RESTRICTEDWORLD TRADE
ORGANIZATIONG/RO/W/72
14 November 2001
(01-5792)
Committee on Rules of Origin Original:  English/
Spanish
SUBMISSIONS ON THE ASSEMBLY RULE
As agreed at the meeting of the Committee on Rules of Origin (CRO) on 8 October 2001, the
Secretariat circulates herewith the submissions made by Members on the assembly rule, which are tobe discussed by the CRO at the informal meeting on 28 November 2001.
A. S
UBMISSION BY CANADA
Canada, since the beginning of the Harmonization Work Programme (HWP), has maintained
the position that the assembly of a good from its parts is a substantial transformation and accordinglyhas endorsed the use of changes in tariff classifi cation (subheading, heading or splits thereof) to
reflect this view.
Benefits of using changes in tariff classification (CTC) for determining origin
It is considered that the most outstanding positive features of using CTC, as a measure of
substantial transformation, is that it is objective, readily understandable and predictable.  Exporters
would be able to determine the origin of th eir goods with certainty; reliance on subjective
interpretations of such things as eligible costs/expenses by customs administrations would be
eliminated and record keeping related to origin de termination would be minimal.  At the same time,
customs administrations could readily verify compliance in a consistent, uniform, impartial and
reasonable manner.
Problems associated with using a value-added requirement
The proponents of using value-added criteria for determining country of origin for goods
requiring the assembly of parts have not provided details concerning the method for calculating ad
valorem  percentages.  Generally, the ad valorem  percentage in value-added rules can be based on
focussing on either:
• the extent of manufacturing, processing or assembly undergone in a country - when this value-
added equals or exceeds a specified percentage of the value of the finished product, the good
acquires origin; or
• the materials or components of foreign or undetermined origin used in manufacturing the good -
where the good originates in a country if these materials or components do not exceed a specified
percentage of the value of the finished product.
For the purpose on this paper, comments will be limited to the value-added method that
compares the value of the materials imported or of undetermined origin with the value of the finished
product.G/RO/W/72
Page 2
Perhaps the most onerous problem with regard to this value-added approach is its
administrative burden - not only for exporters but also for customs administrations.  For exporters, it
will be necessary to trace the origin of all the materials and components incorporated into a given
product, including those purchased from domestic suppliers.  Obtaining this information from
domestic suppliers can be extremely difficult, particularly if it involves suppliers divulging costinginformation.  This requirement would have a notable adverse effect on the smaller
producers/exporters around the world and could negatively impact on their interest and ability to enter
export markets.  Verification of origin by customs administrations in importing countries would also
be extremely difficult (and costly), especially since verifications would have to be undertaken on the
basis of records and accounts only available in foreign countries.  Unlike preferential arrangements
where benefits can be denied for not fulfilling verification obligations, such incentives for compliance
are not obvious for the administration of non-preferential origin regimes.
Origin determinations can also be influenced by a number of factors which are outside the
theoretical scope of measuring value-added or substantial transformation.  These factors can be
significant and take on added importance with regard to “borderline” threshold determinations.  Most
important amongst these factors are fluctuating world market prices for raw materials and currencyfluctuations.  In addition, low labour cost countries are particularly discriminated against with value-
added rules, in that it is far more difficult for such countries to attain the value-added thresholds
required, even though they could subject imported materials to exactly the same production process as
a higher-cost country.  The value of imported materials can vary between countries on the basis of
differing import regimes which affect origin calculations; for example, some countries levy duties ona CIF basis whereas others do so on an FOB value.  As well, countries with higher tariff rate
structures would be disadvantaged by an origin regime based on value-added criteria.
Proponents of value-added rules have stressed that their concerns centre on conferring origin
on the “simple” assembly of parts.  However, threshold levels currently being proposed (e.g., 45%)are considered to be excessive in responding to the issue of simple assembly and reflect the general
arbitrary nature of establishing thresholds.  The use of value-added rules is appropriate for preferential
trading arrangements as they are intended to ensure that the benefits of the arrangement accrue only to
the parties of the arrangement; threshold levels in  such arrangement usually allow for accumulation of
content between the parties to the arrangement.  The use of such a standard to determine substantial
transformation for assembly in a single country for non-preferential trade is not considered
appropriate.
In general, Canada considers that accepting value-added as a primary rule for determining
origin for a large segment of assembled goods would not be trade facilitative and indeed could result
in creating new obstacles to trade.
B. S
UBMISSION BY JAPAN
In the assembly rule, Japan is against introducing any form of value-added criterion in the
harmonized non-preferential rules of origin.  The reasons for our objection are as follows:
Lack of stability and predictability as origin rule
Value-added criterion portrays the idea of conferring to a product the country of origin if a
certain calculated value exceeds a given threshold percentage (or if the certain calculated value does
not exceed a given percentage limitation).  This idea would automatically lead to incidents whereby,
should the relevant economic parameters alter, such as the cost of raw materials, the fluctuation of
exchange rates and profit margins, the country of origin of a product may vary from one to another.The value-added criterion, therefore, lacks stability and predictability as an origin rule.G/RO/W/72
Page 3
Furthermore, such superficial changes in the coun try of origin would be frequent if the origin
is determined very near to the given percentage point.  Thus, frequent changes in the country of origin
would result in increased disputes over the true origin of products.
Implications on other WTO agreements
Article 1 of the Agreement on Rules of Origin stipulates that the harmonized rules of origin
shall apply, among others, to the mark of origin and the collection of trade statistics.  In this regard, if
the value-added criterion is adopted, there would be a lot of possibilities for discretionary calculations
when determining the origin to be used, as well as some burdensome tasks required.  This would
result in creating some extra work for the purpose of changing the mark of origin of a product and
would entail a lack of accuracy in trade statistics.
Problems pointed out by business practices
Traders, who are expected to use the harmonized rules of origin, have been pointing out
problems should the value-added criterion be adopted.  These problems include the divulging ofbusiness confidentiality, such as  the prices/cost of raw materials or non-originating materials, as well
as the great difficulty to maintain price/cost data for every part and component.  This would create
trade-distorting effects as opposed to the current objective of establishing harmonized rules of origin,
i.e. facilitating trade.
Selective origin rule between the value-added criterion and the change-in-tariff-heading criterion
Japan cannot accept the possible idea of a selective enforcement of the value-added criterion
and the change-in-tariff-heading criterion, since gi ving two origin rules to a product would cause not
only unnecessary confusion among the real rule users, i.e. traders and customs officers, but also createan undue burden.
C. S
UBMISSION BY MEXICO
Background
In the discussion of the appropriate criterion to be used for determining the origin of
manufactured products obtained from assembly pro cesses, within the framework of non-preferential
rules of origin, the positions that have been taken may be divided into two main groups:  one
favouring application of the change in tariff classi fication (which means that assembly confers origin)
and the other favouring the application of value criteria to the products concerned.
The application of the criterion of change in tariff classification presents the following
advantages:
(a) It is objective.
(b) It is understandable.
(c) It is transparent.
(d) It is predictable.
(e) It excludes simple assembly.
(f) Origin is determined by the production processes applied to inputs.G/RO/W/72
Page 4
(g) It is easily administrable both for exporters and for customs authorities.
For their part, the proponents of the value criterion base their proposal on the following
points:
(a) Article 9 of the Agreement on Rules of Origin of the WTO authorizes its utilization.
(b) The criterion is designed to rule out simple assembly.
(c) It is easily administrable.
Value criterion
The value methodology, whatever it may be, stipulates the value of non-originating inputs
that may be used in the manufacture of a product.  In particular, the proposed value criterion indicates
that a product would be considered to originate in a country for non-preferential purposes where thevalue of the non-originating materials incorporated in  it does not exceed a specified percentage of the
ex-works price of the product.
With regard to the methodology for the use of the value criterion, the following points are
noted:
(1) Application of the criterion implies administrative costs for users
The methodology involves determining the value of incorporated non-originating materials
and the product value, which leads to the use of accounting information, thus requiring appropriateaccounting records to be maintained for the purpose.  In our experience of preferential agreements,
many companies whose production processes and rules of origin oblige them to use value criteria
employ staff dedicated to origin determination;  despite the additional cost this represents, it is offset
by the benefits of obtaining preferential treatment.  However, such benefits are not clear under a
non-preferential regime, at least not in all cases, and many firms will not therefore be able to devoteresources to maintaining staff exclusively for this purpose;  in many cases training costs alone, even if
the staff concerned do not devote themselves exclusively to origin determination, would constitute a
serious constraint on firms, affecting their competitiveness on external markets.
Over and above the costs involved in maintaining trained staff for this task, it is found that the
methodologies of value currently applied by the Parties vary widely.  Although many firms have
adopted methods of determining value in order to take advantage of a range of preferentialagreements, these methods are not the same under all agreements;  for example, the preferential
agreements signed by Mexico include methodologies based on the transaction value in some cases,
and on the ex-works price or even the "value of the goods" in others.  A review of the different
preferential agreements to which WTO country Members are parties reveals many instances of such
varied methods which are more burdensome for countries that are not parties to preferentialagreements or do not use criteria of value.  In this connection, the costs involved in implementing a
specific methodology are lower for the exporters which already apply that methodology, since they
are not obliged to provide additional training for staff handling this task, or to adjust their existing
accounting systems to enable the methodology to be applied with optimum facility, much less to
implement the system fully.
Given the wide range of methods used, the following question arises:  which one would entail
lower costs for exporters?  Each country would ha ve its own answer, resulting in lower costs for
producers, but this would not necessarily lead to the use of the proposed value method as it might not
be the one most widely applied.G/RO/W/72
Page 5
The foregoing leads us to review the particular characteristics of the proposal:  Why use the
ex-works price?  Why not use another methodology such as one based on the transaction value in
accordance with the Customs Valuation Code?  In the case of the proposed methodology, the
following questions immediately arise:  What recourse is available to the party determining origin ifthere is no quantified value?  And in a case involving related persons, whose relationship influences
the price?  What action will be taken in cases where the value is unacceptable?  This methodology
poses serious problems since it does not clearly define what action is to be taken in such situations.
Furthermore, in addition to the problems associated with the lack of a clear definition of
value, the proposed method requires the per unit determination of origin:  in other words, if it is
necessary to determine what inputs were incorporated in each unit produced, the application ofaverages to determine origin and the use of inventory management methods become superfluous.
This requirement is critical and extremely costly  for companies relying on suppliers of different
nationalities, since in order to ascertain whether each product originates in a specific country, they
must ensure that a specified combination of inputs was incorporated in each product, which means
that inventory management methods cannot be used and the inputs have to be separated physically, aprocedure which is very expensive and not within the means of all companies.
Even if the proposal is amended to resolve these specific problems, or if another alternative is
selected, its use would generate additional costs for those exporters in many countries who would be
obliged to include it in their accounting system.
However, the difficulties of administering the value methodology are not exclusive to
exporters, since the verification of origin is also a complex task for the administering authorities.  In
accounting terms, if the value method selected is not the one currently in use, these authorities would
have to defray the cost of training staff responsible for verification activities, and additionally to adapttheir system to handle the new procedures or create a new one.
Their difficulties are compounded by the fact that such verification activities have to be
carried out on the basis of accounting records kept by other Parties, and such verification can become
expensive if it is carried out on the spot or because each country Member applies specific accounting
definitions and procedures despite the existence of widely accepted accounting principles.  In
addition, unlike preferential agreements where the authority can denounce the agreement if averification of origin determines that the product is a non-originating product or if the verification
cannot be carried out because of obstruction by the exporter, in the case of a non-preferential regime it
is not clear that such incentives exist.
The foregoing leads to the conclusion that the calculation of value is an expensive exercise for
producers, owing to the accounting problems and ad ministrative costs involved in implementing an
accounting system based on the determination of origin.  While it is true that value criteria are applied
in various preferential agreements, and that they are considered very helpful in that context, the
incentives for their use in a non-preferential system are not the same.  In the case of a preferential
agreement, if the additional costs imposed on a firm by the maintenance of an accounting system todetermine origin are greater than the benefits of obtaining preferential treatment, the firm may opt not
to request the preference.  Under a non-preferential system, the exporter does not have an equivalent
option in all cases, hence the firm may face the dilemma of whether or not to export if the costs are
too high.  In other words, the additional administrative costs may become a trade barrier for firms
unable to defray them.
Calculating value is also a costly exercise for the administering authorities, owing to the cost
of implementing or adjusting the applicable system where it is not the one used by the authority
concerned, apart from the administrative costs entailed by the system, including maintenance of staffG/RO/W/72
Page 6
with relevant training, particularly in cases where an authority is involved in the determination of
origin, and the cost of verification activities.
(2) Application of the value criterion leads to different results in the determination of origin
The methodology for determining origin by means of a value criterion is not neutral inasmuch
as it produces different results relative to similar production processes.  The use of this methodology
would make it possible for the determination of a product's origin to be influenced by other factors -
in addition to the production process as such and the composition of inputs - such as profits, royalties
and exchange rate fluctuations between currencies.  For example, it would be possible for products
manufactured in a third country, and subjected to a non-substantial finishing process to be considered
as originating in a final country because the price includes a high royalty or profit component.
Moreover, the fact that the cost of inputs or labour is different in the different WTO country
Members means that this methodology would not produce the same determination of origin in respect
of similar production processes;  for example, given the same input costs and the same production
process but different labour costs for identical products, only the product with higher labour costsmight be considered to originate in the country concerned, if factor proportions are not maintained.
This constitutes a discriminatory measure against countries with lower labour costs (as in the case of
Mexico or developing countries), by making it diffic ult to comply with the re levant rules of origin,
since such compliance would entail a greater number of production processes than in the case of a
country with high labour costs.
Another problem with the value methodology concerns the use of accounting information:
despite the existence of widely accepted accounting principles, definitions in this field are not
harmonized among all country Members.  For example, one accounting method, peculiar to Mexico,
takes account of inflation;  then again, the method of depreciating machinery and the allocation of the
related costs per product are not standardized among the Parties.  These differences affect the
determination of origin, as it is not clear how similar results can be obtained in different countries,
even if the production process is identical.
In addition to the above, the determination of origin would also be affected by different
import regimes, since the value of imported inputs varies according to whether a c.i.f. or f.ob. basis is
applied.  In particular, the proposed methodology uses a c.i.f. basis, which would have the effect ofdiverting trade in the imported inputs, since produc ts could be supplied at lower cost from nearby
countries than from more distant countries.  This would also increase the possibility of the final
product being considered to originate in the country of origin of the inputs and not in the country
where they were made into a product with distinctive characteristics.
In this connection, it can be concluded that the application of a value criterion does not meet
the required objective of neutrality, since the same operations do not necessarily produce the same
result, given variations among countries and even among enterprises based in the same country.
The proposed methodology poses the following additional problems:(a) In order to determine the origin of a product, the exporter uses the value of the non-
originating materials and components incorporated therein, whether or not they were
produced within the country concerned.  According to the proposed methodology, the
value of inputs not originating in a third country would be their customs value or thefirst price paid for those materials within the country which uses them.  However, the
methodology does not cover the eventuality of internal operations;  in other words, in
a case where a producer in country X purchases a non-originating input produced inG/RO/W/72
Page 7
the same country, how is the value of the originating materials and the processes
carried out in the country to be determined?
(b) The proposed percentages are very high.  If what is being established are rules for
determining the origin of a product, which would not yield preferential tariff benefits,what is the purpose of applying value-added percentages as high as 60 per cent for a
country?  Such stiff requirements are conceptually inconsistent, since in many cases
they would exceed the requirements of certain preferential agreements signed by the
proponent countries.  In other words, a point would be reached where products which
could be granted a tariff preference in the importing country, because they satisfy the
applicable rules of origin under a preferential agreement signed with the exporting
country, could not, however, be registered as originating in the exporting countryunder non-preferential rules.
(c) It has been pointed out that the value method would be the best possible option if the
aim is to exclude simple assembly.  However, to date no one has explained what is
meant by simple assembly in the context of this proposal, nor what process orprocesses it is wished to exclude.  Further, a more serious issue arises in this
connection:  is it possible to speak of a uniform definition of simple assembly
applicable to all products?
In our opinion, a standard definition for all products subject to an assembly process could, for
one thing, exclude substantial operations in the working of a specific product, while at the same time
leaving out of consideration many inadequate transformations.  For this reason, the processes that it is
wished to leave out of consideration must be defined with due regard for the particularities of the
production process applicable to each product, and it is accordingly possible to rule out such
operations by using a change of tariff classification criterion appropriate to each product.
To sum up, we consider that the value methodology, in whatever form, and in particular the
one proposed by certain countries, is a methodology which is costly to administer, leads to uneven
results in terms of origin determination, is not objective, is neither transparent nor predictable, and in
some cases could entail failure to exclude "simple assembly".
Change in tariff classification
The use of the criterion of change in tariff classification facilitates a standard interpretation of
origin requirements, thus making the system as simple as possible since it is based on production
processes applied to inputs and not on a value determined in a non-uniform manner.
The application of this method is transparent, clear and neutral, since it indicates what
minimum transformations are necessary for a good to be considered an originating good;  the only
information required is the application to import the non-originating material so as to determine
whether the processes carried out are substantial or not.  In the case of internal transactions, if the
material used is non-originating material, the only re quirement imposed on the supplier is to provide
the above-mentioned information, i.e. the tariff classification of those non-originating inputs that were
used in the manufacturing process.  Such transformations are country-neutral, since the same
production process and combination of inputs will produce the same result.  This criterion is not
influenced by the exchange rate, changes in the co st of foreign inputs, fluctuations in the proportions
of the factors of production, changes in profits and royalties, or other factors unrelated to theproduction process.
Furthermore, the costs involved are lower sin ce it is not necessary for the entire accounting
and administrative apparatus to be used to apply a value criterion for the purposes of both exportersG/RO/W/72
Page 8
and administrative authorities.  Such a system possesses extremely valuable qualities for an agreement
involving so many countries, especially in view of  the diversity of countries and of the agreements
among them.
In this same connection, we take the view that a change in tariff classification rules out simple
assembly because, under the Harmonized System, if the essential parts of a product are imported, they
are not only classified as parts, but as the product, which necessarily implies the working of one or
more of those parts in order for the product to originate in the same country.
For all of the above reasons, we fully support the use of the criterion of a change in tariff
classification (which means that assembly confers origin) in preference to a value criterion, because
the latter poses technical and conceptual problems in terms of its definition and application, andbecause it does not meet the basic requirements of being objective, uniform, understandable and
predictable, apart from the fact that the high cost of application would have restrictive or disruptive
effects on international trade.  On the other hand, the change of classification criterion is easy to
apply, entails minimum costs, and is clear inasmuch as the requirements are known and not subject to
variation by factors external to the production process, and above all because it is applied uniformlyand independently of the country in which it is used.
D. S
UBMISSION BY SWITZERLAND
HS chapters 84, 85 and 90 (machinery)
Issue No. 1: great importance has the general assembly rule, this rule will also solve most of
the remaining open specific issues. Again, Switzerland is still convinced that the compromise
offered in March is the only viable way to go accommodating concerns from both sides
introducing an exclusion list with some simple operations. The double approach value
added/CTSH will also leave enough place to the operators to choose the system known tothem and leave them free to change to the system they consider easier to apply.
HS chapters 93 to 97 (other articles)
General remark: in favour to recognize substantial assembly only, the rules proposed are on a
good way however.
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