WORLD TRADE  
ORGANIZATION  WT/COMTD/LDC/W/34 
28 July 2004  
 
(04-3245) 
Sub-Committee on Least-Developed Countries Original:   English 
   
RESPONSES TO QUESTIONS POSED BY CERTAIN COUNTRIES TO AUSTRALIA 
IN RELATION TO WT/COMTD/N/18 
 
Communication from Australia
 
 
 
 The following communication was received on 20 July 2004 and is being circulated at the 
request of the Delegation of Australia.  
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a) Bangladesh - Could Australia provide an illustration of the app lication of the local 
content requirement, and an explanation of the rules of origin for other preference receiving schemes offered by Australia?  
LDC rules of origin 
 
The Least-Developed Country (LDC) duty-free initiative was introduced on 1 July 2003.  This 
initiative allows duty-free entry for goods that: 
• are unmanufactured raw products of a LDC;  or 
• meet the following criteria: 
- the last process in the manufacture of the goods was performed in a LDC;  and 
- the allowable factory cost makes up at least 50 pe r cent of the total factory cost of the goods. 
Under the 50 per cent criteria, the total factory and allowable factory costs are made up of the 
following costs: 
 
 
Total Factory Cost Allowable Factory Cost 
 
Allowable factory labour Allowable factory labour 
Allowable factory overheads Allowable factory overheads 
All materials Materials produced within the qualifying area (the 
LDC, other LDCs, Forum Island countries, other developing countries and/or Australia) 
  The allowable factory cost can onl y include the cost of materials sourced from developing countries 
(other than LDCs or Forum Island countries) up to a maximum of 25 per cent of the total factory cost.  
The cost of any materials from those countries in exc ess of that 25 per cent is treated in the same way 
as developed country content, and is not allowa ble.  Please see the table below as illustration:  WT/COMTD/LDC/W/34 
Page 2  
 
 Total Allowable Not Allowable 
 
Materials   LDCs  15 15 0
Forum Island Countries 0 0 0
Other Developing Countries 35 25 10
Australia 0 0 0
Other Countries 40 0 40
            All Materials 90 40 50
Allowable Factory Labour  55 0
Allowable Factory Overheads  55 0
Factory Cost 100 50 50
 
 In the above example, the goods would meet the LDC rules of origin, even though only $25 of the 
cost of the materials from “other developing countri es” could be included in th e allowable factory cost 
($25 is 25 per cent of the total factory cost of $100).   It should also be noted that where a material sourced from within the qualifying area incorporates 
components from outside the qualifying area, the cost  of those components must be deducted from the 
allowable expenditure on that material.  That is, if  an LDC material costs $15, but a component worth 
$5 was sourced from Japan to make that LDC material , the $5 would not be allowable.  If this were 
the case in the above example, the goods would not m eet the LDC rules of origin (see example in the 
table below in response to the ne xt issue raised by Bangladesh). 
 
Australian Customs have had a number of meetings  with representatives from the Bangladesh High 
Commission to explain the rules of origin for th e LDC initiative.  We are sure those representatives 
would be glad to assist other officials from Bangl adesh with any further questions they may have. 
 
Other rules of origin 
 The rules of origin for most other preferential tr ade arrangements have some similarities with those 
for the LDC initiative, but with differing qualifying areas (e.g. in our FTA with New Zealand, the 
qualifying area is New Zealand and Australia), and no limitation on the level of materials from within 
the qualifying area that can be included in the allo wable factory cost.  Australia’s agreements with 
Singapore and Canada also have different local content levels for different classes of goods. 
 
The representative of Bangladesh said that their understanding was that the goods 
manufactured by LDCs would be eligible for preference under other schemes if they did not meet the criteria for rules of origin under the new scheme.  
 
If goods manufactured in a LDC did not meet the requirements for duty-free entry under the LDC 
initiative, the goods could still enter Australia at a rate  of duty that is five percentage points below the 
general rate if they meet the rules of origin that a pply to all developing countries.  Those rules are the 
same as the LDC, but with no restriction on the level of content from “other developing countries” 
that can count towards the allowable fact ory cost.  Please see the table below:  WT/COMTD/LDC/W/34 
 Page 3 
 
 
Allowable? 
LDC Rules DC Rules  
Total 
Yes No Yes No
Materials   LDCs  15 10 5 10 5
Forum Island Countries 0 0 0 0 0
Other Developing Countries 35 25 10 35 0
Australia 0 0 0 0 0
Other Countries 40 0 40 0 40
             ALL MATERIALS 90 35 55 45 45
Allowable Factory Labour  550 5  0
Allowable Factory Overheads  550 5  0
Factory Cost  100 45 55 55 45
 
 In this example, the goods would not meet the LDC rules of origin. This is because: 
• the goods included $40 worth of materials from outside the qualifying area; 
• the $15 LDC materials included $5 worth of components from outside the qualifying area; 
and 
• only $25 of the cost of the materials from “oth er developing countries” could be included in 
the allowable factory cost. 
 
The same goods, however, would meet the developing country rules of origin.  While deductions still 
would have to be made in relation to the first tw o dot points above, the entire cost of the materials 
from “other developing countries” could be included in the allowable factory cost. 
 
b) Nepal - Asked for clarification on the defi nition of the inner container and how it was 
effectively utilised in calculating the rules of  origin (see attachment B of ACN 2003/48).  
 
An inner container is anything in or on which goods are contained (e.g. wrappings, coat hangers, 
spools, bags, etc) other than a shipping or airline container, pallet or other similar article.  They are 
treated as if they were part of the goods, no di fferently from materials that are consumed in the 
production of and that form part of goods.  
c) Switzerland - Commented that the 50 per cen t input rule for rules of origin from other 
LDCs and 25 per cent from other developing countries was interesting and wondered if 
allowing up to 100 per cent input from other LDCs was better (Does Customs have any comments on this or why was it restricted to 25 per cent).  Switzerland asked whether 
there was a direct shipment rule and how exactly the donor country content was 
applied.  Switzerland also asked how the verification procedure worked and  the administrative cooperation with the expor ting country, the precautionary measures 
against fraud and circumventions, if there were any safeguard mechanisms in case of a 
major increase of imports from LDCs, and if so, how they were designed. 
 
Please see response to the first issues raised by Bangladesh  for explanation of the LDC rules of origin.  
As can be seen from that response, there is no up per limit place on the level of content sourced from 
other LDCs.  There is no direct shipment rule under the LDC initiative. 
 
Customs uses a self-assessment and risk management approach to verification.  Under this approach, 
an importer prepares an import entry, or declara tion.  The entry would include data necessary to 
determine the duty payable, including the origin an d preferential status of the goods.  The importer WT/COMTD/LDC/W/34 
Page 4  
 
then lodges the entry with Customs.  This woul d normally be done electronically.  Customs then 
screens the entry for any specific risk s using electronic or other risk management systems.  Unless the 
screening process indicates that a more interventi onist approach is warranted, the goods would 
generally be cleared.  
All imports may be subject to post-entry audit within  four years.  If eligibility for preference cannot 
be established to the satisfaction of Customs at th e time of audit, additional duties may be demanded 
and penalties may be imposed.  Our cooperative arrangements with other countries to  combat fraud and the circumvention of Customs 
laws depend heavily on whether or not we have a Memorandum of Understanding with the Customs 
organisation in that country.  There is no specific safeguard mechanis m associated with the LDC initiative. 
 
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