RESTRICTEDWORLD TRADE
ORGANIZATIONG/RO/W/72/Add.2
24 January 2002
(02-0371)
Committee on Rules of Origin Original:  English
SUBMISSIONS ON THE ASSEMBLY RULE
Addendum
The Secretariat circulates herewith an additional submission made by a Member on the
assembly rule.
SUBMISSION BY THE EUROPEAN COMMUNITIES
I. INTRODUCTION
Further to the report by the Chairman of the Committee on Rules of Origin (CRO), on 18 July
2001, the General Council recognised that assembly in Chapters 84 to 90 was one of the major
outstanding issues in the HWP negotiations. Ambassadors therefore instructed the CRO to intensify
efforts in order to find a solution by exploring all options offered by the Agreement on Rules of
Origin (ARO). The CRO Chair indicated that disc ussions on assembly had shown that a solution to
the difficult problem of assembly might possibly be found through the introduction of a “threshold”rule. Such a rule would enable simple assembly processes to be excluded as origin conferring
processes, given that the overwhelming majority of CRO Members agreed they should not to be
considered as substantial transformations (see Chair’s report dated 17 July 2001 and in particular
paragraph 4.4).
As a result, the Chair decided to have a dedicated session wherein Members should discuss
appropriate criteria for determining the origin of goods of chapters 84 to 90 produced by assembly,and delegations were invited to send their submissions. The European Communities had already done
so when they requested the CRO Secretariat to annex to the Minutes of the CRO meeting on 4 April
2001 a note on the origin rules it proposed for Issue No. 1 of chapters 84 to 90. The European
Communities would like to commend the efforts made by the Chair in finding a solution which will
result in a major breakthrough in the negotiations by resolving issues for almost the totality ofheadings included in these seven chapters.
II. RESPONSE TO THE LATEST SUBMISSIONS BY OTHER DELEGATIONS
The European Communities shall hereby further clarify its proposals following its
submissions to the WCO Technical Committee on Rules of Origin and to the CRO.
The European Communities would like to thank all delegations for submitting their views on
an issue which is crucial to the completion of the HWP. It notes with regret, however, that five years
into the negotiations the United States, Canada and Mexico have once again failed to seize the
opportunity offered by the CRO Chair to explain to other CRO Members their proposals and to offertheir contribution to the definition of simple assembly processes.
In particular, after stating in the seventh introductory indent on page 1 of G/RO/W/72/Add.1
that the document was intended “to clarify the United States position with respect to the 5-part rule”,G/RO/W/72/Add.2
Page 2
the United States submission includes ten lines on the 5-part rule. It is completely silent on the
fundamental problem of definition/exclusion of simple assembly processes. It then attempts, in the
remaining six pages, to describe other proponents’ options by listing misunderstandings – long
dispelled – that are incorrect in their substance and misrepresent the proposals made by other
Members, thus instilling confusion in the HWP debate on the very eve of its completion.
As regards the submissions of Canada and Mexico, they merely focus on commenting the
rules proposed by other Members without offering any alternative, apart from a few lines which
basically quote the text contained in the Agreement on Rules of Origin (ARO, Article 9:2.c.ii).
Unlike the European Communities that have long submitted a detailed explanation on the
rationale and application of the rules proposed for each heading of these chapters (s. ANNEX I for the
latest note), none of the latest submissions offers a detailed description of how the proposed rules
would be applied in practice, or illustrates its specific advantages. This silence is all the more
distressing, because the 5-part rule is not widely applied by any CRO Member.
The solution offered by the European Communities, on the other hand, includes the well
known criteria of change in tariff heading (CTH)1 and value added, both currently in use and applied
for years by an overwhelming majority of Members in preferential (NAFTA and GSP for instance)
and non-preferential schemes.
Most notably, paragraphs (m) through (q) of the United States submission paraphrase the
ARO and include a series of general principles (focussing almost exclusively on the CTH approach2)
on which the European Communities, as party to the ARO, are wholly agreed. In fact, the rules
proposed by the European Communities for Chapters 84 to 90 do include CTH and – as an alternative
or as an additional criterion – value added.
When compared to the approach proposed by the United States, the rules proposed by the
European Communities offer the following advantages:
a. unlike the 5-part rule, they offer a clear-cut and simple solution to the fundamental problem of
simple assembly;
b. unlike the 5-part rule, they offer a solution to the most significant issue of assembly of machines
from unfinished machines3. Because of current trade flows and the increased integration of
production between Members, any solution neglecting this aspect is bound to be obsolete and
useless to operators;
c. unlike the 5-part rule, it is already well known to operators;
d. unlike the 5-part rule, it is simple and trade-facilitative.
The European Communities will attempt to clarify the issues raised by the latest submissions in detail.
Before doing so, they would like to reiterate that any of the elements in their proposal is negotiable
and that they are open to any alternatives that ta ke into consideration the need to exclude simple
assemblies.
                                                     
1 For the purposes of this paper, change in tariff heading (CTH) includes the idea of change in tariff sub-heading
unless explicitly excluded.
2 It is not yet clear why the 5-part rule is constantly defe nded with sole recourse to the CTH criterion, as if the 5-
part rule could be equated with CTH.
3 As Switzerland often pointed out, the inability of the 5-part  rule to deal with this issue may usher in paradoxical
situations where a simple assembly of five parts confers or igin, while that of a complicated fitting to a machine requiring
dozens of other pieces to be m ounted on the original machine would not.G/RO/W/72/Add.2
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III. PROBLEMS AND SOLUTIONS RELATING TO THE ASSEMBLY ISSUE
Since HWP negotiations started in the WCO-TCRO, one of the major outstanding issues of
the HWP negotiations has been assembly for products included in Chapters 84-90. The issue revolves
around the problem of “simple assembly” and solutions thereto.
Admittedly, for machinery and vehicles the “last” transformation is an assembly operation.
What remains to be determined is whether this “last” transformation is also “substantial ” as laid down
in Article 9:1.b of the ARO and therefore confers origin.
Since the beginning of the negotiations the overwhelming majority of delegations were
agreed on the exclusion of simple assembly as an origin-conferring event. In so doing, they were in
keeping with the Kyoto Convention, which explicit ly rules out simple assembly as a process
substantial enough to confer origin (Annex D of the 1974 version and Annex K in its 1999 revised
version).
Technically speaking, the easiest way to exclude such processes is a rule that allows a change
into the heading of the finished product from any heading excluding the heading that contains its
parts. The European Communities and other delegations have proposed such rule arguing that the
process of assembly may not be very substantial if the producer merely assembles parts which are
already intended exclusively for the use in that product and possess the essential characteristics of the
finished product itself.
This rule4, however, is extremely strict since it means that origin is lost even in the case of
addition of a single part that does not meet the change of heading.  It would also be extremely
penalising for manufacturers that manufacture products that remain classified in the heading of the
original materials.  By way of solution the European Communities have therefore proposed that in
such cases origin may be conferred whenever a certain value has been added to the product. Withsuch a solution both the addition of labour and the addition of parts originating in the country where
the assembly takes place are duly taken into account. In fact, value added is calculated by simplysubtracting the value of non-originating inputs from the ex-works price.
In reply to some of the comments contained in the latest submissions, the European
Communities would like to draw other Members’ attention to the fact that the elements required for
the application of the value-added rule do not differ from the ones required by other origindetermining criteria. More importantly, they are the same required for CTH (primary rule) or major
portion (residual rule).
Very simply said, if a producer buys materials and has to comply with a CTH
rule, s/he will have to know and keep records of the classification of the materials as well as of theirorigin. If s/he needs to comply with a value-added rule, s/he will need to keep record of the cost of the
materials and the price of manufactured products. All these can be found on a simple commercial
document (e.g. an invoice). The administrative “burden” appears therefore identical. The European
Communities would like to recall that within the context of “architecture” delegations have discussed
of administrative elements linked to implementation such as “accounting segregation”: any suchsystem – which is not even an origin criterion – would imply administrative procedures not dissimilar
to the ones required to comply with origin criteria such as value-added or CTH.
The comments contained in latest submission s, however, prompt other more interesting
considerations. Some of the submissions maintain that a value-added standard requires operators totrace the origin of all the materials and compone nts used. This is incorrect as one can imagine
                                                     
4 The rule in question generally reads “CTH except from [ heading containing parts ]”.G/RO/W/72/Add.2
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situations where one major component (e.g. cathode tube in a CTV) already represents 45 % of the
ex-works price. If this component is originating, the rule is fulfilled and the manufacturer need not
care about other components. In some other cases, the value of one or two major non-originating
components may represent 55 % of the ex-works price, as a result the value-added rule is not met and
the operator should establish origin via one of the residual rules contained in the introductory part ofAppendix 2.
On the other hand, CTH rules may turn out to be extremely burdensome when used for
assembly processes. In such cases the exporter has to know the tariff classification of all the materials
used and when no CTH occurs, s/he must know the origin of the materials concerned because the rulehas to be applied – as all CRO Members know – to non-originating materials only.
With respect to the method of calculation, the mistakes contained in paragraph (k) of
G/RO/W/72 Addendum 1 were particularly disturbing. In particular the following completely
incorrect statement stands out: “The “subtractive method”, i.e. a formula that starts with the ex-factory
price of the good and then subtracts domestic materials and production costs, does not identify the
major portion of the processing. It compares costs of inputs against the total market price or value.  Inthis regard it departs from the substantial transformation principle by introducing “apples-to-oranges”
(sic) comparisons that will be valid only for that single transaction”.
Since the beginning of the negotiations the European Communities have stated that the value
added is determined by taking the ex-works price minus the customs value of non-originatingmaterials. All the data needed are contained in simple commercial documents (invoices). We hope
that the clarification of a major misunderstanding will help the United States in reviewing their
position.
The latest submissions by other Members purport that external factors influence the value-
added rule. In this respect it may be said that if the price for the raw material increases, it is highly
probable that the producer will proportionately increase the ex-works price of its product. Such
swings would therefore not be a problem. As regard s the issue of currency fluctuations, the European
Communities have repeatedly stated that this could be negotiated, so much so, that the problem could
be solved through fixing a fixed rate for a given period (e.g. yearly simple/weighted average).
The assertion whereby a value-added standard would discriminate against low labour-cost
countries has been repeatedly exploded by the European Communities. As is the case with
fluctuations in the price of raw materials, labour costs have an influence on the ex-works price.
Whenever labour costs are low, the price for a product will consequently be lower than the one fixed
for a similar product obtained via an assembly operation in a high labour-cost country. It should not
be forgotten that low prices are crucial for producers to find outlets for their products. The sameexplanation applies mutatis mutandis to comments concerning tariff rates.
Point (a) on page two of document G/RO/72 Addendum 1 refers to the production of
machines from unfinished machines. When dealing with this issue the submission states that no value-
added standard is needed because modifying non-numerically controlled tools to transform them intonumerically controlled ones is always origin conferring, as “statistical data have confirmed the
extensive value added involved”. If by statistical data, the submission alludes to a mere comparison of
the (unit) value of a non-numerically controlled tool as against a numerically controlled tool, the
European Communities would like to differ and would like to offer a very simple illustration of the
reasons why. In fact, it is highly unlikely that producers of numerically controlled scales (digitalscales), for instance, begin their production process by taking non-numerically controlled scales
(analogue scales) and then transform them into digital appliances. Statistical data like these are
completely irrelevant.G/RO/W/72/Add.2
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What is worse, the paragraph in question, does not tackle the veritable issue at stake that of an
enhancement of unfinished machines, an operation which is today at the very heart of the
globalisation of production systems. In the integrated patterns emerging in production today,
manufacturers do, for instance, transform machines that are almost finished and, consequently, can
hardly change tariff heading. Any CTH-based rule is therefore of no use in capturing the substantialprocesses that go into such transformations.
The submissions often describe the rules proposed inter alia  by the European Communities as
“blanket” solutions. Such description is forthwith rejected by the European Communities with regard
to their proposals. The European Communities have never refused to discuss each heading on its own
merits. Furthermore, as such time-worn argument has never been clearly motivated, the European
Communities would not like it to become a criticism against other provisions in the text (evenBasket 1 rules) which could be described as “blanket” rules (e.g. Chapter rules such as “chemical
reaction”). As is the case for the value-added standard they do indeed include all the headings of a
chapter, because they do fit them. The “blanket” argument should, therefore, cease to be adduced
because similarity of provisions for similar processes is regarded as an advantage rather than a
disadvantage by operators.
In document G/RO/W/72 Addendum 1 the percentage rates proposed are described as
“arbitrary” and easily “manipulated”. The European Communities consider the fixation of a threshold
at 5 parts much more arbitrary and still completely obscure in its rationale. In fact, as demonstrated
via the examples given in the course of discussions, in some instances assembling a higher number ofparts may be easier than assembling four or even three parts. The cogency of the percentage rates
chosen by the European Communities, on the other hand, clear. Incidentally, the European
Communities reiterate that the addition of value they proposed is linked to a manufacturing process.
The percentage level is achieved through the incorporation of originating materials and the addition of
labour costs linked to the assembly process, and not just via the addition of “parts”. As for“manipulability”, a 5-part rule is much more liable to manipulation as operators by assembling sub-
assemblies or disassembling them will be able to ch ange the origin of a product in no time. Finally, if
at all manipulability may be an issue for all rules and does not concern value standards in particular.
It would be indispensable, in this respect, to understand the meaning of paragraph (c) on
page 3 of the United States submission, in particular the following sentence: “the 5-part rule imposes
specific production criteria, provides latitude (sic) in the case of originating material contributions and
provides some (sic) comfort in recognising simple assemblies from conferring origin unless there is
significant production by the country of assembly”.
As regards the problems related to confidentiality, the European Communities do not feel that
those raised by a value-added standard are different from the ones raised by other rules such aschemical reaction – where issues may even concern substances under patent or pending patent. The
European Communities wonder whether the statement “suppliers will normally be reluctant to provide
data, and may not provide it at all” (of G/RO/W/72 Addendum 1 p. 4) does apply to value added only,
and how it should be interpreted in the overall framework of the HWP.
The submission by Mexico indicates that the value-added standard would require a “per unit”
determination of origin. On this point the European Communities do not see any difference with
respect to other rules (CTH, product specific processes, etc.). As regards Mexico’s comments
concerning the possibilities of obtaining different results: it is obvious that the various options for all
the rules under discussion at the moment (product specific, value standards, CTH,) may show
different possible outcomes which will no longer be possible once the rules are harmonised.Furthermore, if such differences were to be due to the choice of elements included in the value
standard, the European Communities cannot but reitera te that all elements (ex-works price included)
are negotiable.G/RO/W/72/Add.2
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The European Communities draw the attention of Members to the fact that the text indicating
the “limitations” of the value-added approach text on page 3 of G/RO/W/72 Addendum 15 does not
contain any technical reason (i.e. inability to capture assembly processes) related to the substantial
transformation described by a value-added rule.
As regards the comment made under point (b) page 4 of G/RO/W/72 Addendum 1, namely
the fact that value-added rules are “less objectionable” in the preferential context, the European
Communities would like to indicate that such comment begs the question on the reason why the ARO
includes value-based rules as additional or supplementary standards for the HWP. They are included
because, as is the case with for instance product sp ecific rules, value standards can sometimes be the
only means of capturing a substantial transformation (machine to machine transformations).Delegations are called upon to decide on the ability a value standard to capture a substantial
transformation. Such a decision has nothing to do with the differences between “preferential” and
“non-preferential” settings, otherwise and a contrario  all preferential rules should be value added
rules.
As regards the last but one paragraph of G/RO/W/72 Addendum 1, the European
Communities would like to correct the statement. Th e value information needed for value-added rules
is always available, as it is contained in commercial documents such as invoices.
The reason for including the final paragraph of page 4 is totally unclear, as it has nothing to
do with the issue at stake and is furthermore possibly applicable only to complex preferential systems
such as NAFTA.
Paragraph (f) of G/RO/W/72 Addendum 1 is completely silent on the burdens posed by the
need to keep track of classifications of materials in order to check compliance with the CTH-basedrules. Paragraph (h) is a mere statement. The European Communities cannot but repeat that the
administrative requirements of value standards are – as amply demonstrated above – identical to those
required by other origin criteria.
Finally paragraph (n) of G/RO/W/72 Addendum 1 has raised major doubts on basic legal
underpinnings of the HWP. In fact, the comments that the European Communities would like to raise
with respect to paragraph (m) and in particular to the objectivity of the tariff-shift approach become
rather superfluous, given the inclusion of the following text in paragraph (n): “Given that
classification of a good or material is in the overwhelming majority of cases,  the same in any country,
specified changes in classification will produce the same outcomes everywhere”. It should always be
the same. The fact that in of G/RO/W/72 Addendum 1 classification is not defined as identical by all
Members in all cases is most disturbing. The European Communities would like to stress that thewhole work of the CRO would be nullified if Memb ers were to cast any doubt on the identical nature
of classification of goods, as all Members are expected to base their decisions on the Harmonized
System nomenclature.
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5 The text reads as follows: “In our view, to the extent possible value-added rules should be avoided for
determining non-preferential origin by reason of their difficulty of administration, burdens upon traders, technical
deficiencies, questionable neutrality, and lack of uniformity and predictability.”