WORLD TRADE
ORGANIZATIONG/RO/30
22 January 1999
(99-0229)
Committee on Rules of Origin
UNRESOLVED ISSUES FOR DECISION BY THE
COMMITTEE ON RULES OF ORIGIN
Overall Architecture of the Harmonized Rules of Origin
The Technical Committee on Rules of Origin has submitted to the Committee on Rules of
Origin (CRO) unresolved issues for decision by the CRO concerning the overall architecture of the
harmonized rules of origin.  The unresolved issues are herewith circulated to Members.
_______________
The CRO is invited to decide which approach is most appropriate for the articulation of the
harmonized rules of origin.
ISSUE :  When are the residual rules to be applied: when the primary rules applicable to the
good have not been satisfied in any country involved in the production of the good, or,
when the primary rules applic able to the good have not been satisfied only in the
country where the last production process has taken place?
This referral stems from three differing approaches to the application of origin conferring
primary rules.
The key difference is that under Option A the pr ocess of applying primary origin conferring
rules does not stop until it has been determined that  the applicable rule has not been satisfied with
respect to any country.  Under Options B and C the primary origin conferring rule(s) are only applied
with respect to the good of which the origin has to be  determined.  If the primary rule is not satisfied in
the country in which this good has been produced, the origin of that particular good is determinedunder the applicable residual rule.
Questions Option A Options B and C
What is the procedure used
to determine the country of
origin of a good which is to
be exported from thecountry in which it was
produced?Apply Appendix 1 first.  If origin is
not determined, the primary rule
applicable to the good determines
the origin.Apply Appendix 1 first.  If
origin is not determined, the
primary rule applicable to the
good determines the origin.G/RO/30
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When the primary rule
applicable to the good has
not been satisfied in the
country of export, how is
the origin of the good to bedetermined?The primary rule shall be applied in
any preceding countries.  The
country of origin is the country
where the good last satisfied theprimary rule.
If the production of the good does
not satisfy the primary rule, the
residual rule shall be applied to
determine the country of origin of
that particular good.If the production of the good
does not satisfy the primary
rule, the residual rule shall be
applied to determine the countryof origin of that particular good.
Note 1:  In Option A the good is defined within the categories of the HS as agreed by the TCRO.  In
Options B and C the good is any good subject to a production process in the exporting
country.
Note 2:  Option C differs from B only in the content of proposed residual rules.Note 3:  Final detail of the residual rules are not provided by proponents of all proposals.
Illustrative example is annexed for ea sy comparison between the options.
OPTION A:    Residual rules are to be applied only when none of the primary origin conferring
primary rules applicable to the good is satisfied in any country involved in the
production of the good.
1. Option A reflects the mandate of the Agreement on Rules of Origin that origin is to be
determined by application of rules based on the principle of substantial transformation as expressed,
for example, as a change of classification in the Harmonized System.  The Agreement on Rules of
Origin establishes a preference for the use of change in classification as the sole criteria fordetermining whether a substantial transformation has occurred.  See paragraph 2(c)(iii) of Article 9 to
the Agreement which provides:  “…[W]here the exclusive use of the HS nomenclature does not allow
for the expression of substantial transformation, the Technical Committee … shall consider and
elaborate upon, on the basis of the criterion of substantial transformation, the use, in a supplementary
or exclusive manner, of other requirements…”
2. Primary rules were prepared based on whether a change in HS classification or the occurrence
of a particular process of manufacture did or did not result in a substantial transformation of the
materials in the good.  These rules are explicitly based on the HS classification of the subject good.
To limit their application only to the country of last production is arbitrary and inconsistent with theintention of the Agreement.  Only if the production of a good has not satisfied the applicable primary
rule in any country involved in its production should  one need to resort to residual rules to determine
the origin of the good.  Obviously, the rule applicable to a good is the rule appropriate to its
classification under the Harmonized System.  Residual  rules are only to be developed for and applied
in those limited situations where the primary rules do not result in an origin determination for the good
based on application of the primary rules.
3. Residual rules are intended to ensure that an or igin determination is made in every case.  They
do not always reflect a substantial transformation for the good itself.
4. Application of the primary rules applicable to the good to any country involved in the
production of the good will achieve the results intended by the primary rules.  In addition, suchG/RO/30
Page 3
application will result in consistent origin outcomes irrespective of the order of manufacture or place
of final shipment.  Limiting the application of primary rules only to the last country of manufacture
will often yield outcomes not intended by the Agreement or by the TCRO as the residual rules may be
based on origin criteria different from the primary rule criteria.  For example, if a good is shipped to a
third country in which it undergoes a non-origin conferring process of manufacture, it will be subjectto a different rule than if it were shipped directly to the country of final consumption.  This approach
allows origin to be conferred based on unwarranted deflections of trade.  Such a result would be trade
distorting and contrary to Article 2 (c) of the Agreement.
5. The application of primary rules provides greater certainty and predictability of result than do
residual rules.
6. Customs and traders will be able to apply the primary rules regardless of the country where in
the chain of manufacture the primary rules are satisfied for a good since origin declarations or other
indications of origin are prepared in the normal course of business and accompany the goods as they
move from country to country.
7. Application of the primary rules as suggested in this option will maximize the use of origin
rules based on change in classification.  This method facilitates the origin determination as traders and
Customs must already indicate the classification of goods under the HS for tariff and other purposes.
Resort to classification of the good is an easy and useful means for the articulation of origin rules.
8. Residual rules, many of which may be based on value standards, are in many instances more
difficult to apply.   Use of value standards requires information from foreign producers which may be
difficult or time-consuming to obtain.  Determining the cost of originating components when there is
no transaction value (i.e., when the material is captively obtained) is subject to the vagaries of
accounting systems which may vary from company to company.  Further, value standards areinfluenced by currency fluctuations and other variables.  Such standards suffer from a lack of
predictability.
9. The residual rules should be applied only when no country has satisfied the primary origin
conferring rules applicable to the good.
10. The relevant rules in the architecture of the Harmonized Non-Preferential Rules of Origin
should provide :
General Rule 4:
1. The country of origin of a good shall be determined in accordance with the provisions
of paragraph 2 of this General Rule, applied in sequence.
2. The country of origin of a good is the country in which:
(a) The good is wholly obtained as defined in Appendix 1;
(b) The good satisfies the applicable rule set forth in Appendix 2;
Paragraph 2 of Appendix 2:
2. The country of origin of a good shall be determined in accordance with the following
subparagraphs, applied in sequence:
(a) the [last] country in which an origin conferring primary rule in this Appendix
applicable to the good was [last] satisfied;
(b) the [last] country in which a residual rule specified at a Chapter level  (Sec) in this
Appendix applicable to the good was [last] satisfied;G/RO/30
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[(c) the [last] country in which a rule set out below was [last] satisfied:]
(GENERAL RESIDUAL RULES YET TO BE DETERMINED)    (US) (CAN) (JPN)
(AUS) (SG) (SEN) (NZ) (HK) (EGY) (ARG) (THA) (COL)
OPTION B: Residual rules are to be applied if none of the primary rules applicable to the
good is satisfied  in the country where the last production process has taken place
11. Option B reflects the requirement of the Agreement on Rules of Origin that when more than
one country is concerned in the production of the good, Rules of Origin should provide for the country
to be determined as the origin of that particular good on the basis of the criterion of substantial
transformation.
12. Primary rules are based on that criterion.  They are applied to the good under consideration as
it results from the processing or manufacturing carried out in the country of production.  Their
application shall be limited to that particular good.
13. Option B states that primary rules shall only apply to the good of which the origin has to be
determined.  Therefore, when the last transformation carried out in the country of production of that
good is not substantial, origin is determined by means of residual rules.
14. Application of the primary rules to the good in a previous stage in upstream countries involved
in the production or manufacturing of the good of which the origin has to be determined, will result inorigin outcomes which, contrary to the mandate of the Agreement, may disregard the country where
the last substantial transformation has been carried out.
15. Rules of Origin themselves should not create unnecessary obstacles to trade.
16. Determination of the origin of a particular good by applying the primary rules for that good to
processing or manufacturing of intermediate goods in other countries than the country of production of
the good of which origin has to be determined will require Customs and traders to use information
concerning these processes which is not available in the normal course of business.  Obtaining this
information from foreign producers and administrations may be difficult and time-consuming.
17. In accordance with the Agreement on Rules of Origin, residual rules are also based on the
principle of the last substantial transformation. When the last transformation carried out is not
substantial, origin has to be determined on the ba sis of the penultimate transformation which is then
considered to be the last substantial transformation. This penultimate transformation is the production
of the materials incorporated. Residual rules give an answer to the question : “which of the materials
used confer(s) origin on the good under consideration?”
18. Application of residual rules as suggested in this  option will facilitate the origin determination
by Customs and traders by requiring only information already available in the normal course of
business in the country of production of that particular good (data available on import documents).
19. The relevant rules in the architecture of the Harmonized Non-Preferential Rules of Origin
should provide :
General Rule 4 :
1. The country of origin of a good shall be determined in accordance with the provisions
of paragraphs 2 and 3, applied in sequence.
2. The country of origin of a good is the country in which:
(a) the good is wholly obtained as defined in Appendix 1; orG/RO/30
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(b) the good is obtained, provided it satisfies the applicable primary rule set forth in
Appendix 2.
3. When the origin criteria laid down in paragraph 2 above are not met, the country of
origin shall be determined in accordance with  the residual rules set forth in Appendix 2.
4. Notwithstanding the provisions in paragraphs 2 b) and 3 above, non-originating
materials that do not meet the primary rules set forth in Appendix 2 shall be disregarded in
determining the country of origin provided that these materials do not exceed the threshold
laid down in Appendix 2.  This provision is hereinafter referred to as the “de minimis rule”.
Paragraph 2 of Appendix 2:
2. The country of origin of a good shall be determined in accordance with the following
provisions, applied in sequence:
(a) the country of origin of a good is the country in which the good is obtained, provided
the applicable primary rule set forth in this Appendix is satisfied there;(b)  when the primary rule is not satisfied in the country where the good is obtained, the
country of origin shall be determined in acco rdance with the following general residual rules
which are applied without prejudice to product specific residual rules for which provision is
made below in this Appendix;
(i) when the good is obtained from materials of a single country, the origin of thegood shall be that country;
(ii) when the good is obtained from materials of more than one country, the origin
of the good shall be the country of the material or materials that give the good its
essential character.
The following rules shall apply for determining th e material or materials that are considered to
give the good its essential character :
A. The good is an agricultural product (Chapters 1-24 of the HS)
(Proposal currently examined)
B. Other goods
(1) The essential character of the good shall be given by the material or materials
originating  in that country which accounts for the major part (by value, volume or weight, as
specified at the Chapter level (*)) of the non-originating materials  used.  The value, volume or
weight of materials of the same origin shall be taken together .
(2) Notwithstanding paragraph 1 above, the essential character of the good shall be given
by the originating materials used, provided they  represent at least 50 % (by value, volume or
weight, as specified at the Chapter level (*)) of all the materials used.   (EC) (NOR)
OPTION C: Residual rules are to be applied if none of the primary rules applicable to the
good is satisfied in the country where the last production process has taken place
I. Principles
                                                     
(*) The applicable unit of measure shall be chosen in function of the good and be mentioned at the
appropriate place in the relevant Chapter.  Example :  Appendix 2, Chapter XY: “Chapter Notes :   xx) For the application of the residual rules, the applicable unit of measure is the weight of the materials used.”G/RO/30
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20. Residual rules have to be applied if a primar y rule for a specific good is not met (See Swiss
document : 42.697).
21. The objective of a primary rule is to confer origin to the country which has done the last
substantial transformation on a good.
22. The origin determination is done on a good and not on its part(s). As a matter of fact, there is
no knowledge whether the part(s) obtained its/th eir origin  through fulfilling the corresponding
primary rule or a residual rule. Therefore, there is no knowledge  where the last substantial
transformation according to Appendix 2 to Annex III of th e Agreement  was achieved . The only
known facts  are the origin of the part(s) .
23. A residual rule test must come to a reasonable  and final origin result. A residual test can only
come to a reasonable result if the test is done on the good for which the origin has to be determined.
24. The residual rule test is a new test of the determination of the origin of a good.25. Non-originating
1 and originating2 part(s) must have an equal status in determining the origin
of the good. Manufacturing processes, overheads and profits are included in the value of the non-
originating and originating part(s). The origin must however not be determined on these part(s) but on
a good made therefrom ; whether one of these part(s) shall give its origin to the good will depend on
the relative importance  of :
(i) the non-originating inputs (including the non-originating processing activities) by
country for each part;
(ii) the originating inputs including the originating processing activities related to thepart(s) and to the good for which the origin is to be determined.
26. Due to the fact that the processing activities to produce the non-originating and the originating
part(s) are considered, the processing activities combining the  part(s) must also be considered . It
would not be reasonable and fair for the country where the last production process has taken place to
ignore them and to limit the residual rule  to an arithmetic comparison  of part(s) which may very
well have obtained their origin through the application of a residual rule .
27. The residual rule must therefore focus on a good and  compare  non-originating and
originating part(s) together with related processing activities. No value judgment can be made on the
last substantial transformation of part(s) because they may have obtained origin through a residual
rule.
II. Application
28. The residual rule applies to all chapters of th e HS and should therefore be placed in a General
Rule or in an Appendix 2 Rule. The residual  rule must be simple and straightforward.
29. The residual rule provides directly and exclusively the final origin of the good.
                                                     
1Part(s) not produced in the country where the last production process of the good takes place ; origin of the part(s)
determined either with a primary or residual rule.
2 Part(s) produced in the country where the last production process of the good takes place ; origin determined
either with a primary or residual rule.G/RO/30
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II. Rule
30. When the primary rule(s)   - subject to the "de minimis"-rule-   referring to a good is (are) not
fulfilled, the country of origin shall be determined in accordance with the country contributing most to
the good in terms of total value of part(s) and related processing activities.  (CH)G/RO/30
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ILLUSTRATIVE EXAMPLE
(Exercise undertaken by manufacturers in Country B)
When exporting decorated hats from Country B to Country C:
Option A:
Step 1:  The primary rule for hats (65.06) is CTH.
In country B decorating hats does not change the classification of the hats.  Thus origin is notconferred in Country B.
Step 2:  The primary rule is applied in Country A as to whether CTH took place in Country A.
Answer is yes.
Step 3:  Origin is determined as Country A by the primary rule.
Options B and C:
Step 1:    The primary rule for hats (65.06) is CTH.
In country B decorating hats does not change the classification of the hats.  Origin is not conferred in
Country B by the primary rule.
Step 2:    Thus the residual rule shall be applied to the hats.  The imported hats cost $100, while the
diamonds cost $500.Step 3: Origin is determined as Country B by the residual rule.
__________Country A
Hats (65.06)
 manufactured from
hat-forms and other
parts (65.01)
CTH is met.
(Originating incountry A)
Price:  100$/hatCountry B
The hats imported from
Country A are permanently
decorated with diamonds or
lined with materials
originating in Country B.
The applicable residual rule isbased on value.
Cost of additional materials
(diamonds):  500$/hatCountry C
Decorated hats
imported from
Country B