The basic role of rules of origin is to determine the economic nationality of a given good. There are several mandatory legal or administrative requirements to observe when goods are traded on the international market. This is necessary for the implementation of various trade policy instruments such as imposing import duties, allocating quotas or for collecting trade statistics.
The WCO, in the International Convention on the simplification and harmonization of Customs procedures (Revised Kyoto Convention), defines rules of origin as “the specific provisions, developed from principles established by national legislation or international agreements ("origin criteria"), applied by a country to determine the origin of goods.”
A distinction can be made between non-preferential and preferential rules of origin.
Non-preferential rules of origin are applied for different types of trade measures such as anti-dumping duties, quantitative restrictions, tariff quotas, origin marking, government procurement and trade statistics. The World Trade Organization (WTO) Agreement on Rules of Origin (ARO) in its Article 1.2 establishes the definition and scope of non-preferential rules of origin.
Preferential rules of origin are applied when goods are eligible for preferential treatment upon importation (reduced or zero customs duty). To be eligible, the goods must meet a number of origin criteria to make sure that only originating goods benefit from this preferential treatment. Agreements comprising preferential rules of origin can be in the form of reciprocal agreements in which case, the parties grant each other respective preferences. However, they can also be autonomous arrangements with tariff preferences granted only by the importing country without reciprocity.
The country of origin must not be confused with the country of provenance (i.e., the country whence the goods were exported). The determination of the country of origin is, alongside tariff classification and customs valuation, an essential factor for establishing the amount of the customs duties and taxes payable.
There are several methods and criteria for determining the origin of a good. Goods naturally occurring in a country are deemed originating as “wholly produced” while processed goods have to undergo a substantial transformation to be originating. The substantial transformation criterion is universally recognized and can be described as a change of tariff classification, a specific value addition or specific manufacturing or processing operations.
Towards the end of the 1980’s, developments in three important areas helped to focus more attention on the problems posed by rules of origin:
- an increase in the number of preferential trading arrangements;
- an increase in the number of origin disputes arising out of quota arrangements;
- an increase in the use of anti-dumping laws and, alongside this, of claims of circumvention of anti-dumping duties through the use of third country facilities.
The Members of the WTO, wishing to ensure that rules of origin did not themselves create unnecessary obstacles to trade, decided in 1994 to establish the Agreement on Rules of Origin.
The Agreement states that rules of origin must not be used as instruments to pursue trade objectives, and must not themselves have restrictive, distorting or disruptive effects on international trade.
The WTO Agreement on Rules of Origin sets out important provisions relating to the application and administration of rules of origin, providing for the Harmonization of Non-Preferential Rules of Origin, those rules of origin which are not derived from trade regimes leading to the granting of tariff preferences.
By securing transparency in trade policy, this harmonization was expected to facilitate international trade.
The WTO Committee on Rules of Origin (CRO) and the WCO Technical Committee on Rules of Origin (TCRO) are the two bodies responsible for the full development of this Agreement.
In 1999, the TCRO concluded the technical review of the Harmonized Rules of Origin and these final results were forwarded to the CRO in Geneva for consideration. In 2006, these results are still under consideration by the WTO.
For the last number of years, the harmonization process has, however, stalled within the CRO. A number of WTO Members have taken the standpoint that the harmonization of non-preferential rules of origin is no longer a priority and that the CRO should focus on other more relevant topics, such as enhanced transparency and preferential market access for Least Developed Countries.
Until the finalization of the Harmonization Work Programme by the WTO, each Member can design and apply its own non-preferential rules of origin. At the same time, WTO Members had decided not to harmonize the preferential rules of origin negotiated as part of preferential trade agreements or set down in unilateral trade arrangements.
The proliferation of preferential trade agreements alongside national non-preferential rules of origin, create the so-called spaghetti bowl of overlapping origin provisions, which is a source of great concern for WCO Members and private operators.