RESTRICTED
WORLD TRADE G/RO/W/20
7March 1997
ORGANIZATION(97-0929)
Original: English Committee onRules ofOrigin
REVISED PROPOSAL BYTHE UNITED STATES PURSUANT TO
ARTICLE 9.3(a) OFTHE AGREEMENT ONRULES OFORIGIN
TheCommittee onRules ofOrigin, atitsmeeting on6February 1997, agreed thatthefollowing
communication from thePermanent Mission oftheUnited States should becirculated toMembers.
Theinitial proposal bytheUnited States onthismatter iscontained indocument G/RO/W/15.
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Attheupcoming meetings oftheWTO Committee onRules ofOrigin (Committee) therewill
beconsideration ofaUSproposal fora"Starting Point" forapproaching theanalysis required bythe
Harmonization Work Programme under theAgreement onRules ofOrigin (Agreement), particularly
attheWCO 'sTechnical Committee onRules ofOrigin (Technical Committee). TheUSproposal is
intended toenhance theongoing work byadding efficiency tothediscussions, without changing any
oftheprocedures already underway. Theproposal isalsointended tohelpensure thattheharmonization
work isconsistent withtheintent oftheAgreement. TheUSproposal alsoreflects ongoing concern
overtheneedtoavoid theuseofrulesoforigin thatinvolve requiring avalue content percentage (value
test).
Under themandate oftheAgreement, theTechnical Committee iscurrently providing the
Committee withitsinterpretations andopinions. Likewise, theCommittee isgiving itsongoing
consideration tothose interpretations andopinions oftheTechnical Committee. Pursuant toArticle 9
oftheAgreement, theCommittee mayrequest theTechnical Committee "torefine orelaborate itswork
and/or todevelop newapproaches".
USproposal foraStarting Point fororigin harmonization discussions
- Thedevelopment ofproduct-specific rulesiscurrently being conducted under theterms ofthe
Agreement 'ssecond phase oftheHarmonization Work Programme. Inaccordance withtheAgreement,
thistaskincludes considering andelaborating upon, onthebasis ofthecriterion ofsubstantial
transformation, "theuseofchange intariff subheading orheading when developing rules oforigin
forparticular products oraproduct sector and,ifappropriate, theminimum change within the
nomenclature thatmeets thiscriterion" (i.e.thecriterion ofsubstantial transformation).
- While itistruethattheHarmonized System (HS)wasnotoriginally developed withanintent
asabasisfororigin rules, itisalready usedthroughout theworld forpreferential andnon-preferential
rulesoforigin. Thishasdeveloped byvirtue ofthefactthattheHSestablishes aunique nomenclature
andcoding system forallgoods thataretraded, withlong-standing andwell-established rules for
interpretation.
- TheAgreement specifically reflects anintent fortheparamount useofchange intariff
classificationindevelopingmultilateralnon-preferentialrulesoforigin.Moreimportantly,theAgreement
mandates consideration oftheminimum change within theHSnomenclature thatrepresents asubstantialG/RO/W/20
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transformation. Thismakes clearthatarigorous value testasruleoforigin runscounter totheintent
oftheAgreement.
AStarting Point toprovide focus fordiscussions
- Theproposed Starting Point involves thefollowing: thediscussion would simply startwith
theproposition thatsubstantial transformation isdeemed tohavetaken place when assembly orother
processing operation results inachange fromtheHSnomenclature category providing for"parts" to
atariff category providing forthe"goods". Thiswould beconsistent withtheAgreement-mandated
consideration of"theminimum change within thenomenclature" which meets thecriterion ofsubstantial
transformation.
- Forcertain products, anyMember mayhaveaviewdiffering fromtheStarting Point proposition
thatorigin isconfirmed when anoperation brings about atransformation of"parts" intoa"product".
TheMember could present aspecific reason forthisview totheCommittees inthecourse ofthe
discussion onthespecific ruleoforigin involved.
- Such aStarting Point would provide acommon analytical framework forallMembers and
forboththeCommittee andtheTechnical Committee. Itwould alsosetadirection fordiscussion and
consideration bytheMembers. Thepaceandefficiency oftheWork Programme would beincreased,
consistent withtheanalytical methodology mandated under theAgreement.
TheStarting Point would notdisturb procedures
- TheuseofaStarting Point would notinvolve disturbing results already reached, andsucha
Starting Point would havenoeffect onMembers 'participation indiscussions, norinthesubstance
orformat oftheresults ofthework being donebytheTechnical Committee.
- More importantly, itwould ensure thatthefocus oftheharmonization negotiations isonthe
products themselves, byconsidering -asmandated bytheAgreement -theminimum change intariff
classification thatarticulates asubstantial transformation.
- ThisStarting Point fortheharmonization discussions istobecontrasted withaninappropriate
focus -ashasbeensuggested bysome Members -onhow"sophisticated" or"complex" or"substantial"
aparticular manufacturing process is.Such afocus which ignores theeffect thattakes place onthe
product itself (i.e.thesubstantial transformation of"parts" intoa"product") willbring about rules
oforigin -suchasavalue test-thataredisruptive totradeandcontrary totheintent oftheAgreement.
- TheuseofaStarting Point would advance thefundamental intent oftheAgreement, which
istoensure that"rules oforigin themselves donotcreate unnecessary obstacles totrade" and"are
prepared inanimpartial, transparent, predictable andconsistent manner".
Difficulties withavalue testasanon-preferential ruleoforigin
- Inthisregard, weareaware thatsome participants intheHarmonization Work Programme
areseeking avalue testasamultilateral ruleoforigin forcertain products, sucha45percentdomestic
content testforproducts intheelectronics sector. Thisisamatter ofconcern because oftheuncertainty,
complexity andcostburdens resulting from theuseofsuchavalue testasaruleoforigin.G/RO/W/20
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Costburden ontrading community
- Implementation ofavalue testcanbring about asignificant resource burden oncustoms
administrations. More importantly, withregard tothecompliance burden presented tothetrading
community therehavebeenestimates thatsucharuleoforigin -regardless ofthepercentage required
bythevalue testruleoforigin -istheequivalent ofanadditional twotofivepercenttariff. This
isbecause ofthecostly systems necessary totrack inputs andother costs.
- TheHarmonization Work Programme mustbeundertaken inanoutward-looking fashion, with
market access concerns inmind, rather thaninward-looking withanintent tomaintain outdated,
inefficient andtrade-distorting practices. Theresults oftheharmonization should berulesthatallow
origin determinations tobemade easily andtransparently.
Complex, withinconsistent results
- Ithasbeensuggested thatavalue testasaruleoforigin would besimple. Infact,ourexperience
shows thetheory issimple, theapplication isnot.Avalue testasaruleoforigin presents theneed
totrackthecostofinputs andkeepextensive accounting andfinancial records, adding anunwarranted
costly burden tomanufacturing.
- Theresults ofavalue testasaruleoforigin areoften inconsistent andunpredictable. Many
manufacturers utilize global sourcing, particularly withfungible inputs. Changes inthecostofmaterials
combined withexchange ratefluctuation canmean thataparticular production operation mayconfer
onecountry oforigin oneday,butadifferent country oforigin thenextday.
- Thenon-preferentialrulesoforiginresultingfromtheongoingHarmonizationWorkProgramme
willbeusedmultilaterally. Inconsistent determinations ofcountry oforigin thatmayresult from a
multilateralvaluetestruleoforiginwillbecontrarytotheintentoftheAgreementandtheHarmonization
Work Programme.
Same product, same process, butwithdifferent origin results
- Avalue testasaruleoforigin could beapplied tothesameproduct made bythesame process,
butcould leadtodifferent results incountries thathavediffering costsofproduction. Inthiswayvalue
testasaruleoforigin mayactually reward lessefficient, more costly production. Inparticular, such
arulemaywork tothedisadvantage ofdeveloping countries, where labour costsmaybelowandmake
itdifficult tomeetthevalue testifanysignificant amount offoreign inputs areused.
- Under avalue testfordetermining country oforigin, issues overallocation continually arise
withregard toeachcostinvolved intheproduction ofagood, creating aneedforcomplex rules of
inclusion andexclusion. Oneexample ofthisproblem relates todetermining theproportion ofoverhead
costsattributable toproduction, ordetermining whether suchcosts, iffullyallocated topastproduction,
cannot beallocated tofuture production ofexported goods.
- Thevalue testmaynotreflect thelevelofproduction thatoccurs inaparticular country, since
theresults maybemore dependent oncurrency exchange ratesandswings inthecostsofrawmaterials.
Assuch, thevalue testdoesnotproduce consistent results, andmeans thatitsuseasamultilateral
ruleoforigin would notbring certainty tothetrading community.G/RO/W/20
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Implementation resources
- Significant resources onthepartofboththeprivate sector andcustoms administrations are
required toensure compliance withvalue testrulesoforigin, including development ofagreed-upon
accounting controls andanalysing andverifying costinformation.
- Customs administrations arepresented withdifficulty when verifying orrefuting origin claims
byanon-domestic manufacturer under avalue testruleoforigin. Because ofthecomplexities and
uncertainties involved, avalue testasanon-preferential ruleoforigin provides opportunities for
manipulation inorder tocircumvent trade laws, andalsoprovides ample potential fortrade disputes
overorigin determinations.
- Allofthese difficulties mean thatavalue testasamultilateral non-preferential ruleoforigin
could undermine theintended benefits oftheresults ofthework under theAgreement.