Rules of origin

Rules of origin have become a challenging topic in international trade, not only because they constitute a highly technical area of rule-making, but also because their designation and application have not been harmonized across the world.

The lack of harmony is even more remarkable in the era of regionalism, when more and more free trade agreements (FTAs) are concluded, creating the spaghetti bowl effect.

Such criteria may be developed from principles in national legislation or international treaties, but the implementation of rules of origin (i.e., certification and verification) is always at the country level.

However, this Convention does provide many important definitions and standards, which serve as a harmonized basis for national laws and trade agreements to formulate origin.

Non-preferential rules of origin are those primarily designated in order to sustain the most-favored-treatment (MFN) within the World Trade Organization (WTO).

Preferential rules of origin are those associated with "contractual or autonomous trade regimes leading to the granting of tariff preferences going beyond" the MFN application.

[7] However, rules of origin in FTAs and autonomous trade regimes (e.g., GSP schemes) are not subject to any substantive requirement from the WTO.

[12] So far, the most successful initiative to harmonize this area of rule-making at the multilateral level is the WTO's implementation of preferential rules of origin in favor of least developed countries (LDCs).

[13] Being the criteria to determine the economic nationality of goods, the role of rules of origin is inherently derived from the fact that a number of trade policy measures are applied based on the source of the imports.

Specific Annex K to the Revised Kyoto Convention provides a list of wholly obtained or produced products, which can be taken as a good example for the second method:[3] 2.

There are several methods of application to identify the fulfillment of the ‘substantial transformation’ criterion, which include rules that are based (i) on the change in tariff classification, (ii) the ad valorem percentage, or (iii) the list of specific manufacturing or processing operations.

A rule based on the value added requirement may be expressed in one of the following tests: (i) Minimum percentage of the value added to final products (build-up or direct test): The manufacturing or processing operations carried out in the country of origin must reach a certain extent, i.e., the percentage of value they add to the final products must be equal to or exceed a given threshold, so that the latter can obtain origin there.

This Article points out that to ensure the timely completion of the harmonization work program, it ‘shall be conducted on a product sector basis, as represented by various chapters or sections of the Harmonized System (HS) nomenclature.’ Only where the usage of the nomenclature does not enable a proper expression of ‘substantial transformation’ shall the Technical Committee on Rules of Origin consider elaborating on ‘the use, in a supplementary or exclusive manner, of other requirements, including ad valorem percentages and/or manufacturing or processing operations.’[19] This method dictates specific production processes that may confer originating status to the goods.

Although the Revised Kyoto Convention has dropped this method, it is still commonly used in practice: the often cited ‘from yarn forward’ rule is a good example.

Article 2(a)(iii) of the agreement states that in cases where this method is used, the operations conferring origin on the goods in question need to be precisely specified.

Although there is no harmony across trade agreements, the Comparative Study on Rules of Origin of the WCO has listed the most commonly found provisions of this category.

Cumulation: A provision which allows to consider goods obtained in as well as processing taking place in one FTA member country as originating in another.

De Minimis: A provision that allows a small amount of non-originating materials to be used in the production of the good without affecting its originating status.

It allows both types of goods to be tracked not through physical identification and separation but based on an accounting or inventory management system.

Penalties: A provision that specifies the legal consequences of submitting an origin documentation based on incorrect or falsified information.

Those annexes or chapters include a number of provisions such as retention of documents, refund of excess duties paid, minor errors, etc., which need to be taken into account if traders want to claim preferences for their goods.

If it is permitted, the trader (either the producer, the exporter, or in some cases, the importer) only needs to fill out the information relating to the consignment on a prescribed form (if any), and declare that the goods listed therein fulfill origin criteria and other requirements.

The competent authority will examine the documents, and pay visits to an applicant's premise to verify if necessary, and certify if the goods are compliant with the origin criteria set out in the trade agreement at hand.

[23] Regarding verification, when the consignment arrives at the port of entry in the importing country, the proof of origin will be submitted to the customs authority.

To facilitate trade, sometimes a physical submission is not required - the importer or its representative may simply submit the document number and/or an electronic copy thereof.

[24] Because rules of origin are implemented at the country level, it is domestic institutions which directly deal with the certification and verification procedures.

The reason is that the verification of origin in the importing country must be carried out when the goods arrive at the port of entry in order to determine the (preferential) duties applied to the consignment, which falls within the realm of its customs.

It requires the Members which commit under the Ministerial Declarations to submit notifications regarding their rules of origin in preferential treatment for LDCs.

For instance, Article of this agreement provides that each member shall issue an advance ruling on the origin of goods "in a reasonable, time-bound manner to the applicant that has submitted a written request containing all necessary information".

This database is gradually expanding with the ultimate goal to cover over 400 FTAs and preferential schemes that are currently active in the world.