G/RO/W/178  
 
9 October 2018  
(18-6225) Page: 1/4 
Committee on Rules of Origin  Original: English  
 
PREFERENTIAL RULES O F ORIGIN FOR LEAST -DEVELOPED COUNTRIES  
RULES OF ORIGIN BASE D ON THE CRITERION OF CHA NGE OF TARIFF CLASSIFICATI ON 
BACKGROUND NOTE BY THE SECRETARIAT1 
1  INTRODUCTION  
1.1.  When a product is manufactured in two or more countries, different criteria  help identify 
meaningful manufacturing processes that can be considered to have "substantially transformed" or 
"sufficiently processed" the product in question . The outcome of such transformation is a new 
product the origin of which can be attribu ted to a single country. Three  main types of criteria  can be 
used to draft substantial transformation rules of origin:  
(i) a criterion based on a change of tariff classification: that is , a comparison between the tariff 
classification of the final product  and the tariff classification of the inputs or raw materials 
used;  
(ii) a criterion based on the value of the material: that is, a threshold defining the minimum value 
that needs to be added locally or the maximum value of foreign inputs that may be used;  
(iii) a criterion based on specific manufacturing operations: that is, the enumeration of specific 
manufacturing or processing operations that must occur within a country.  
1.2.  The Bali (WT/L/917) and Nairobi (WT/L/917/Add.1) Ministerial Decisions on preferential rules 
of origin contain specific provisions covering these three criteria. This note focuses on the provisions 
and existing national practices in relation to the change of tariff classification criterion.  
2  THE CHANGE OF TARIFF  CLASSIFICATION (CTC ) CRITERION  
2.1.  The change of tariff classification (CTC) criterion considers differences in tariff classification  
between a final product and the materials used in the manufacture of the product. It identifies 
minimum requirements that must be met in the classification of non-originating materials for origin 
to change. In general, non-originating materials will be deemed to have undergone a "substantial 
transformation" when their tarif f classification is different from the ensuing final product  for the 
manufacture of which they were used . 
2.2.  In designing rules using the CTC criterion, the following  technical terms are commonly used.  
- Tariff classification  refers to the taxonomy  of goods under specific chapter s, heading s, or 
sub-heading s in the Harmonized System (HS) .2 The HS provides a coding system that is based 
on a hierarchical structure, starting with section  at the highest level , and getting more specific 
at chapter , heading  and sub-heading  levels. Its nomenclature  consists of 21 sections, 
                                                
1 This document has been prepared under the Secretariat's own responsibility and is without prejudice 
to the positions of Members or to their rights and obligations under the WTO.  
2 Harmonized  System (HS) is the short form for the Harmonized Commodity Description and Coding 
System,  a multipurpose international product nomenclature developed by the World Customs Organization 
(WCO).  More detailed information on the HS Convention and the HS Nomenclature 2017 Edition can be found 
on the WCO's website:  http://www.wcoomd.org/en/topics/nom enclature/instrument -and-
tools/hs_convention.aspx . G/RO/W/178  
 
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  arranged in  97 chapters, and further divided into  around 1 ,200 four-digit headings , and 
5,000 six-digit sub -headings . All products  of a single industry are generally grouped together 
in one chapter or a group of chapters. Within the same chapter, headings and sub -headings 
are generally arranged by stage of processing, starting with raw materials and progressing to 
finished products3; 
- Change in tariff classification means that the tariff classification  of the final product is different 
from the tariff classification of all non -originating materials used. The minimum requirement 
of change is defined by the rule of origin and may take place at  different levels: chapter 
(two-digit level), hea ding (four -digit level), or sub-heading  (six-digit level).  In other words:  
- Change in chapter (C C) means that all non-originating materials are not classified  in 
the same chapter as the final product ; 
- Change in tariff heading (CTH)  means  that all non-originating materials are not 
classified in the same heading as the final product ; 
- Change in tariff sub -heading (CTSH ) means that all non-originating materials are not 
classified in the same sub -heading as the final product ; 
- Non-originating materia ls refers to all raw materials , inputs , or components , that do not 
originate  in the country of manufacturing or the country where the last substantial 
transformation has occurred (that is, the preference -beneficiary LDC). Materials of 
indeterminate  origin  will also be considered as non-originating . A change of tariff classification 
rule focuses only on non-originating materials . That is, when verifying if the rule has been 
met, only non -originating materials must have undergo ne the minimum prescribed tariff 
classification  change ; 
- Tolerance  (or de minimis ) rule is a derogation  for products contain ing minor  amounts  of 
non-originating materials that have not met the minimum changes stipulated in the rule of 
origin. Sometimes the tolerance rule also applies to sub -headings, headings , or chapters , that 
are excluded from consideration, or to the sub -headings, headings or chapters that are 
identical to those  of the final product4; 
- Insufficient operations  rules (or minimum processing  rules) refer to simple  or minimal working 
processes , such as storage or packaging , that do not confer origin . These operations are 
disqualified for the purpose of origin determination even if they  result in change s in tariff 
classification.  
2.3.  The CTC  criterion can be used to establish  general rules of origin for all products, or specific 
rules of origin for certain products or sect ors. The stringency of rules of origin using this criterion 
depends on the tariff classification changes  required. A change at chapter level is the most 
demanding, while a change at sub -heading level is the least demanding, thus the order of rules in 
descending stringency is CC, CTH , and CTSH. Moreover, the stringency also depends upon additional 
requirements  that may be attached to each individual rule, which are often provided as restrictions 
or exclusions.  
2.4.  An example  of such additional requireme nts, which may be combined with CTC  rules, can be 
found in t he rule for heading  18.06 in a Member's  Generalized System of Preferences , which requires  
"chocolate and other food preparations containing cocoa" to be "manufactured from produ cts other 
than those of heading  18.06, provided t hat the value of non -originating products used does not 
exceed 40% of  the value of the products and the sugar and milk (including cream) used is 
originating."  This rule not only sets a value threshold in addition to  the CTC  rule, but also demands 
specifically that the sugar and milk used in the manufacture be originating in  the beneficiary country.  
                                                
3 It is common for many countries to use two additional digits for tariff duties and another two  digits for 
more specificity  in their trade statistics. These additional breakouts beyond the six -digit codes  are referred to 
as national tari ff lines, or national breakouts . 
4 For instance, the rule for Chapter  32 in a Member's  GSP scheme provides: " Manufacture from 
materials of any heading, except that of the product. However, materials of the same heading as t he product 
may be used, provided that their total value does not exceed 20% of the ex -works price of the product."  G/RO/W/178  
 
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  2.5.  The CTC  criterion is widely used because it is based on  the HS, a comprehensive and widely 
used nomenclature . Since the HS is a common language for traders  and customs officers worldwide , 
rules based on it should  have a coherent a nd uniform application . As a consequence, the outcome 
of the application of CTC  rules of origin is generally objective and predictable . This criterion can also 
be used across  all product categories , with specific adaptations to specific circumstances . For these 
reasons , the CTC  criterion was the criterion of choice for the harmonization of non-preferential rules 
of origin  under the WTO  Agreement on Rules of Origin .5 
2.6.  However, this criterion  also has its shortcomings, linked mostly to the structure of the 
HS convention itself . In fact, the HS was not designed for origin determination purposes  and may 
impose limitations when raw materials and final products are classified in the same classification 
unit (i.e. when both the unprocessed materials and the processe d final product have the same tariff 
classification).  For this reason, drafting and applying CTC  rules of origin require s extensive 
knowledge not only of the HS  convention itself , but also of the manufacturing processes of specific 
products or sectors . In addition, there remains a risk of classification divergence, which means that 
the authorities in the exporting and importing countries may disagree on the tariff classification of 
inputs and final products.  Finally, a significant complication is that the HS Nomenclature  is amended 
regularly , creating a need to update CTC  rules of origin  accordingly . 
3  BENCHMARK S OF THE BALI AND THE  NAIROBI MINISTERIAL  DECISIONS  
3.1.  The Preamble of the Bali M inisterial Decision (WT/MIN(13)/42) states that "the objectives of 
transparent and simple rules of origin that contribute to facilitating market access of LDC  products 
can be achieved in a variety of ways, and that no one method is preferred to another."  Paragraph  1.2 
of this Decision recommends that preferential rules of or igin "should be as transparent, simple and 
objective as possible. It is recognized that other than wholly obtained products, origin may be 
conferred by substantial or sufficient transformation, which can be defined in a number of ways, 
including through: ( a) ad valorem percentage criterion; (b)  change of tariff classification; and 
(c) specific manufacturing or processing operation. It is also recognized that these methods in 
certain cases may be used in combination."  
3.2.  Paragraph  1.5 of the Decision also specifies that , upon applying rules based on the change of 
tariff classification, "a substantial or sufficient transformation should  generally allow the use of 
non-originating inputs as long as an article of a different heading or sub -heading was created f rom 
those inputs in an LDC, notwithstanding that product specific rules with different requirements may 
also be more appropriate. " 
3.3.  Building upon  these recommendations, subparagraph  1.2 (a) of the Nairobi Ministerial Decision 
requires that, as a general pri nciple, such rules shall "allow for a simple change of tariff heading or 
change of tariff sub -heading."  The requirement of "simple change" is partly interpreted in 
subparagraph  1.2(b) of the Decision, which provides that preference -granting Members  shall 
"eliminate all exclusions or restrictions to change of tariff classification rules," except where they 
deem that "such exclusions or restrictions are needed, including to ensure that a substantial 
transformation occurs."  The Decision further  requires prefe rence -granting Members  to "introduce, 
where appropriate, a tolerance allowance so th at inputs from the same heading or sub -heading may 
be used. " 
3.4.  In short, the benchmarks provided by the Nairobi Decision include: the adoption of a simple 
change of tariff cl assification  (CTH or  CTSH) , avoiding exclusions and restrictions  whenever possible , 
accompanied by an appropriate tolerance allowance  for inputs that do not fulfil the requirements . 
4  DESCRIPTION OF PREFERENCE -GRANTING MEMBERS' PR ACTICES  
4.1.  Currently , some  preference -granting Members  apply  the CTC as a general or main rule, 
including  China (as an alternative to the ad valorem  criterion) ; India ( in combination with the 
ad valorem  criterion) ; Japan ; Norway (excluding products of Chapters  50-63); and  Switzerland 
(as the general rule , for products of Chapter s 1-24). Other  Members  generally apply the CTH  rule, 
with the exception of India, which applies the CTSH  rule. The EU applies the CTC  criterion in its 
                                                
5 See Agreement  on Rules of Origin, Art icle 9(2)(c).  G/RO/W/178  
 
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  product specific rules of origin, either separat ely or in combination/alternation with the ad valorem  
percentage criterion.  
4.2.  All other preference -granting  Members , that have notified their rules of origin to the 
Secretariat, do not apply this criterion at all  in their preferential rules of origin for LDC s, including 
Australia;  Canada;  Korea;  New Zealand;  Russia;  Chinese Taipei ; Thailand;  and the US . 
4.3.  Most preference -granting Members  that apply this criterion  still maintain  various  exclusions or 
restrictions ; these  commonly take the form of provisions precluding materials of specific chapters or 
headings, or provisions setting additional requirements to the change in tariff classification. 
However,  the legislation s of China and India, for example, allow for a simple change in tariff 
classification without any additional requirements . 
4.4.  All preference -granting Members  that apply this criterion have also provide d indicative lists of 
insufficient (minimal ) operations in their rules of origin.  With regard  to the de minimis  rule, most 
preference -granting Members  that apply  the CTC  criterion also allow for tolerance levels , except for 
China and India,  who do not indicate  such allowances  in their legislations or in their notification . 
4.5.  A summary of practices in preference -granting countries is provided in the tables below6: 
Table 1: The use of the CTC criterion  
Preference -
granting 
member  In general 
rules  In product 
specific rules  Restrictions  
or exclusions  Note  
China  CTH No No The CTC criterion is used as an 
alternative to the ad valorem  
percentage criterion  
EU No Mostly CTH  Yes  
India CTSH  No No The CTC criterion is used in  
combination with the ad valorem  
rule 
Japan  CTH CC/CTH Yes  
Norway  CTH Mostly CTH  Yes  
Switzerland  CTH CTH/CTSH  Yes  
 
Table 2:  Tolerance ( de minimis ) allowance  
 
Preference -
granting 
member  Tolerance allowance  Note  
China  No  
EU 15% of weight  (applied to 
HS Chapters  2, 4-24) or 15% of the 
ex-works price (applied to other 
products).  Specific tolerances applicable to textile products 
falling within HS  Chapters  50 to 63 (in general , 10% 
of the total weight of all the basic textile materials 
used). 
India No  
Japan  10% of weight  Applied  to goods of HS  Chapters  50-63. 
Norway  10 or 15% of ex -works price  The rule is not ap plied to textile products of 
HS Chapters  50-63. 
The tolerance  can be 20% of the ex -works price for 
some products  in the specific rules.  
Switzerland  15% of ex -works price  The tolerance can be 20% of the ex -works price for 
some products  in the specific rules.  
 
A tolerance of 10% of the total weight applies to 
mixed products made from at least two basic textile 
materials.  
 
__________  
 
                                                
6 The information  is extracted from the notifications by preference -granting members under the Nairobi 
Ministerial Decision, based on the template adopted by the WTO Committee on Rules of Origin (G/RO/LDC/* 
and template adopted in document G/RO/84) .