World Trade Law – Lecture 6

RULES OF ORIGIN
and related WTO provisions

Serafino Marchese
“Virtual” Visiting Professor, Foreign Trade University, Hanoi
Former WTO staff member
 Rules of Origin: Outline
1.Why do we use rules of origin and how are
they designed?
2.How do rules of origin affect trade and firms?
3.WTO rules related to rules of origin
4.How can firms fully benefit from opportunities
created by rules of origin and minimize related
risks?
1.
RULES OF ORIGIN: BACKGROUND
 Origin
• What is origin?

• Dictionary: The fact of being born from a particular ancestor or

race; parentage, ancestry, pedigree. More generally: the act or fact
of beginning, from something; source or cause; starting point

– Origin grants certain benefits: residency benefits, work,

access to social security, political rights, etc...

– Origin might change: marriage, prolonged residency

Rules of origin are those which determine the framework

for acquiring or changing origin
 Why do they matter?
• They regulate the conditions of entry into foreign
markets and may hence affect market access
opportunities;
• They can have a significant bearing on the cost of a
product and therefore its competitiveness;
• They are one of the considerations leading to foreign
investment decisions;
• They may influence a firm’s choice of suppliers

They create both business opportunities and challenges

 Tariff treatment: Trade Preferences
Rules of Origin ONLY ONE
Proof of Origin
NAFTA ORIGIN
CAN BE
0%
ADMITTED
US-Jordan
FTA
0%
MFN

16%
US-Australia
FTA 8%
Lesotho
US GSP (AGOA)
0%
Boy’s pyjamas
76% “General Duty” HS6207.22
 Ex.2 - Country of origin marking
• Country-of-Origin: from cattle born in Mexico, Raised
and Slaughtered in the United States.
 Ex.3 - Anti-Dumping Duties

Antidumping duty likely on Chinese, Korean, Thai

alloy wheels

NEW DELHI: Government is likely to impose anti-

dumping duty on a certain type of aluminium alloy
auto wheels imported from China, Thailand and
Korea, to protect domestic players 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.
Ex.4 - Sanitary restrictions
1) PREFERENTIAL
Customs treatment
• Reciprocal Trade Regimes
• Bilateral FTAs: EU-Chile, US-Korea
• Regional FTAs: EU, NAFTA, CARICOM, EU-ACP EPAs, etc.

• Non-Reciprocal Trade Regimes

• Developed countries’ GSP schemes: US Caribbean Basin Initiative,
EU GSP-plus, Canada’s General Preferential Tariff, etc.

2) NON-PREFERENTIAL
• Regular duties (WTO’s Most Favoured Nation (MFN) Treatment)
Summarizing…
2.
HOW ARE RULES OF ORIGIN
DESIGNED?
 How can origin be determined?
• Laws, regulations, any other legal provisions
• National (USA), bilateral (EU-CARIFORUM EPA), plurilateral
(CARICOM), multilateral (WTO)

• Sequence:
1. Identify the product (Harmonized System)
2. Identify the applicable rule (which Agreement?)
3. Apply the relevant rule, may seek exemptions
4. The Certificate of Origin demonstrates compliance with the rule
 Supply chains: cotton pyjamas
Cotton: Malawi

Yarn: Pakistan

Fabric: South Africa

Dyeing: South Africa

Buttons: India

Cutting to parts
Cotton pyjamas
Printing: South Africa

Assembly: Malawi

Licenses (Copyright): USA

level 3
Designing preferential rules of origin
Wholly Obtained Products
•A single country intervenes in the production process.
•Simple treatment: if the country is within the preferential region,
preferences will apply.
•If the country is located outside the region, no preferences apply.

Substantial Transformation
•More than one country participates in the production process (either
successive stages of production or supply of inputs).
•Question: did the last production process occur in the region? If so, was it
substantial? Or, where did the last substantial transformation occur?
Approaches to determining origin

“Substantial transformation”

Walk “backwards”, from the last country of production

Approaches to Substantial
Transformation
 Approaches - illustration
Fertilizers (SH 3105)

 Value Added (VA)

• 30% of the regional value added
• Non originating materials must not be more than 70% of works
price
 Change of tariff classification
• Change of Tariff Heading (CTH): all materials must be classified
in a tariff heading different from that of the final product
 Product – specific rule
• Origin is determined by the place where the ammonium was
obtained or where the blending was performed
 Other concepts related to origin
Direct consignment
•Goods must be transported directly from the last country of
production to the importing country.
•If transhipment: proof of non-manipulation
•Underlying assumption is that the goods have not undergone any
transformation during trans-shipment

Minimal Operations and Processes

•Some operations cannot confer origin (exclusions).
• Example: ensuring preservation of goods for transportation,
packaging; removing dust, cleaning; affixing marks, labels; simple
mixing, simple assembly of parts (e.g. kits); slaughter of animals; etc.
 Other concepts related to origin
Packing and packaging
•Disregarded if classified in the same code as the good
Accessories and spare parts and tools
•Disregarded if items are sold with main good and correspond, in kind
and number, to the normal equipment
De minimis
•A specified portion of non-originating materials may be disregarded in
checking origin (value, weight)
•Across the board (all goods) or sector specific: textile goods, certain
Agricultural products.
 Other concepts: Cumulation
• Aka “accumulation”
• Definition: Inputs originating
in qualifying countries are
regarded as domestic - not as
foreign input
• E.g. EU-ACP Economic
Partnership Agreement (EPA)
• EU-ACP, ACP-ACP, ACP-OCT,
ACP-neighbouring countries*
• Example: 40% local content

Extremely relevant; only for

Preferential Trade Agreements
3.
WTO RULES RELATED TO
RULES OF ORIGIN
 WTO Agreement on ROO:
summary
Rules of origin: laws and regulations of general application used to
identify the country of origin of a good

Trade in goods only (based on the HS)

NON PREFERENTIAL ROO PREFERENTIAL ROO

•“MFN” trade relations
•The Agreement requires WTO
Members to harmonized these rules
(Art. 9)
•Minimum disciplines for the transition
period (e.g. appeal)
•“Advance Rulings”
•“Contractual “relations (FTAs)
•Need not be harmonized
•Minimum requirements: clear,
published promptly, transparent,
appeal…
•“Advance Rulings”

level 3
 WTO Agreement on TF:
summary
Importation and exportation requirements, import clearance,
transit of goods

Implementation is in progress! Individual conditions depend on current legislation

ASPECTS RELATED TO ROO

•Increased transparency regarding ROO (publication and availability through
the Internet and national “Enquiry Points”)
•Greater opportunity to comment on new legislation or new requirements
•Reiteration of the obligation to provide “advance rulings”
•Encouragement to establish regimes for Authorized Economic Operators:
possible reduction of requirements related to origin certification
•Encouragement to establish a single window for the submission of import,
export, transit documents

level 3
4.
HOW DO RULES OF ORIGIN AFFECT
TRADE AND FIRMS?
 Firms and Rules of Origin
• Typically, exporters come across Rules of Origin:
– When seeking to obtain a Certificate of Origin: Chamber
of Commerce, Ministry of Commerce, Customs (challenges
are mostly procedural in this case)

– When seeking to benefit from trade preferences (the

challenges then relate to identifying the relevant rules and
being able to comply with them)
 Notifications to the CRO
As May 2014, 88*
Members had notified
Rules of Origin to the CRO

APPLY P ROO A third of WTO

Members have
non-preferential
rules of origin in
effect
APPLY NP ROO (41 Members).

Another third of
Members do not
(45 Members)

*Total 131 Members. The EU(28) is counted as one member

ROO affect business operations..
but also business decisions
How businesses make decisions
regarding sourcing?
Business opportunity
Produce or
import finished goods
Firm
Where to produce?
Buy inputs and
components locally or
choose suppliers abroad

GLOBAL
REGIONAL Value Chains
Value Chains
Trade and investment impact
Capacity to utilize
preferences: consequence
of ROO (compare with ROO
with no cumulation)

EU

USA

Madagascar
Secondary beneficiaries of preferences:
consequence of ROO (suppliers)
level 3
 Economic impact
• Madagascar: apparel and clothing export boom 1990s
• Economic Processing Zones (EPZs)
• Investors: France, Mauritius, China, Ch. Taipei
• 50% of exports
• Sewing, cutting, spinning, weaving
• High utilization: Cotonou (88%) + AGOA (97%)
•Input sourcing:
95% Mauritius (EU – selective cumulation)
90% China (US - 3rd country fabric rule)
Local cotton (?)

level 3
 Global Value Chains: sectors
Intermediate imports embodied in exports
(% of total intermediate imports, 2009)

Source: WTO calculations from the OCED WTO Database of Trade in Value Added (TiVA), 2013
4.
HOW CAN FIRMS FULLY BENEFIT FROM
OPPORTUNITIES CREATED BY RULES OF ORIGIN AND
MINIMIZE RELATED RISKS?
 Challenges
Higher transaction costs
• Understand the
requirements, problems
related to tariff classification
• Demonstrate compliance
• Keep separate books and
records
• Increased paperwork
• Uncertainty regarding
acceptance of goods and or
tariff treatment
Compliance costs for enterprises:5-15%
• Meet different rules at the
same time
• Source switching (find new
suppliers) - adapt production
methods (specific processes)
• Separate / parallel production
lines to segregate suppliers
• Risks related to labelling
(branding related to “made
in”)
 Effect on ability to utilize trade
preferences
• Firms’ ability to export under the PTA may be
diminished: low “utilization rates”
• Government support, information and
experience
• SMEs vs. large firms
• Average firm size (2011):
• Using PTAs: 30,104 workers (Japan), 3,542 (China)
• Not using PTAs: 7,020 (Japan), 2,226 (China)

Source: WTR 2011, p.85

 Effects
• The greater the reliance on foreign intermediate
goods, the greater the (negative) effect of
conflicting / multiple ROO:
• Thailand: centre of production networks in the
automobile and electronics sectors: 22% of firms
reported that ROO was an obstacle to using PTA
preferences in 2010
• Smaller countries / Smaller firms face problems in a
more acute manner
5.

Exercises
EXERCISE 1

• What is the origin of wholly obtained products?

• Enumerate some “wholly obtained products”

• What are examples of wholly obtained products”

exported by your country?
EXERCISE 1: APPENDIX 1 - Wholly Obtained Goods
(a) Live animals born and raised in that country;
(b) Animals obtained by hunting, trapping, fishing… in that country;
(c) Products obtained from live animals in that country;
(d) Plants and plant products harvested, picked or gathered in that country;
(e) Minerals… extracted or taken in that country;
(f) Scrap and waste derived from manufacturing or processing operations or from
consumption in that country and fit only for disposal or for the recovery of raw
materials;
(g-h) Articles collected in that country which can no longer perform their original
purpose nor of being repaired and which are fit only for disposal or for the recovery of
parts or raw materials and parts or raw materials derived thereof;
(2) [Products of sea-fishing and other products taken from the sea outside a country
are considered to be wholly obtained in the country whose flag the vessel that carries
out those operations is entitled to fly]…
EXERCISE 2: what is the origin of…

USA Canada China Zambia

Seeds Fertilizer Greenhouse Peppers

Fresh chillies (07.01)

General Rule 5: neutral elements

Appendi Plants and plant Wholly obtained products
x 1, 1(d) products (including fruit, flowers,
harvested, picked vegetables, trees … and live plans
or taken in that grown in that country
country
 EXERCISE 3: value added

Drill (84.59) manufactured in Mexico:

 Case (Mexico) $ 50
 Electric command (Germany) $ 250
 Engine (China) $ 100
 Other parts (unknown) $ 50
 Labour and profits $ 550

 ex-works price $ 1000

Imported by the USA

Rule: NAFTA (USA) non-originating components and parts must not be
more than 40% of ex-works price
EXERCISE 4: what is the origin of…

• Cow born in Tanzania • Bought by a ranch in • Imported into South

Zimbabwe Africa for further
• Raised for 2 months fattening with a
• Raised for 3 months
weight of 200kg
01.02 Live bovine animals. As specified for subheading
0102.10 - Pure-bred breeding animals [The origin shall be the country where the
animal was born.]
0102.90 - Other [The origin of the bovine animals of a weight
of 300 kg. or more shall be the country where
the animal was fattened for at least 8 months
to come from a weight of less than 300 kg. to
a weight of 300 kg. or more; otherwise the
origin shall be the country where the animal
was born.]
EXERCISE 5: what is the origin of…

China Mexico Costa Rica

Manufactures a Door handle (HS 8302) painted
steel door manufactured and
installed
(HS 7308)

Imported by Brazil
Rule: Constructions and parts: CTH
EXERCISE 6: what is the origin of…

USA China Sweden South

Africa
Chasis Parts Airbag
with system and Automobile
engine 87.08 breaks
87.03
87.06 87.08

Automobiles (85.03)

HS Designation Primary rules

Motor cars and other motor vehicles,
87.03 principally designed for the transport CTH [35 or 45]% value
added rule
of persons
 Rules of Origin Facilitator
The first comprehensive global online resource on tariffs, trade agreements and rules
of origin designed with SMEs in mind. The tool enables you in a few clicks to find out
import duties in foreign markets applicable to your product, available duty savings,
detailed rules of origin, and certification procedures.

https://findrulesoforigin.org
THANK YOU!