Study Guide

4. WTO Agreement on Rules of Origin

Learning objectives

✓	Summarize the structure of the WTO Agreement on Rules of Origin (its four parts and two Annexes).
✓	Identify the three tests for substantial transformation recognized in Article 2 of the Agreement.
✓	Explain the purpose of the harmonization work program under Article 9 and its progress to date.

GATT contains many provisions which require the determination of origin. Rules of Origin are important in implementing trade policy instruments such as anti-dumping and countervailing duties, origin marking, and safeguard measures. To ensure as much uniformity as possible in interpreting GATT, the Uruguay Round produced a WTO Agreement on Rules of Origin which is an Annex to the WTO Agreement. We consider this Agreement first.

The Agreement is in 4 parts and has 2 Annexes.

Section	Topic	Articles
Part I	Definitions and Coverage	Article 1
Part II	Disciplines to Govern the Application of Rules of Origin	Articles 2 and 3
Part III	Procedural Arrangements on Notification, Review, Consultation and Dispute Settlement	Articles 4-8
Part IV	Harmonization of Rules of Origin	Article 9
Annex I	Technical Committee on Rules of Origin	n/a
Annex II	Common Declaration with regard to Preferential Rules of Origin	n/a

The first point to note is Article 1, paragraph 1, which expressly provides that the Agreement is not intended to apply to ‘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.’ In other words, the determination goods’ origin enjoying preference granted beyond the basic MFN treatment provided for in Article I will not be caught by this Agreement.

 Conversely, Article 1, paragraph 2 of the Agreement provides:

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 under Articles I, II, III, XI and XIII of GATT 1994, anti-dumping and countervailing duties under Article VI of GATT 1994; safeguard measures under Article XIX of GATT 1994; and any discriminatory quantitative restrictions or tariff quotas. They shall also include rules of origin used for government procurement and trade statistics.

The Agreement contemplates a work program for the harmonization of Rules of Origin, based on work to be done within the WCO, to determine Rules of Origin for each tariff heading in the Harmonised System. This work began in 1995 but has not yet been completed, and has proved much harder than originally envisaged. The Agreement contemplated one set of rules to apply during the transitional period, and a new set of disciplines to apply after the work had been completed. We are still in the transition period, and the disciplines set out in Article 2 still apply.

Origin is now well understood for wholly obtained goods. Substantial transformation is where the contention remains.

During the Uruguay Round, three tests for substantial transformation were recognized, but it did not prove possible to reach agreement on one single determinant of origin. Article 2 therefore reflects all three tests as being legitimate:

01  Change of tariff classification A good is so transformed in a country that it changes its tariff classification. An example is the conversion of leather into shoes.

02  Ad valorem percentage A defined percentage of the goods’ value, usually 50%, must be added in the country of manufacture.

03  Manufacturing or processing operation The basic process of manufacture occurs in the country claiming origin.

Article 2 does not attempt to define each of these tests but sets out criteria under which they are to be administered. Article 3 of the Agreement sets out the basic principles about the way in which Rules of Origin are to be applied once the transitional phase is over. Article 2, paragraph (c) requires that rules of origin shall not themselves create restrictive, distorting or disruptive effects on international trade.

The concept of the transitional phase comes from Part IV of the Agreement. Article 9 establishes a work program (with the WCO) to harmonize origin rules on the basis of certain key principles, set out in paragraph 1 of Article 9 (the principles largely included in Articles 2 and 3). The agenda for this harmonization program is set out in Article 9, paragraph 2 (c), which also requires the work to be conducted on a product sector basis, as represented by various chapters of the Harmonised System. The work was designed to achieve the following objectives:

01  Wholly obtained definitions Harmonized definitions of the goods to be wholly obtained in one country, and the minimal processes or operations that do not confer origin.

02  Substantial transformation criteria Elaboration of the criteria for substantial transformation, including the use of change in tariff subheading or heading and the minimum nomenclature change required to achieve that criterion, on a product-sector basis.

03  Other transformation criteria Following completion of the tariff classification rule, the basis of the criteria for the other types of substantial transformation, namely changes to ad valorem percentages and/or manufacturing or processing operations

The Agreement also contains two Annexes. Annex I establishes a Technical Committee on Rules of Origin, and Annex II contains a Common Declaration with regard to Preferential Rules of Origin. The Declaration seeks to apply similar administrative rules to non-GATT origin issues as to GATT origin issues. These relate to matters such as transparency of regulations, the need for positive standards rather than negative ones, judicial review of administrative decisions, and the treatment of confidential commercial information.

Further reading 1: WTO 1994. Agreement on Rules of Origin, Geneva

Further reading 2: Pryles, Waincymer and Davies 2004, International Trade Law, Lawbook Co, Sydney, pp 942/3