The Kyoto Convention entered into force in 1974 and was the first instrument addressing origin on an international scale. For the first time, definitions, standards and recommended practices were given which became generally accepted by the international community and influenced the shaping of many origin rules, such as the principles of wholly obtained and substantial transformation, the documentary evidence of origin and its control.
However, individual countries kept great freedom under the Kyoto Convention in drafting their own origin legislation. Rules of origin became increasingly subject of complaints and more and more countries were of the opinion that rules of origin should be subjected to some form of GATT discipline.
The results of the discussions on rules of origin within the Uruguay Round talks were compiled in the “Agreement on Rules of Origin” and were annexed to the Agreement Establishing the World Trade Organization (WTO) which entered into force in 1995.
The WTO Agreement on Rules of Origin seeks to harmonize all the non-preferential rules of origin used by WTO members into a single set of international rules and the negotiations on the harmonization of non-preferential rules of origin are underway. But, until the negotiations are finalized each country continues to apply its own non-preferential rules of origin.
The WTO Agreement on Rules of Origin does not foresee harmonisation of preferential rules of origin and each country continues to be free to shape its own preferential rules of origin in its preferential trade relations.
The WTO rules seek to provide rules which are transparent and objective. In the long run, the WTO seeks to align the rules worldwide. The WTO has adopted the technical rules evolved by the World Customs Organization. The WTO rules seek to cover all rules of origin in non-preferential trade, statistic, and other areas.
The rules provide for a transitional period until the full harmonised rules are put in place. The transitional rules provide that the criteria on which they are based must not distort or restrict trade. The same rules must apply to import and export. The decision on origin must be made within 150 days at the latest, provided all necessary information is provided.
In relation to the intended harmonised substantive rules, the basic principle is that the origin is the country where the goods have been wholly obtained, in the case of one country. When there is more than one country, the country of origin is where the last substantial transformation was carried out. There is a dispute resolution mechanism under GATT.
The World Customs Organisation is seeking to develop implementation rules under the WTO Council for trade in goods. The WCO undertakes the technical work. The harmonised rules on origin are intended to comprise a global set of rules based on the harmonised system.
Before the development of the WTA agreement on origin, the Kyoto Convention of the Customs Cooperation Council (now the WCO) was the only convention in relation to rules of origin. Only 20 countries had formally accepted it.
Scope of WTO Agreement
The objectives and principles of the agreement on rules of the origin are to develop clear and predictable rules of origin
- to facilitate the flow of trade
- not to create unnecessary obstacles
- not to nullify or impair the right of members under GATT
- provide transparency in laws practices and administration.
- ensure that the rules of origin are prepared and applied in an impartial transparent predicable consistent and neutral manner.
- make available a consultation mechanism and procedures for the speedy, effective equitable resolution of disputes.
- to harmonise and clarify the non-preferential rules of origin.
The non-preferential rules of origin are not related to contractual or autonomous trade regimes relating to tariff preferences. They are used in the application of the –
- WTO most favoured nation treatment.
- anti-dumping and counterfeiting duties
- permitted safeguard measures
- origin marketing requirements
- discriminatory quality of restrictions or tariff quotas
- Government procurement
- trade statistics
The negotiations for the harmonisation work program is still ongoing nearly 20 years after commencement.
Proof of Origin
Documentary evidence of origin is required in order for goods to benefit from a preferential regime. The evidence comprises a certificate of origin issued by the relevant competent authority, certified declaration of origin certified by a competent authority or an origin declaration made on a commercial document by the manufacturer the producer, supplier, exporter or import or another competent person.
The definition of competent authority of a person is set out in the relevant free trade agreement together with the general requirements and procedure for the issue and the validity of the proof of origin and possible exemptions.
Documentary evidence may be a specific form, certificate or declaration identifying a given product in which the authority manufacturer or other competent persons certifies that the goods to which the certificate relates, originate in a specific country.
A certificate of origin is in a specific form based on a model attached to the Kyoto Convention. The competent authority certifies that the goods covered originate in a specific country. The competent authority may be a customs administration, governmental authority or chamber of commerce. The certificate may be electronic if this is provided for under the relevant agreement or legislation.
A declaration of origin may be permitted to be made by a producer, manufacturer, supplier, importer, exporter or other competent person on a commercial invoice or any other document relating to the goods Most trade agreements limit self-certification. It may require approval by the authorities or approved exporter status.
Substantial and Sufficient Transformation
The two basic criteria to determine origin are the wholly obtained criteria or the substantial sufficient transformation criteria.
Wholly obtained goods are goods naturally occurring or live animals born or raised in a given country or plants harvested, minerals extracted or taken there. Wholly obtained also covers goods produced from wholly obtained goods alone or scrap and waste derived from manufacturing or processing operations.
Substantial sufficient transformation involves three principal criteria. The first is based on a change in tariff classification. A good is considered substantially transformed when the goods classified in a heading or sub-heading differ from all non-originating materials used. This has the merits of simplicity and predictability. It requires extensive knowledge of the tariff.
Regardless of the change in classification, a good is considered substantially transformed when the value-added of a good increase up to a specified level expressed by a percentage. This can be expressed in two ways, namely a maximum allowance for non-originating material or a minimum requirement for domestic content.
A further criterion is that of manufacturing or processing operations. Regardless of a change in classification, a good is considered substantially transformed when it has undergone specified manufacturing or processing operations. Specifically identified manufacturing operations may be regarded as insufficient to confer origins such as labelling, packaging or assembling.
There may be a de minimis or tolerance rule which allows a specific share, often 10 to 15 per cent of the value of volume to be non-originating without the final product loosening its originating status. There may be in the alternative, a negative list of components that may not be included in the allowance or list of products.
Several operations and processes are defined as minimal operations or processes and do not confer origin. A minimum or tolerance rule permits a specific share of the value or volume of the final products to be non-originating without the final product losing its status.
Under cumulation rules, parties to preferential trade agreement may source non-originating raw material or components from specified countries and deem them to be originating.
Generally, the rules require the direct consignment of goods from the place of production to the place where it is preferred. This is to ensure that the bulk cargo, which may be difficult to identify is identical of the goods leaving the export country and to reduce the risk of intermixing with non-eligible goods which may be transitting to other countries.
The parties of WTO agreement on rules of origin agree when they issue administrative determinations of general application that the requirements be fulfilled or clearly defined. In cases where the criteria of change of tariff classifications are applied, such a preferential rule of origin and any exception must clearly specify the sub-headings within the nomenclature that are addressed by them.
Revised Kyoto Convention Recommendation
The recommended practice under the revised Kyoto Convention is that in applying the substantial transformation criteria, use should be made of the international convention on harmonised commodity design and coding.
The Kyoto Convention annex provides that the “wholly produced” basis applies mainly to natural products and goods made entirely from them. Goods containing imported products are of undetermined origin and not dealt with under this principle.
The second principle applies where more than one country is involved in the production of goods. The fundamental test is substantial transformation.
Goods whose production involves more than one country, are deemed to originate in the country where they underwent their last substantial economically justified processing, working in an undertaking equipped for that purpose and resulting in the manufacturer of a new product or representing an important stage of manufacture. Whether or not the process is the last relevant process is a technical question which is defined with reference to the product itself, the operations resulting in its manufacture or its creation.
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