Rules of Origin (ROO)

The authorities of an importing country may have several reasons for wishing to determine the origin of a product or the place in which the last or the most important processing step took place:

 A product may be entitled to preferential tariff treatment if it comes from a developing country or from a member of a regional agreement
 The product may be subject to anti-dumping or countervailing duties, or to safeguard measures if it originates in a particular country
 There may be import quotas for the product that set limits on the access of products according to the country of origin
 Product labeling requirements may need to be verified
 Origin may be needed for the purpose of import statistic

A variety of tests

In most cases the origin of a good is determined to be the place where it underwent its last ’substantial transformation’. But there is a variety of criteria for determining what the last ’substantial transformation’ means.

The most widely applied criterion attributes origin to a country if the product was altered in that country in a way that caused it to be classified under a different customs tariff heading after the process was completed. For example, if the product comprised ’leather uppers for shoes’ and ’non-leather soles of shoes’ before the process but was classified as ’mens leather shoes’ after the process, that would count as a ’substantial transformation’ under the ’Change of Tariff Heading’ (CTH) test because the customs classification of the product had changed after the process was completed.

The "percentage of value-added" criterion measures how much value was added to the product in that country. In some cases, technical tests that vary from product to product and may be used to determine whether a ’substantial transformation’ took place: for example, the test may determine the country of origin to be the country where a particular manufacturing process took place.

ROO often complex, obscure

Rules of origin are, by their nature, complex and national regulations in this area are often difficult to understand. The confusion for business is made worse, on the one hand, because there is no world-wide agreement on which rules for determining origin should apply in different situations. Most regional agreements, on the other hand, do have agreed rules that apply among the member countries, to ensure that the regional trade preferences are restricted to products originating in the member countries of the agreement.

The uncertainty caused by the lack of multilateral agreement on origin rules can be costly for both importers and exporters - particularly where a difference in origin affects the price of an import, or even access to a market. Also, in the absence of multilateral agreement, rules of origin may be applied arbitrarily or used to create protective import barriers.

WTO Agreement on ROO

The WTO Agreement on Rules of Origin reached in the Uruguay Round is a first step towards the harmonization of ROO to be applied by all WTO members. The only exception to this harmonization will be rules used for preferential arrangements such as GSP preferences for developing country imports and preferences inside regional free-trade agreements. Even in these cases, however, the Agreement commits members to apply many of the same principles. The Agreement directs the WTO and the World Customs Organization to create new multilaterally-agreed procedures for determining the origin of imports in non-preferential trade.

The most important principles of the procedures will be:
 that rules of origin should not be used as a means of protecting markets
 that the rules should be based on objective criteria, applied in a predictable way and should be based on positive standards
 that the origin of a good should be either the country from which it was "wholly obtained" or, when more than one country has been concerned in its production, the country where the last substantial transformation was carried out

The new rules are expected to be ready for adoption by late 1998. The technical experts are required to work through the whole Harmonized System tariff classification, product group by product group, to decide the most appropriate way of determining ’substantial transformation’, if necessary, for that particular product group.

The CTH test will be the preferred method, but the experts will also decide on additional criteria - such as percentage of value-added or processing criteria - for defining origin for any products that cannot satisfactorily be dealt with on the basis of a change in customs classification.

While these technical preparations are being made for new multilateral rules on ROO, WTO members are required by the current Agreement to ensure that their rules of origin are clearly defined and published, and are not used for trade protection.

Source: ITC

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