibits the imposition of
condition/s unrelated to manufacturing or processing as a prerequisite to conferral
of origin). The Panel concluded that India did not establish that the measures at
issue required the fulfilment of conditions prohibited by Art. 2(c) second sentence.2

 ROA Art. 2(d) (discrimination): The Panel concluded that Art. 2(d) applies to
discrimination between goods that are the "same", not those that are "closely
related", and that India had failed to demonstrate that the US legislation was in
violation of Art. 2(d).

 India failed to establish that section 405 of the Trade and Development Act is
inconsistent with Articles 2(b), 2(c) or 2(d) of the RO Agreement;

At its meeting on 21 July 2003, the DSB adopted the Panel Report.
 ANNEXURE-I

A. SECTION 334 OF THE URUGUAY ROUND AGREEMENTS ACT

I.A.1.a.i.1 Section 334 provides, in relevant part, that:

"(b) Principles.—

(1) In general.-- Except as otherwise provided for by statute, a textile or

apparel product, for purposes of the customs laws and the administration of
quantitative restrictions, originates in a country, territory, or insular
possession, and is the growth, product, or manufacture of that country,
territory, or insular possession, if--

(A) the product is wholly obtained or produced in that country,

territory, or possession;

(B) the product is a yarn, thread, twine, cordage, rope, cable, or

braiding and--
(i) the constituent staple fibers are spun in that country,
territory, or possession, or

(ii) the continuous filament is extruded in that country, territory,

or possession,

(C) the product is a fabric, including a fabric classified under chapter

59 of the HTS, and the constituent fibers, filaments, or yarns are
woven, knitted, needled, tufted, felted, entangled, or transformed by
any other fabric-making process in that country, territory, or
possession; or

(D) the product is any other textile or apparel product that is wholly
assembled in that country, territory, or possession from its component
pieces.
 (2) Special rules.-- Notwithstanding paragraph (1)(D)--

(A) the origin of a good that is classified under one of the following
HTS headings or subheadings shall be determined under
subparagraph (A), (B), or (C) of paragraph (1), as appropriate: 5609,
5807, 5811, 6209.20.50.40, 6213, 6214, 6301, 6302, 6303, 6304,
6305, 6306, 6307.10, 6307.90, 6308, or 9404.90; and

(B) a textile or apparel product which is knit to shape shall be

considered to originate in, and be the growth, product, or manufacture
of, the country, territory, or possession in which it is knit.

(3) Multicountry rule.-- If the origin of a good cannot be determined under

paragraph (1) or (2), then that good shall be considered to originate in, and
be the growth, product, or manufacture of--

(A) the country, territory, or possession in which the most important

assembly or manufacturing process occurs, or

(B) if the origin of the good cannot be determined under subparagraph

(A), the last country, territory, or possession in which important
assembly or manufacturing occurs."

I.A.1.a.i.2 The descriptions of goods classifiable under HTS headings and subheadings
referred to in section 334 quoted above are as follows:

HTS headingDescription

5609 Articles of yarn, strip or the like of heading No. 54.04 or 54.05, twine,
cordage, rope or cables, not elsewhere specified or included.

5807 Labels, badges and similar articles of textile materials, in the piece, in
strips or cut to shape or size, not embroidered.

5811 Quilted textile products in the piece, composed of one or more layers
of textile materials assembled with padding by stitching or otherwise,
other than embroidery of heading No. 58.10.

6209.20.50.40 Infants' woven cotton diapers.

6213 Handkerchiefs.

6214 Shawls, scarves, mufflers, mantillas, veils and the like.

6301 Blankets and travelling rugs.

6302 Bed linen, table linen, toilet linen and kitchen linen.
 6303 Curtains (including drapes) and interior blinds; curtain or bed
valances.

6304 Other furnishing articles, excluding those of heading No. 94.04.

6305 Sacks and bags, of a kind used for the packing of goods.

6306 Tarpaulins, awnings and sunblinds; tents; sails for boats, sailboards
or landcraft; camping goods

6307.10 Floor-cloths, dish-cloths, dusters and similar cleaning cloths.

6307.90 Other made-up articles.

6308 Sets consisting of woven fabric and yarn, whether or not with
accessories, for making up into rugs, tapestries, embroidered table
cloths or serviettes, or similar textile articles, put up in packings for
retail sale.

9404.90 Other articles of bedding.

B. SECTION 405 OF THE TRADE AND DEVELOPMENT ACT OF 2000

I.B.1.a.i.1 Section 405 amended section 334 of the Uruguay Round Agreements Act.
Of particular relevance to this dispute are two exceptions which section 405 created from
the "fabric formation" rule established by section 334. Specifically, section 405 provides
that:

- for silk, cotton, man-made or vegetable fibre fabric, origin is conferred by dyeing
and printing and two or more specified finishing operations; and that

- for certain textile products excepted from the assembly rule, origin is also
conferred by dyeing and printing and two or more specified finishing operations,
subject to certain exceptions.

I.B.1.a.i.2 Section 405(a) reads as follows:

"In General. Section 334(b)(2) of the Uruguay Round Agreements Act

(19 U.S.C. 3592(b)(2)) is amended-

(1) by redesignating subparagraphs (A) and (B) as clauses (i) and (ii),
respectively;
(2) in the matter preceding clause (i) (as redesignated), by striking
"Notwithstanding paragraph (1)(D)" and inserting "(A) Notwithstanding
paragraph (1)(D) and except as provided in subparagraphs (B) and
(C)";and

(3) by adding at the end the following:

"(B) Notwithstanding paragraph (1)(C), fabric classified under the HTS
as of silk, cotton, man-made fiber, or vegetable fiber shall be
considered to originate in, and be the growth, product, or manufacture
of, the country, territory, or possession in which the fabric is both dyed
and printed when accompanied by 2 or more of the following finishing
operations: bleaching, shrinking, fulling, napping, decating, permanent
stiffening, weighting, permanent embossing, or moireing.

"(C) Notwithstanding paragraph (1)(D), goods classified under HTS

heading 6117.10, 6213.00, 6214.00, 6302.22, 6302.29, 6302.52,
6302.53, 6302.59, 6302.92, 6302.93, 6302.99, 6303.92, 6303.99,
6304.19, 6304.93, 6304.99, 9404.90.85, or 9404.90.95, except for
goods classified under such headings as of cotton or of wool or
consisting of fiber blends containing 16 percent or more by weight of
cotton, shall be considered to originate in, and be the growth, product,
or manufacture of, the country, territory, or possession in which the
fabric is both dyed and printed when accompanied by 2 or more of the
following finishing operations: bleaching, shrinking, fulling, napping,
decating, permanent stiffening, weighting, permanent embossing, or
moireing."