1. Rules of origin
16.4. Rules of origin. Statistics on imports by country of origin depend on the countries’ rules of origin and the ways they are applied. Compilers need to be familiar with those rules and to know how they are applied in order to be able to assist users in interpreting the disseminated trade data and to provide feedback to customs authorities on possible amendments and improvements. Compilers need to be aware that, in the absence of internationally accepted detailed rules of origin, the only international guidance in this area is provided in Specific Annex K of the RKC. The RKC is instrumental in ensuring that national rules of origin have many similarities. However, Annex K is very general and, in practice, national rules of origin for particular commodity groups reflect national trade policy priorities. Therefore, they may, and do, vary significantly.
16.5. Non-preferential and preferential rules of origin. In general, countries distinguish between rules of origin for non-preferential and preferential trade. Non-preferential rules of origin are used to differentiate between foreign and domestic products in order to determine the origin of products that are subject to various kinds of commercial policy measures (such as the application of the most-favoured-nation (MFN) clause, anti-dumping and countervailing duties, safeguard measures, origin marking, quantitative restrictions, tariff quotas and public procurement). The preferential rules of origin are related to contractual or autonomous trade regimes leading to the granting of tariff preferences.
2. Guidance provided by the revised Kyoto Convention
16.6. Guidance on non-preferential rules of origin. The RKC is intended to provide guidance on the non-preferential rules of origin in trade. “Country of origin of goods”, according to the RKC, means the country in which the goods have been produced or manufactured, according to the criteria laid down for the purposes of application of the Customs tariff, of quantitative restrictions or of any other measure related to trade.
16.7. Two basic criteria. The RKC formulates two basic criteria for the determination of the origin of goods: (a) the criterion of goods "wholly produced" (obtained) in a given country, where only one country enters into consideration in attributing origin and (b) the criterion of "substantial transformation", where two or more countries have taken part in the production of the goods. In this context, IMTS 2010 (para. 6.7) recommends that, while defining their national rules of origin, countries follow the relevant provisions of the RKC. The substantial transformation criteria are being elaborated on a product-specific basis, and are to be applied to a good when more than one country is involved in its production.
16.8. Goods produced wholly in a given country. According to the RCK, goods produced wholly in a given country shall be taken as originating in that country. Only the following goods shall be taken to be produced wholly in a given country:
(a) Mineral products extracted from its soil, from its territorial waters or from its sea-bed;
(b) Vegetable products harvested or gathered in that country;
(c) Live animals born and raised in that country;
(d) Products obtained from live animals in that country;
(e) Products obtained from hunting or fishing conducted in that country;
(f) Products obtained by maritime fishing and other products taken from the sea by a vessel of that country;
(g) Products obtained aboard a factory ship of that country solely from products of the kind covered by item (f) above;
(h) Products extracted from marine soil or subsoil outside that country's territorial waters, provided that the country has sole rights to work that soil or subsoil;
(i) Scrap and waste from manufacturing and processing operations, and used articles, collected in that country and fit only for the recovery of raw materials;
(j) Goods produced in that country solely from the products referred to in subparagraphs (a) to (i) above.
16.9. Substantial transformation. Where two or more countries have taken part in the production of the goods, the origin of the goods should be determined on the basis of substantial transformation. According to the RKC definition of “substantial transformation criterion”, the country of origin is the country in which the last substantial manufacturing or processing, deemed sufficient to give the commodity its essential character, has been carried out. It is a recommended practice that in applying the substantial transformation criterion, use should be made of the International Convention on the Harmonized Commodity Description and Coding System (HS Convention). It should be noted that the concept of “essential character” is defined neither in RKC nor in the HS Convention. However, the General Rules for the Interpretation of the HS imply that articles classified in different subheadings of the HS have different essential characters. Therefore, any manufacturing or processing that results in the reclassification of a product in another HS subheading can be treated as a substantial transformation. Where the substantial transformation criterion is expressed in terms of the ad valorem percentage rule, the values to be taken into consideration should be:
(a) For the materials imported, the dutiable value at importation or, in the case of materials of undetermined origin, the first ascertainable price paid for them in the territory of the country in which manufacture took place;
(b) For the goods produced, either the ex-works price or the price at exportation, according to the provisions of national legislation.
16.10. Operations that should not be regarded as substantial transformations. The RKC stipulates that operations that do not contribute or that contribute to only a small extent to the essential characteristics or properties of the goods, and in particular operations confined to one or more of those listed below, should not be regarded as constituting substantial manufacturing or processing:
(a) Operations necessary for the preservation of goods during transportation or storage;
(b) Operations to improve the packaging or the marketable quality of the goods or to prepare them for shipment, such as breaking bulk, grouping of packages, sorting and grading, repacking;
(c) Simple assembly operations;
(d) Mixing of goods of different origin, provided that the characteristics of the resulting product are not essentially different from the characteristics of the goods that have been mixed.
16.11. Special cases. There are certain special cases for which the RKC identifies the recommended practice:
(a) Accessories, spare parts and tools for use with a machine, appliance, apparatus or vehicle should be deemed to have the same origin as the machine, appliance, apparatus or vehicle, provided that they are imported and normally sold therewith and correspond, in kind and number, to the normal equipment thereof;
(b) An unassembled or disassembled article that is imported in more than one consignment because it is not feasible, for transport or production reasons, to import it in a single consignment should, if the importer so requests, be treated as one article for the purpose of determining origin;
(c) For the purpose of determining origin, packings should be deemed to have the same origin as the goods they contain unless the national legislation of the country of importation requires them to be declared separately for tariff purposes, in which case their origin should be determined separately from that of the goods;
(d) For the purpose of determining the origin of goods, where packings are deemed to have the same origin as the goods, account should be taken, in particular where a percentage method is applied, only of packings in which the goods are ordinarily sold by retail.
16.12. Note on certain inputs. It should be noted that for the purpose of determining the origin of goods, no account shall be taken of the origin of the energy, plant, machinery and tools used in the manufacturing or processing of the goods.
16.13. Documentary evidence of origin. The trade statistics compiler should be aware that the recommended practice is to require such evidence only when it is necessary for the application of preferential customs duties, of economic or trade measures adopted unilaterally or under bilateral or multilateral agreements or of measures adopted for reasons of health or public order. If imported goods are being admitted to the country on a non-preferential basis and are not subject to any other customs controls requiring the evidence of their origin, the recorded country of origin will be as indicated by the declarant. Small-value shipments and goods granted temporary admission are also exempted from the requirement to proof origin.
3. The status of work on the harmonized rules of origin
16.14. WTO Agreement on Rules of Origin. The WTO Agreement on Rules of Origin concerning objectives and principles, the establishment of committees, etc., came into force as part of the Agreement Establishing the World Trade Organization in 1995. Since then, the Technical Committee on Rules of Origin (TCRO), under the auspices of the World Customs Organization (WCO) in Brussels, and the Committee on Rules of Origin (CRO), under the auspices of the World Trade Organization in Geneva, have been undertaking work programme set out in the Agreement and which aims at harmonizing the non-preferential rules of origin. The Committees are to: (a) develop definitions of wholly obtained goods and of minimal operations or processes that do not by themselves confer origin to a good (article 9 (2) (c) (i)); (b) elaborate upon substantial transformation expressed by change in HS tariff classification (article 9 (2) (c) (ii)); and (c) develop - in cases where the exclusive use of the HS nomenclature does not allow for the expression of substantial transformation - supplementary criteria, such as ad valorem percentages and/or manufacturing or processing operations (article 9 (2) (c)(iii));. The harmonization work is still ongoing and thus the rules of origin themselves have not yet come into force.
16.15. Application of the WTO Agreement on Rules of Origin. The WTO Agreement on Rules of Origin, which will be obligatory for all WTO members, indicates such areas for their application as most-favoured-nation treatment, anti-dumping and countervailing duties, safeguard measures, origin marking requirements, quantitative restrictions and quotas. The Agreement specifically provides that the WTO rules of origin, after their adoption, will “include rules of origin used for government procurement and trade statistics” (article 1 (2)).
16.16. Status of work. In 1999, the Technical Committee on Rules of Origin had concluded the technical review of the Harmonized Rules of Origin and these final results were forwarded to the Committee on Rules of Origin for consideration. As of 2011, these results were still under consideration by the WTO. In June 2010, the CRO had reached consensus on 349 of the 486 technical questions submitted by the Technical Committee but the remaining 137 questions (the most difficult ones) were still pending. The harmonization work programme could not be completed owing to sensitive trade policy and political aspects and the very important question of “implications” of the Agreement on Rules of Origin for other WTO Agreements. On 11 November 2010, the Committee on Rules of Origin issued its latest draft consolidated text of non-preferential rules of origin which are contained in the document G/RO/W/111/Rev.6. and Corr.1. The text refers to HS96 and therefore needs to reflect the application of the current version of the HS (i.e., HS2012). There are currently 83 countries that have notified WTO of the application of non-preferential rules of origin.
4. Preferential rules of origin
16.17. Rules of origin in the case of preferential trade. Preferential rules of origin are used to establish whether goods are eligible for special treatment under a trading arrangement between two or more countries or customs unions. Preferential (or reduced) rates of duty are applied to goods that are found to be the products or manufacture of a country defined as a preference country. The principal objective of preferential rules of origin is to ensure that benefits are restricted to those goods that originate and are traded within the particular preference area, i.e., those goods whose origin is from a particular specified country.
16.18. Requirements. Each multinational or bilateral agreement has its own rules of origin. There is no work programme for the harmonization of preferential rules of origin. However, annex II of the WTO Agreement on Rules of Origin (entitled “Common Declaration with regard to preferential rules of origin”), provides the general principles and requirements applied to preferential rules of origin. These requirements include notification procedures. All members agree to provide to the WTO Secretariat, as soon as possible, their preferential rules of origin, including a listing of the preferential arrangements, judicial decisions and administrative rulings of general application relating to their preferential rules of origin, including any modification or new preferential rules of origin. In particular, members agree to ensure that: (a) in the case where the criterion of change of tariff classification is applied, such a preferential rule of origin, and any exceptions to the rule, must clearly specify the subheadings or headings within the tariff nomenclature that are addressed by the rule; (b) in the case where the ad valorem percentage criterion is applied, the method for calculating this percentage shall also be indicated in the preferential rules of origin; and (c) in the case where the criterion of manufacturing or processing operation is prescribed, the operation that confers preferential origin shall be precisely specified.
16.19. It is advised that if a country’s trade statistics are compiled using preferential rules of origin with respect to certain countries, an appropriate explanation is provided in the methodological note to the disseminated data.
5. Compilation of country of origin for imports
16.20. Application of Specific Annex K of the revised Kyoto Convention. Most countries broadly follow Specific Annex K of the RKC with regard to the definition of both wholly produced and substantially transformed goods. However, there is a significant divergence of views regarding the details of the application of the Specific Annex. Which goods can be considered wholly produced in a given country, and what kinds of transformations of the goods can be considered substantial, remains, in many cases, a matter of trade dispute.
16.21. National practices in defining wholly produced (obtained) goods. It is a good practice to base national definitions of the wholly produced (obtained) goods on the RKC and elaborate the provisions in certain commodity groups that might be of particular interest to the compiling county.
16.22. National practices in defining substantial transformation. As the RKC does not contain a detailed definition of the substantial transformation, especially with regard to the ad valorem percentage rule, it is good practice to elaborate a national definition of this concept and make it available to users in the trade statistics metadata. For example, in some regional blocs like the Common Market for Eastern and Southern Africa (COMESA), the definition of substantial transformation is based on the rules of origin contained in the RKC and is specified as value addition to the product exceeding 35 per cent.
16.23. Practical difficulties in determining the country of origin. While having national rules of origin in place is important, countries still face numerous challenges in practice in respect of determining country of origin of imported goods. Difficulties arise for many reasons. For instance, the information on origin with respect to different transactions may not be of the same quality owing to variations in the requirements for producing documentary evidence. The requirement of presenting a certificate of origin of goods is defined by the tariff law of countries and does not apply to all goods entering or leaving a country. Further, compilers should be aware that IMTS 2010 (para. 6.28) recommends that the economic territory (and not the statistical territory) of trading partners constitute the basis upon which the statistics on trade by partner are compiled, of which free zones and other territorial elements are part.
 See the RKC, Specific Annex K, Chapter 1, Definition E1./F2.
 See the RKC, Specific Annex K, Chapter 1, Standard 2.
 The list provided in the RKC is seen by some trade statistics compilers as not exhaustive, since certain goods that appear to be wholly produced in a given country are not included (e.g., wheat).
 See RKC, Specific Annex K, Chapter 1, Definition E3./F1.
 United Nations, Treaty Series, vol. 1503, No. 25910.
 See RKC, Specific Annex K, Chapter 1, Recommended Practice 6.
 Ibid., Recommended Practice 7.
 Ibid., Recommended Practice 8.
 Ibid., Recommended Practice 9.
 Ibid., Recommended Practice 10.
 Ibid., Standard 11.
 Ibid., Chapter 2, Recommended Practice 2.
 See Legal Instruments Embodying the Results of the Uruguay Round of Multilateral Trade Organizations, done at Marrakesh on 15 April 1994 (GATT secretariat publication, Sales No. GATT/(1994-7).
 In its 2009 annual report, the Committee on rules of Origin acknowledged that members expressed considerable differences of opinion regarding technical issues and aspects of the overall architecture of the draft scheme, and that manufacturing sector rules of origin were still a matter of specific concern.
 See the note by the Secretariat containing the seventeenth annual review of the implementation and operation of the Agreement on Rules of Origin, conducted by the Committee on rules of Origin on 27 October 2011 (G/RO/71 of 2 November 2011).