RESTRICTEDWORLD TRADE
ORGANIZATIONWT/REG/GEN/M/1
16 November 1998
(98-4522)
Committee on Regional Trade Agreements
EXAMINATION OF THE SYSTEM OF EUROPEAN CUMULATION OF ORIGIN1
Note on the Meeting of 23 September 1998
Chairman:  Mr. J-M. Noirfalisse (Belgium)
1. The Chairman said that although the issue of European cumulation of origin was being
addressed in a single agenda item, it was of relevance to the examination of 30 regional trade
agreements (RTAs), namely the Free-Trade Agreements (FTAs) between the European
Communities (EC) and Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland,
Romania, Slovak Republic and Slovenia;  the FTAs  between EFTA and Bulgaria, Estonia, Hungary,
Latvia, Lithuania, Poland, Romania and  Slovenia;  the Central European Free-Trade
Agreement (CEFTA);  the FTAs between the Czech Republic and Bulgaria, Estonia, Latvia and
Lithuania;  the FTAs between the Slovak Republic and Bulgaria, Latvia and Lithuania;  and the FTAs
between Slovenia and Bulgaria, Estonia, Latvia and Lithuania.  He recalled that in the examination of
the majority of those RTAs, the question of rules of origin, and in particular of the pan-Europeancumulation system, had been constantly referred to.  The Committee had received a communication
on that system
2 and he hoped that the meeting, which would count with the presence of some rules of
origin experts, would help Members to unders tand the system.  Reminding Members that the
examinations of many of the RTAs concerned were already at the stage of consultation on the report,
he invited delegations to give their views on whether, and if so how, discussions under that item
should be integrated into the reports of examinations.  He said that the present meeting should be
viewed as a thorough briefing on the pan-European cumulation, although the issue would probablycome up again in each individual review in light of the debate held under that agenda item.
2. Responding to the Chairman's comments, the representative of Hungary said there was no
sense to speak in each review about a unique and single type of rules of origin.  To save time, the
Committee should only discuss those rules of origin on this occasion and simply make reference to
those discussions in individual examinations, if necessary.
3. The representative of the European Communities said that the EC Commission's expert on
rules of origin would intervene at a latter stage in the meeting.  Echoing the statement made by
Hungary, he said that the issues of rules of origin and of operation of the pan-European system of
cumulation had arisen, and he expected would continue to arise, on each occasion when the
Committee examined one of the RTAs concerned.  The basic document for the debate contained, in itsAnnex, a list of the very considerable number of RTAs already in existence to which the system was
applicable.  There would be a large amount of common ground among each of the RTAs listed, and it
                                                     
1This is of relevance for the examination of the following agreements: the Free-Trade
Agreements (FTAs) between the European Communities (E C) and Bulgaria, Czech Republic, Estonia, Hungary,
Latvia, Lithuania, Poland, Romania, Slovak Republic and Slovenia;  the FTAs between EFTA and Bulgaria,
Estonia, Hungary, Latvia, Lithuania, Poland, Romania and  Slovenia;  the Central European Free-Trade Area(CEFTA);  the FTAs between the Czech Republic and Bulgaria, Estonia, Latvia and Lithuania;  the FTAsbetween the Slovak Republic and Bulgaria, Latvia and Lithuania;  and the FTAs between Slovenia and Bulgaria,
Estonia, Latvia and Lithuania.
2 WT/REG/GEN/N/1.WT/REG/GEN/M/1
Page 2
would not be in the interest of the Committee if co mments were simply repeated.  In response to the
numerous questions raised by third countries, an agenda item, intended as an overarching part of the
examinations, had been organized to permit am exchange of information on the operation of the
system.  As noted in paragraph 4 of the communication, discussions held in the Committee should not
replace discussions that might take place in other fora, more specifically, the Committee on Rules ofOrigin.  He emphasized that the system had not merely an impact on the operation of RTAs and on
the trade among their parties but also benefited third countries, in that the introduction of a single
system would bring simplification in procedures for all economic actors in all trade.  Once a product
received a certificate of European origin, that would suffice for movement among any of the countries
concerned by the system.  That meant very positive benefits for companies from third countries as
well as for those based in Europe.
4. The representative of Poland remarked that the pan-European system of rules of origin also
applied to some other RTAs that had not been listed in the Annex to the communication because the
WTO had not yet been informed of their existence.  That was the case for the FTA between Poland
and Lithuania, to be examined at the next Session, and the Poland-Latvia FTA, which would be
notified very soon.  The former was not included in the list because, by the time of the submission of
the communication, the RTA had not yet been notified to the WTO.  In fact,  the agreement wasnotified to the WTO on 14 September 1998.  Additional Protocol No.1, which introduced pan-
European rules of origin into that agreement, was signed on 8 May 1998 and has been provisionally
applied since 1 July 1998.
5. Thanking the parties for the submission of information, the representative of the United States
said that the system of cumulation was an integral part of each of the agreements and that discussions
on that item should have been part of their reviews.  That had not been possible because the
information had not been made available.  Rules of origin were an important part of any agreement
and the European cumulation origin scheme was a functional link between the various European
integration agreements.  Given the interlocking network of 38 agreements, and perhaps more, it was
important to understand how the system worked.  In particular, discussion should be held for eachagreement on the rules in place prior to the adoption of the cumulation scheme, and on the main
changes made to the agreements to incorporate the re levant rules of origin.  It was not clear whether
the documentation provided was complete;  he wondered whether the Parties intended to provide any
additional documentation.  His delegation would submit specific written comments and questions
once additional documentation was supplied.
6. Thanking the parties for the information supplied, the representative of New Zealand said that
he was also interested in receiving clearer informa tion about the precise nature of the changes that the
system introduce to the pre-existing arrangements.  It would also be useful to have more information
on the statement contained in paragraph 3, where it was said that the new rules were generally more
flexible with respect to third country materials a nd that a general tolerance rule was provided for.
7. The representative of Hungary said that Protocol 4 annexed to the communication contained
the central information for the debate.  The Protocol  was exactly the same in each agreement.  Given
the notification requirements, each country concerned by the system would notify the Committee on
Rules of Origin of changes that had been made.  Those notifications would make cross-reference to
the basic notification and list the Decrees in which Protocol 4 was published.  He called Members'
attention to the fact that, in addition to th e basic document for today's discussion, document
WT/REG11/9/Add.2 of 3 June 1998 was, to  some extent, even more detailed.
8. The representative of Japan said that his delegation appreciated the notification made to the
Committee.  The documentation was, however, incomplete.  Without the submission of Annex 2 to
Protocol 4, which contained the list of rules of orig in according to Harmonized System tariff lines, the
pan-European system could not be assessed.  As noted by the representative of the United States, theWT/REG/GEN/M/1
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Committee should also know what were in force before the implementation of the system, to judge
whether barriers were higher or not.  While his delegation understood that, overall, the new system
was an improvement on the non-cumulative system, examination of each agreement should be done
individually.  In this connection, he agreed with the representative of the United States that a detailed
examination of the system might show, for example, that some local content ratio had been raisedcompared to the previous one or that the method had been changed from a change in tariff
nomenclature to a value-added test.  Such changes might vary depending on the agreement.  He
thought that the Committee should come back to the issue in individual examinations if it was found
that the changes introduced had resulted in more restrictive rules of origin.
9. The representative of Hong Kong, China said th at the documentation was very useful and that
his delegation would examine it carefully and come back at a later stage.  He asked whether the
decision of the Council of the European Communities on modification of the Protocol between the ECand the Czech Republic, made on 29 November 1996 and reproduced in the basic document, was
made after the entry into force of the Association Agreement and, if that was the case, how that
affected the percentage of product coverage as related to Article XXIV:8(b).
10. The Chairman said that, in stating that the day's debate should inspire the review of each
individual agreement, he meant that, in continuing the review of individual agreements and in
working on the preparation of draft reports, the Committee should not repeat the general debate in
discussing individual agreements.  If issues like changes in local content requirements or the method
used were raised, specific questions should be asked in the context of individual examinations;
however, he would expect that general issues be dealt with only once, now.
11. The representative of the European Communitie s said that the document being discussed in
the CRTA would be followed by a series of no tifications to the CRO, where full details of the
applicable changes in each of the different agreements would be provided in order to discharge the
responsibilities of the parties to the RTAs under the Agreement on Rules of Origin.  The notifications
relating to changes in the legislation relating to the agreements concluded by the EC had been made
very recently and should be issued shortly as a formal WTO document.  He hoped that theinformation, together with the information provided in the context of the notifications of other
agreements covered by the pan-European system of cumulation, would help to satisfy the interest of
Members for further information.
12. Regarding the questions posed by the representative of Hong Kong, China, he said that the
Interim Agreement between the EC and the Czech Re public entered into force in March 1992, and the
respective Europe Agreement in February 1995.  On the question of the percentage figure, he did not
yet understand what was being calculated if Members sought to apply a rules of origin considerationto the examination of "substantially all trade" and what would be the use of the figure that might result
from such calculations.  He would further reflect on the question.
13. The representative of the United States said th at there were some problems with the procedure
followed by the parties with respect to notification to the Committee on Rules of Origin.  Preferential
rules of origin had attracted considerable interest in the CRTA in the examination of many RTAs,with probably the greatest concern being registered with respect to the North American Free Trade
Agreement (NAFTA).  This Committee was the appropriate forum to discuss the notifications.  He
failed to see how some of the more fundamental questions could be addressed without having the
actual documentation before the Committee.  He also wondered why the EC, given the interest shown
in the Committee for that topic, had not chosen to submit the documents both to the CRTA and to theCRO.
14. The representative of the European Communities clarified that, in submitting a notification to
the CRO, the EC considered that it was seeking to  discharge its responsibilities in that forum underWT/REG/GEN/M/1
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the Agreement on Rules of Origin, in particular under its Annex 2, which called on Members to
provide the Secretariat with information on their preferential rules of origin.  Copies of the
notification to the CRO were also sent to the Chai rman and Secretary of the CRTA for information.  If
the Committee so wished, that notification could also be circulated within the CRTA.  That however
would lead to duplication of information, in particular given that the essential provisions were exactlythe same for each agreement.  The information cont ained in the basic document, while referring to the
EC-Czech Republic Agreement, could serve as a model for any of the other Protocols and detailed
rules of any other EC's agreement, simply by substitution of the correct country name.  He felt that
given the large amount of documentation involved in the workings of the WTO, any step taken to
avoid unnecessary duplication should be of benefit to all Members.  He reiterated that the EC
notification made to the CRO was also copied for information to the CRTA.
15. The representative of Hungary said that his delegation had never denied the legitimate right of
every Member of the CRTA to have the fullest information possible about preferential rules of origin.
It was not by chance that parties to the pan-European system of cumulation had sent a joint
communication to the Committee, as that was for full information of its Members.  The notification
commitment which had to be fulfilled was that of the Agreement on Rules of Origin.
Notwithstanding the fact that parties to the RTAs concerned should provide all information and try toreply to all questions on preferential rules of origin, as had been the case for NAFTA and CEFTA,
that should not be interpreted to mean that preferen tial rules of origin were part of the Article XXIV
compliance test.
16. The representative of the United States sa id that while sharing the concern of the EC
representative about the amount of paper involved, he supposed that the notification made to the CRO
could simply also have a REG/ symbol.  Clarifying that point, a representative of the Secretariat said
that, subject to confirmation, a document bearing symbols of relevance to both the CRTA and CROcould be distributed.  However, there was one difficulty in that the CRO did not publish any document
with the text of the preferential rules of origin being notified.  Rather, what was distributed was
simply a document informing the CRO that a notification was received and, in that case, it would notseem appropriate to issue a double symbol document.
17. Responding to a request by the Chairman for suggestions on how to deal with that question,
the representative of the United States said that, following the explanation just given, it would not
appear that what would be circulated would satisfy his delegation.  He said that for legal reasons he
would like to have a submission made directly to the CRTA. The representative of  Romania said that
the same procedure followed by the CRO, from the point of view of notifications and obligations to
notify, also existed in the CRTA.  When an agreement was notified, a document within theREG/ series was published but all the Annexes and Protocols attached to it where at the disposal of
Members within the Secretariat for consultation.  So far, Protocols had not been published as official
documents of the REG/ series.
18. Summarizing the points made, the Chairman said that all elements in connection with rules of
origin could be found in annexes to the REG/ series documents, which were deposited in the
Secretariat.  He wondered whether that would repl y to the questions posed taking into account the
legal arguments expressed.  The representative of the United States said that such proposal posed
practical problems for his delegation because the officials in his capital that reviewed suchinformation could not access to it through the Documents Dissemination Facility (DDF).  Compared
to the size of documents being distributed by other WTO bodies, e.g. the Committee on Safeguardsand the Dispute Settlement Body, the information  being requested did not appear to be so big.
19. The representative of Japan said that the CRTA was the responsible body for examining
issues related to rules of origin in the context of Article XXIV.  Since the CRO had been only dealing
with non-preferential rules of origin, Members could not be guaranteed that it would receive fullWT/REG/GEN/M/1
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information from parties to RTAs.  His delegation was of the view that the CRTA could request
parties to RTA to submit to it all information on preferential rules of origin.  If documents had already
been submitted to the CRO, the party could then refer to the document by symbol.  Members should
have easy access to the full documentation without necessarily having to come to the Secretariat.
20. A representative of the Secretariat said that the practice had been that the Secretariat had
provided photocopies for interested Members of the full information available on Annexes and
Protocols, but that it would be very difficult to publish them as official documents, particularly given
that they were already published in Members' official journals.  Concerning the basic document being
discussed, she affirmed that the Secretariat had received a copy of, and distributed as an official
document, the new Protocol 4 to the EC-Czech Republic Agreement.  However, neither its Annexes
nor the new documentation relating to the other EC's agreements had been submitted to the
Secretariat.  The Secretariat had, however, copies of  all the original Protocols and Annexes to those
agreements.
21. The Chairman said that discussions had related to two different topics;  first, the
comprehensiveness of the documentation provided for that day's discussion and second, the fact that
the practice for dealing with voluminous material re lated to all RTAs, such as annexes and protocols,
was that general distribution was not provided for budgetary reasons but that copies from the relevantmaterial could be obtained from the Secretariat.  It seemed that discussions were concentrated at that
point in the last item.
22. The representative of Hong Kong, China said that his delegation was less concerned about
how Members could access the information.  Rather, he had a legal point, that is, whether the
notification made by the EC was made under the obligation of Annex II to the Agreement on Rules ofOrigin or under the obligation to report any significant changes in RTAs contained in paragraph 11 of
the Understanding on the Interpretation of Article XXIV of the GATT 1994 (the Understanding).
23. The representative of the European Communities reiterated that the solution suggested by the
Secretariat seemed reasonable and consistent with the practice of that and other WTO Committees.
He appreciated that documents only available in the Secretariat made additional work forGeneva-based missions, but he thought that that was part of their work.  He noted that the photocopies
were made available on request.  He emphasized that the substance of all the protocols was the same.
Responding to the comment made by the representativ e of Hong Kong, China, he said that the EC,
together with the parties to the agreements concerned, had very recently made a notification to the
CRO of the pan-European system of cumulation,  with a copy being provided to the CRTA for
information, given the interest Members had on that issue.  Paragraph 11 of the Understanding was
not of relevance at that stage, since examinations were still being carried out and the reportingrequirements only began once examinations had been concluded.  The material had been provided for
information, without any particular link to any paragraph of Article XXIV or the Understanding.
24. The representative of Hong Kong, China said that he did not agree that paragraph 11 was not
relevant.  Nevertheless, should that be the case, he wondered whether the EC representative agreed
that the obligation contained in paragraph 7 applied.  The representative of the United States said that
a practical solution would be that a formal written request be made for the submission of the relevant
information;  however, that procedure would basically represent a waste of time.
25. The representative of the European Communities replied that being overly precise about legal
matters might not help the Committee's work.  The delegations concerned had provided the
information because they recognized that Members had interest in the issue and that the system ofpreferential rules of origin was of practical relevance.  References to Article XXIV:7(a) would lead
the Committee towards some issues being considered in the systemic debate, where no consensus had
been reached on what constituted a "regulation of commerce" or a "restrictive regulation ofWT/REG/GEN/M/1
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commerce" depending on the context and whether they included preferential rules of origin, which
were indispensable to the effective operation of FTAs.  Should any Member wish to formulate
requests in a more formal manner, those would be considered by his delegation and responded as
appropriate.  However, given that the information was submitted in a spirit of transparency and for
practical purposes, he did not see what could be added by a debate on legal issues which had been
under consideration for some time under the systemic discussions.
26. The representative of the New Zealand said that his delegation was very flexible on how
information could be made available and appreciated the practical difficulties, as explained by the
Secretariat, in making all information available in the DDF.  Referring to the substance of the
information to be made available to the CRO and through it to the CRTA, he asked whether it was
intended that the information would clearly identify the changes introduced by the new system, as
compared to preferential rules of origin previously  in place.  That was quite an important issue in
determining the implications of the new rules of origin.  Under the Agreement on Rules of Origin,
Members were already obliged to promptly notify their existing preferential rules of origin.  For
transparency purposes, changes could be clearly identified in the notifications and he hoped that
Members concerned could take that into account.  Supporting the statement made, the representative
of Japan said that his delegation also wanted the notifications to identify clearly which changes had
been made.
27. The representative of Hungary said that some Members were not aware of the volume of the
documents being referred to.  The notification made by the EC to the CRO had hundreds of pages.  In
that Committee, it had been agreed that the notifi cations to be made by the other parties to the
European system of cumulation would make a cross-reference to the EC notification and its annexes,and enumerate the number of the regulations which introduce, in each country, the same regulations
notified by the EC.  That detailed and voluminous information was available for interested Members,
while the essence of it was already at the disposal of the CRTA.  He repeated that while his delegation
had no objection to provide any information requested, that was made in the framework of an
information exercise and not of a legal commitment.
28. Following the preliminary discussion held, the Chairman noted, first, that the parties to the
European system of cumulation had a commitment to total transparency and full cooperation in
answering the questions posed.  Second, unless there was a strong request, he suggested that the
CRTA follow the most practical way for the dissem ination of documentation.  Third, the question of
preferential rules of origin was clearly within the competence of the CRO and, he thought, also within
the CRTA's competence, because RTAs were exam ined in it.  Regarding the way in which the
Committee should take up the matter, it seemed that agreement existed that information would beprovided to the CRTA and that a debate would be held, and he thought that the time had come for the
Committee to embark upon a substantive discussion.  In his opinion, a significant question which had
been raised related to the comprehensiveness of documents supplied to CRTA;  the most substantial
question related to the changes introduced in each agreement following the adoption of the European
system of cumulation.  Other general questions, to be dealt with by the EC expert on rules of origin,had been raised, e.g. on whether and, if so, how the new system was more flexible than the old one,
and on the general tolerance rule.
29. Regarding the notification, the representative of the United States said that he needed to
consult his authorities in the capital on its legal status.  However, he agreed that the discussion should
move into the items identified by the Chairman.  The representative of the European Communities
reaffirmed that the information provided was comprehensive and that Members would be able to
verify it once they received the material.  The information could be further explored, with the help of
the EC expert, to reply to the questions posed.WT/REG/GEN/M/1
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30. The representative of New Zealand asked whether any Members could explain the practical
changes that have been brought about through the introduction of the new system.  The representative
of Japan said that, while the changes were important, there was a need to have a general picture of the
new system.  The document presented, of a legal and technical nature, was difficult to understand, andhe wondered whether a summary of the system could be submitted, i.e. based on the Standard Format.
31. Taking the floor for the first time, the expert on rules of origin from of the delegation of the
European Communities, speaking also on behalf of EFTA countries (Iceland, Liechtenstein, Norway
and Switzerland), Bulgaria, the Baltic countries (Estonia, Latvia, Lithuania), Czech Republic,Hungary, Poland, Slovak Republic, Slovenia, Ando rra, San Marino and Turkey, which would accede
to the system as from 1 January 1999, said that, since the beginning of 1997, new rules of origin based
on the concept of pan-European cumulation were implemented in a number of FTAs within Europe.
Thanks to the new provisions, separate free-trade areas established under individual FTAs had beencombined into one area at European level.  The new cumulation rules,  based on similar structures and
substantive provisions, would be duly notified to the CRO by the individual WTO Members
concerned.
32. The general framework of existing FTAs or Association Agreements in Europe remained
unchanged.  Only the Origin Protocols in every trade agreement had been replaced by the pan-European cumulation provisions.  The implementation of the new origin network had two major
consequences.  Firstly, semi-finished products originating in any country of the system and which
were further processed or assembled in any other partner country would always be considered as
originating products.  Secondly, originating product s could be traded freely between any of the
countries involved in the system.  The advantages of the new system of cumulation in origin forproducers and traders, both in and outside the pan-European cumulation area, were significant.
Customs procedures were simplified by the fact that once a product had been given “European origin”
there was no need for the origin to be verified again.  For firms established in Europe, including
foreign-owned firms, that meant more freedom in us ing input material or deciding in which country to
invest production facilities.  With regard to third country materials, the new rules were generally moreflexible because they provided for a general tolerance rule as well as alternative processing rules
allowing more input of third country materials.  The parties involved were conscious of the
importance of the system of cumulation to third par ties and were willing to give further information
on the matter both in the CRO and, in the context of the examination of individual agreements under
GATT Article XXIV, in the CRTA.
33. The representative continued that the essential change introduced by the new system was the
unification of all the rules of origin included in all the agreements signed by the EC with its Europeanpartners.  Unification meant that the rules of origin were identical among some 30 countries, which
was a major advantage not only for the administrations in charge of their management but mainly for
economic operators.  Further, the system was advantageous not only for its participants, but also for
countries outside the European area.  To implement the new system, all Protocols relating to rules of
origin annexed to the agreements signed betwee n the EC and its European partners, and to the
agreements signed between the EC's European partners among themselves, had been amended to
create an identical set of rules of origin throughout Europe.  That system was elaborated on the basic
principle that rules of origin were only an  instrument for the smooth operation of FTAs.
34. Another change brought by the new system was the removal of frontiers.  For example, the
EC had an agreement with Switzerland and Poland, and Switzerland had also an agreement withPoland.  Before the entry into force of the system, a product obtained under the EC-Switzerland
agreement and exported afterwards to Poland had to pay a duty because it was not an originating
product in the context of the EC-Poland agreement. All such frontiers had been removed.  For
example, a good processed in Norway from third country material, e.g. Japan, and finished in the
Czech Republic could be considered as originating in the Czech Republic and hence within the wholeWT/REG/GEN/M/1
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pan-European area.  From the moment when there we re no residual tariffs between the countries, the
good was then duty-free within the whole area.  Another example concerned an unfinished product
originated in the Slovak Republic which went to France for finishing;  the product would not be
regarded as originating only from the EC but from all of the countries in the area.
35. Regarding administrative facilities resulting from the new system, where cumulation of origin
applied, certification of origin was ensured in the fi rst stage by a certificate entitled EUR.1.  The new
system was far more flexible, as the institution of an invoice declaration would no longer require
approved operators to apply for a certificate of or igin from Customs.  All that was required was a
stamp certifying that the goods were of European origin. A further advantage would accrue to plants
which worked days and nights, as previously they often had to wait the opening of the customs office,
which represented a delay and waste of money.
36. The representative stated that the EC provided preferential treatment to almost every country
in the world, making it impossible to verify in every case that imported goods were consistent with
declarations of origin.  The essential point of the new provisions was the need to establish mutual
relations based on trust and confidence between the customs officials of the EC and its trading
partners.  In an EC Commission communication published in 1997, the functioning of preferential
tariff treatment and abuses reported were reviewed;  the conclusion reached was that, in the absenceof effective customs cooperation and mutual trust between the countries concerned, preferential
agreements were of no avail and that if such mutual trust could not be achieved, there was no point in
negotiating them.
37. The Chairman said that, in the debate held earlier, three questions had been posed.  He
requested the expert to address them.  First, what were the practical changes in the new system.
Second, how was the new system more flexible than the previous.  And third, that the general
tolerance rule be further explained.
38. The representative of the European Communities recalled that in a free-trade area, the basic
concept was that of originating products.  Confusion should not be made with the underlying principle
of customs unions, i.e. goods supplied in the free market.  The three questions were related, andamounted in fact to a single one.  Concerning the practical changes, the new system had instituted the
diagonal cumulation rule.  In the presence of the numerous free-trade areas in Europe, and taking into
account the wish that originating goods under the terms of one agreement also qualify as originating
goods under the terms of all other agreements in the area,  the new diagonal cumulation system was
implemented using the concept of bilateral cumulation as a starting principle.  For example, when a
good partially manufactured in one country which was part of the area was sent to another country in
the area and processed therein, it acquired the origin of the second country.  The Protocol on Rules ofOrigin spelled out the rules whereby goods might acquire the status of an originating product from the
area.  For example, the rules for TV sets provided that, to be originating, added value within the area
should be 60 per cent.  That meant that producers could import from outside the area up to 40 per cent
of the parts that made up the TV set, provided that once it was in the area, the added value represented
the other 60 per cent of its final value.
39. The concept of diagonal cumulation came in once at least three countries were involved in a
final product.  This rule requires that third country goods imported into the area must be sufficiently
transformed in the first country of importation.  Once a product had acquired originating status, it
could be sent to other countries in the area to be finished.  An example would be that of a drill, made
of several parts from different countries.  In manufacturing the motor, a country might import partsfrom outside the area up to 40 per cent of its value and, by adding 60 per cent value, it would have
produced a motor which would be classed as originating in the area.  The motor was then assembled
in a drill in another country, with the same rule of 40/60 per cent applying, and sent to a third country
to be put in a box and sold.  That meant that, in practice, around over half of the value might comeWT/REG/GEN/M/1
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from outside the area.  That should be of interest for Members who were concerned with new barriers
being raised through the European system of cumulation.  In fact, barriers were being removed.  The
cumulation aspect of the new system thus helped in removing remaining barriers within the area.
40. Concerning flexibility, he referred Members to the documentation provided and said that for
some chemical products and machinery, two rules applied;  that of the 40/60 per cent rule and lesselaborated rule allowing a 30 per cent value from outside the area.  That was the reason why the rules
were more flexible.  Turning to the general tolerance rule, he said it modified a principle which was
reflected in free-trade areas up to 1997, according to which the advantages brought by an agreement
were to be shared among its parties.  The general tolerance rule allowed the use of products coming
from outside the area without the final product losing the originating status.  For example, the rule
applying up to 1996 for fishery products was that of totally obtained product, that is, basically the fish
had to be caught by vessels belonging to nationals of the area.  For example, if in preparing fish soupa producer added some fish not meeting that requ irement, the soup would not have the originating
status.  The new rule allowed producers to use up to 10 per cent of non-originating product in the fish
soup while retaining the originating status.  That rule also applied to totally obtained products in the
agricultural sector.
41. The general tolerance rule was linked to a new rule that would enter into force on
1 January 1999, and which would introduce changes to the documentation distributed.  The major
change, apart from the incorporation of Turkey into the system - which was of major political
importance - was the principle of territoriality.  In the present system, a good being processed within
the area but which exited it for a given reason - e.g. electronic chips which exited the area to be
tested - would lose its originating status.  The new rule would make it possible that goods exportedfrom the area to be further processed outside the ar ea - e.g. tested, finished - would not lose their
originating status, provided processing did not represent more than 10 per cent of the value.  That
represented a major opening because it went in the direction of trade globalization.  The change was
introduced because the EC and its partners had realized that some operations were best carried on
outside the area.  He reminded Members that rules of origin were simply a tool serving the purposesfor which they were devised;  if the purposes changed, so should the tool.
42. The representative of Canada referred to the example presented by the EC expert whereby 40
per cent of the value of the drill motor could be imported.  She proposed another example, whereby a
motor manufactured in France with 60 per cent of parts from a third country - thus not having the
French originating status - went to Switzerland.  She wondered whether, when the motor entered into
the manufacture of the drill, it would represent 0 or 40 per cent of French origin – that is, whether that
count on the calculation to determine whether the drill was or not originating.  Responding, therepresentative of the European Communities said that 40 per cent of the value of the motor, which
was not originating, would be taken into consideration for the final calculation.  In adding the drill aswhole and supposing that the motor had a cost of 100, 40 from the area and 60 outside it, and that the
other parts, which were originating, had a cost of 200, a simple addition was required with 240 being
originating and 60 non-originating.  If parts such as the motor had acquired origin because there wassufficient value-added, the entire motor would be considered as originating, even if 40 per cent came
from a third party.  However, if 60 per cent came from a third party, the 60 per cent would be added to
other third party components of the drill.
43. The representative of the United States said that the last comment provided good clarification.
His impression was that the domestic content of 40 per cent in the motor was essentially lost in terms
of figuring domestic content for the overall drill.  That is, if 60 per cent of domestic content was not
met, it counted as a 100 per cent against domestic content for the final product.  The representative of
the European Communities said that such understanding was not correct, and that confusion was
understandable given that the technical rules involved were very complicated. For example, if in thecase of a gearbox, value-added inside the area amounted to 60 per cent, it was classed as 100 per centWT/REG/GEN/M/1
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originating.  However, if the value-added inside the area amounted only to 40 per cent, than the 60 per
cent from outside the area would be added to the other percentages of other parts incorporated into the
car which came from third countries.  At the end, a ddition should be made of the whole and, if 60 per
cent of the value come from within the area than  the product was originating from the area.  The
40 per cent was not lost if, in the end the value-added in the area was 60  per cent or over.
44. The representative of Japan said that he understood that, in principle, before the establishment
of the pan-European system of cumulation, many countries in the area used non-preferential system of
rules of origin, but that it had been subsequently replaced by the European system of cumulation.  He
wanted to know what were the differences betwee n the non-preferential system used and the new
preferential system, or between the new and the old preferential system, and especially whether there
were areas where the test used changed from that of change in tariff heading to that of value-added.
His delegation considered that such change might represent an increase in barriers.  Further, hewondered whether the local content ratio requirement had been raised from, for example, 50 to 60 per
cent.  According to the examples given, the local content requirement of the new system was 60 per
cent.  If previously the level was 50 per cent, than  that represented an increase in the local content
ratio.  He would like areas where that had occurred to be identified, and that an explanation be given
on why the changes introduced were necessary.
45.  The representative of the European Communities said that the questions posed might help the
Committee to understand the problem of rules of origin on the basis of a wider picture.  First, the
Agreement on Rules of Origin contained common rules for non-preferential rules of origin, but simply
a Declaration concerning preferential rules of origin.  The EC and its partners, as well as Japan, had
rules of origin of both of a preferential and non-pref erential nature.  Preferential rules of origin were
applied in the framework of preferential agreements or of the GSP.  Trade carried out under non-
preferential treatment was governed by each country's non-preferential rules of origin, which were
drawn up according to its needs.  The EC non-preferential rules of origin were used in the framework
of e.g. trade in goods and anti-dumping.  Those rules were different from the ones proposed in the
agreements just mentioned because non-preferential rules of origin did not involve tariff reductions,while preferential rules of origin always involved preferential treatment.  For example, motor vehicles
imported into the EC from Poland entered the EC without customs duty, so that in the agreement
between the EC and Poland it was required that the acquisition of originating status was granted in
accordance to strict  rules of origin.  In a non-preferential regime, vehicles imported into the EC from
the United States had to pay a normal customs duty provided certain criteria were met;  however, in
some cases there was even no need for a certificate of origin because the same duty applied to all
countries.
46. In the case of non-preferential rules of origin, each WTO Member had its own rules of origin.
For example, in exporting a Czech machine tool to the United States, the non-preferential rules of
origin of the latter would have to be fulfilled, but the same product exported to Argentina would have
to met other rules of origin.  That disturbed the functioning of world trade and, as a consequence of
the Marrakech Agreement on Rules of Origin, a programme of harmonization of non-preferential
rules of origin had been set up.  Discussions were progressing properly under the auspices of the
WTO and of the World Customs Organization, and the hope was that by next year there would be a
common system of non-preferential rules of origin.  That was quite different from the questions
surrounding preferential rules of origin, which were the basis for trade within a free-trade area.
Sometimes, the criteria used by the two systems were equivalent.
47. He recalled that there were three criteria for granting origin to a product.  For example, if milk
was imported and manufactured into cheese, that would be considered as a "substantial
transformation" so the cheese would be originated from the country where such manufacture took
place.  That was a chemical process, but at the same time the cheese found itself under a tariff item
different from that of the milk.  That would mean that a change in tariff item conferred the origin of aWT/REG/GEN/M/1
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product.  However, that was not always the case given the structure of the Harmonized System (HS)
nomenclature.  For example, Chapter 8 which concerned fruit, had an item for fresh fruits and another
for frozen fruits, but it could not be said that because the fruit was frozen a substantially different
product existed.  A third criteria was that of value-added, which was the one used in the EC for
electronic equipment.  The EC had proposed to use that criteria in the harmonization programme ofnon-preferential rules of origin.  In light of the fact that some Members said that the rules set up in the
framework of the pan-European agreements were an obstacle to trade, he said that he would be ready
to compare them with those applied in the framework of preferential treatment provided e.g. by Japan.
He repeated that preferential rules of origin were applied in the framework of preferential agreements
which provided for tariff reductions up to zero and there was therefore the need for an in-depth
cooperation among countries, which had to be distinguished from the cooperation existing towards
countries not parties of the area.
48. Referring to the Japanese question on why the new system had been introduced, the
representative of the EFTA Secretariat said that it was not right to say that before 1997 EFTA
countries were using non-preferential rules of origin in their preferential trade relations.  The newsystem of cumulation was not completely new;  it was simply a further development of the rules
applied since 1972 when the EFTA States concluded free-trade agreements with the EC, and evenbefore that in the 1960s.  While some new rules were introduced, e.g. the general tolerance rule, the
rules concerning value added were simply a further development of rules existing previously.  The
most important point of the system was the merger of preferential rules of origin, whereby the similar
rules applied on agreements between the EC and Ce ntral and Eastern European countries and between
the EFTA States and EC and the Central and Eastern European countries were combined in a newtext.  Around 98 per cent of the new system was identical to what existed previously.
49. The representative of Japan said that the new system seemed to be better than the old one,
given the addition of the general tolerance rule and the cumulation system and the better cooperation
among Customs authorities.  His delegation's questions on whether barriers had been raised were
related to Article XXIV:5 requirements.  He understood the explanations given as indicating that,overall, the basic rules had not been changed and that the central change amounted simply to an
integration of existing systems.  While he acknowledged that value-added criteria had been used
previously, his delegation would have concerns if the domestic content requirement had been
increased from 50 to 60 per cent.  If that was the case, he would like to receive information on
products affected and an explanation for such an increase.  The same material should be provided
concerning changes from the "change of tariff heading" method into "value-added" method.  He also
sought clarification on whether new rules had been introduced requiring that certain parts of productsshould come from within the area so to acquire European origin, whereas beforehand those parts
could come from third countries.  That would also amount to a case where barriers had been raised.
50. The representative of the European Communities said that most of the issues raised by Japan
had been previously answered, both by the repres entative of the EFTA Secretariat and by himself.
The EFTA representative had outlined the history underlining the new set of rules, whereby the rulesapplied between the EC and the Central and Eastern European countries were the same that applied in
the EC relationship with EFTA since the 1970s.  The rules were updated on a regular basis and they
were at present simpler and more flexible.  Comparing the new set of rules to those applied in the
1970s, it could be seen that in many cases some of the minor exceptions, e.g. that 5 per cent of the
components should come from certain tariff lines rather than others, had been removed.  The rules hadbeen updated and streamlined and took into account technical progress.  By and large, the rules were
simpler and easier to apply.  That being said, he agreed with the Japanese representative that in
looking at the new Protocol on rules of origin, it would appear that there was a substantive change
whereby the change in tariff line method was replaced by the value-added method.  However, in
considering all of the tariff lines, that was by no means the case.  The Protocol included all tariff lines,instead of simply referring to change in tariff lin es or exceptions.  All tariff lines had been listedWT/REG/GEN/M/1
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because that implied an interpretation of the nomenclature convention, which could differ among the
15 Member States so that what might be considered as a change in tariff line in one country might not
be seen as such in another country.  However, changes were not made to the criteria used when the
method of the change in tariff heading was applied.   The new system did not include any rule
whereby any product could be excluded for the sole reason that it was non domestic and come from acountry outside the area.
51. The representative of Japan said that his understanding was therefore that, generally, the
change of the method used from "change in tariff heading" into "value-added" had not occurred.  If
that was a general tendency, his delegation would like to know whether there were exceptions and, if
so, that those be listed.  He reiterated that he had not received a reply on the increase of the local
content ratio, and he would like that to be answered in writing. Reiterating what he had said
previously, the representative of the European Communities said that the rules of origin system found
its origin in the FTA between the EC and the EFTA  countries in the 1970s, and that was the basic
text.  As the years went by, trade increased and became more specialized;  rules were supplemented,
improved and made easier to apply.  He had also said that instead of having general rules at the head
of each HS Chapter spelling out the tariff heading ch anges, parties to the system had included the full
tariff headings in the Annex.  That made the ru les easier to apply within the EC(15) given that a
simple reference to a change in tariff heading did not produce identical results in all the 15 Members.
That was not a change of substance, but simply made it easier to apply the rules and showed
appropriate and correct application of the rules by all Member States.  It also made easier for the
operators to see what was the rule applied for each product.  The present system had a rule providing
for the mention of changes in tariff heading, but th e text would be changed because the rule was not
satisfactory in the practice of dealing with 15 Member States that might have different applications of
the nomenclature.  In summary, the rules were not changed;  they were updated and brought them up
to the new requirements and adjusted the rules which had originally devised for the EFTA
agreements.  Some of the new rules were more flexible and simpler;  that information would be
provided within few days in writing.
52. The Chairman said that delegations would appr eciate receiving the information in written
form.  He thanked the EC expert for being pres ent in the Committee in order to help Members to
better understand the pan-European system of cumulation.  He found it very interesting to have the
issues presented by someone who dealt with those questions on a day-to-day basis.  However, the
discussion was by no means over;  there would be a written procedure in which Members would come
up with new questions.  He welcomed the fact that written information would be submitted and said
that the Committee should set a final aim so that it did not turn into an endless exercise.
53. The representative of the European Communities sa id that in its efforts to harmonize rules of
origin, the EC would do its best to extend the new system to the Mediterranean countries and to any
new agreement concluded with other trading partners.  He insisted that the new system represented a
major advantage for operators which had to work on the basis of a single rule to deal with preferential
origin.  He said that he was somewhat surprised to see that the rules being discussed, which were inforce for 20 years at least and were improved, updated and upgraded to facilitate trade, have been
referred to as constituting additional barriers to trade.  It seemed to him that that went against
common sense.
54. The Chairman said he should not be surprised, as the very raison d'être  of the Committee was
to review RTAs and to check that no new barriers had been raised.  Replies had been provided to
questions and all Members were entitled to pose them.  It was up to the Members now to judge
whether the new system would be more or less co stly.  That day's discussion was part of the
horizontal review of a number of agreements and would be fully reflected in conclusions at the
appropriate time.  Regarding the jurisdiction of the Committee, he said that the Committee would waitWT/REG/GEN/M/1
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until the delegate of the United States had completed its legal consultations to find out how the
Committee could proceed in a practical manner.
55. The Committee took note of the comments made.
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