“Net cost” represents all of the costs incurred by the producer minus expenses for
sales promotion (including marketing and after-sales service), royalties, shipping
and packing costs and non-allowable interest costs.

Example
An electric hair curling iron (subheading 8516.32)

Retrieved from:WCO ORIGIN COMPENDIUM

An electric hair curling iron (subheading 8516.32) is made in Mexico from
Japanese hair curler parts (8516.90). Selling price value 4.40; the value of
the non-originating hair curler parts is 1.20.

Example of Product-specific rule for headings 8516.32 is

(a). 60 percent where the transaction value method is used, or
(b). 50 percent where the net cost method is used.

There are two requirements to satisfy the rule of origin.
(a) calculation, adopting for “Transaction value method”
(b) calculation, adopting for “Net cost method”

If Transaction value method is used in this example,
The formula for calculating the qualifying value content is:

On the other hand, if the Net cost method is used,
The sum of “Non-originating materials” and “Cost of production” are
considered as a Net cost.

Main differences between “Build-down method” and “Build-up method”

Calculation method of Build-down

Calculation method of Build-up

Features of the Ad-valorem rule/Value-added criterion:

The exact methods for calculating the input materials and the final product are
stipulated in the aplicable agreement.

A direct comparison between the percentages used in the different methodologies
cannot be made because of the different calculation bases.

The higher the allowed percentage for use of non-originating material, the more
liberal the origin rule.

The higher the minimum requirement for the domestic content, the more
stringent the origin rule.

The ad-valorem calculation may also vary according to the price basis used for the
final product, i.e. the price of the final product at the moment when it leaves the
factory (ex-works price), or the price of the final product at the time of exportation
or importation (FOB or CIF price).

1,Suitable for goods which have been further refined or processed without a change of tariff
classification;

2,Value-added criterion is relatively easy to understand and to apply in practice;
value-added rules allow simple and flexible adjustments for different stages of
development of developing countries;

3,Economic operators are familiar with the cost components of their inputs as the values are
known for commercial and Customs purposes;

4,The administration of value-added rules is complex for small and medium sized companies
and may demand additional book-keeping and sophisticated accounting systems;

5,Requires disclosure of sensitive commercial information by suppliers;

6,Relatively high administrative burden due to the necessity to calculate the various cost
components;

7,Susceptible to the impact of fluctuating exchange rates. A weakening of the exchange rate
raises the value of the foreign inputs in relation to the total cost/ex-works price of a given
product. An increase of the exchange rate of a foreign currency (imported goods are often
invoiced in foreign currencies) will cause an increase of the value of all imported components
priced in a foreign currency. This will render a given ad-valorem rule more restrictive;

8,Susceptible to commodity value fluctuations.

Retrieved from:WCO ORIGIN COMPENDIUM

The criterion “wholly obtained or produced” is one of the two basic types of
origin criteria which have to be fulfilled for the purpose of determining the
country of origin of a commodity in preferential trade relations.

It is mainly used for natural products and for goods made from natural products
which are obtained entirely in one country or area, comprising products extracted or
harvested in a country and live animals born, raised or hunted there.

The scope of wholly obtained or produced products is normally interpreted in a very
strict way, insofar as the addition of imported parts or materials excludes such products
from being wholly obtained or produced.

For the sea fishing industry, the wholly obtained or produced criterion is very important.
The sea beyond territorial waters (the open sea) is not considered to belong to the
national territory of a country.

The (Revised) Kyoto Convention requires that fish caught outside the territorial sea and
other products extracted from marine soil or subsoil outside a country’s territorial
waters have to be taken by vessels of that country in order to fulfill the criterion of
wholly obtained.

The Territorial Sea

The Territorial Sea is an area of water not exceeding 12 nautical miles (22,2 km)
in width which is measured seaward from the territorial sea baseline.
The territorial sea is regarded as the sovereign territory of the coastal state.
If this zone overlaps with another state’s territorial sea, the border is taken as the
median point between the states’ baselines, unless otherwise agreed.

The contiguous Zone

The contiguous Zone is a belt of water adjacent to the territorial sea with its outer
limits not exceeding 24 nautical miles (44,4 km).
This zone must be claimed and does not exist automatically. It allows coastal states
to exercise the control necessary to prevent and punish infringements of Customs,
sanitary, fiscal and immigration regulations.

The Exclusive Economic Zone

The Exclusive Economic Zone is the area of sea beyond and adjacent to the territorial sea.
Its outer limit cannot exceed 200 nautical miles (370 km) from the territorial sea baseline.
A coastal state has control of all economic resources within its Exclusive Economic Zone,
including fishing, mining and oil exploitation.

Retrieved from:WCO ORIGIN COMPENDIUM

With regard to goods of the sea fishing industry, the provisions on wholly obtained
or produced goods might also be supplemented by definitions of what constitutes a
vessel of a contracting party.

What is Preferential Rule of Origin

For the customs clearance of goods, it is necessary to determine the “nationality”
of the goods, i.e. to ascertain the country of origin of imported products.

After the classification of a commodity into the Harmonized System and the
determination of its value, the determination of the country of origin is the third
key element in customs clearance procedures.
The laws, regulations and administrative rulings applied by governments to
determine the country of origin are called “Rules of Origin”.

The concept of origin used in the study relates to the identification of the rules and
regulations used for the determination of the country of origin in trade in goods.
“Goods” are defined to be all those commodities which are classifiable under the
Harmonized System (HS).

Studies on rules of origin do not deal with geographical indications, such as
“Champagne”, “Cognac”, “Tequila” etc.. This area of intellectual property rights is
sometimes confused with rules of origin.
However, rules of origin are not relevant for the regulations of geographical indications.

The reason why countries wish to determine the origin of goods lays in the existence of
differentiated treatment on international trade.
Rules of origin would not be necessary in a completely open world economy as all
commodities would be treated in the same way regardless of their origin.

Even in a system where trade-restrictive measures would be applied on a
non-discriminatory basis, it would not be necessary to know the origin of a commodity
since the measures would be applied for all countries in the same way.
But the reality is another: countries do not apply the same trade policy measures
towards all other countries in international trade of goods, which leads to the need to
fulfil various legal or administrative requirements for the implementation of different
trade policy measures according to the different origin of goods, such as different levying
of import duties, allocating quotas, imposing anti-dumping duties or applying safeguard
measures etc.
Thus, the determination of the country of origin is a very important element in
international trade relations and it is not surprising that different international instruments
address this topic. The first international instrument to deal with rules of origin was the
WCO Kyoto Convention (International Convention on the Simplification and Harmonization
of Customs Procedures), which was drawn up by the Customs Co-operation Council (CCC) on
18 May 1973 and entered into force on 25 September 1974.
Three chapters in the Kyoto Convention deal with rules of origin
(Annex K to the Revised Kyoto Convention – former Annex D).

There, rules of origin are defined in a broad way as “specific provisions,
developed from principles established by national legislation or
international agreements applied by a country to determine the origin of goods”.
However, the Kyoto Convention does not address the issue of an internationally agreed
definition on how to determine the origin of a product.
Attempts to reach an internationally agreed definition on how to determine the origin of
a product were undertaken under the more recent WTO Agreement on Rules of Origin
which was negotiated during the Uruguay Round of multilateral trade negotiations and
which is contained in the multilateral legal framework of the WTO.
In this Agreement, the WTO members try to pave the way for an internationally accepted
definition on how to determine rules of origin for non-preferential purposes.

For that reason, the WTO Agreement on Rules of Origin has to distinguish between the
following two distinct types of rules of origin:

– Non-Preferential Rules of Origin; and
– Preferential Rules of Origin.

What’s the difference between

Non-preferential Rules of Origin

Article 1 of the WTO Agreement on Rules of Origin defines
“Non-Preferential Rules of Origin” as “those laws, regulations and
administrative determinations of general application applied by any Member to
determine the country of origin of goods provided such rules of origin are not
related to contractual or autonomous trade regimes leading to the granting of
tariff preferences going beyond the application of paragraph 1 of Article I of
GATT 1994” (Most Favoured Nation Clause).

The non-preferential rules of origin are used for the implementation of an array
of trade policy measures which are listed under paragraph 2 of Article 1 of the
WTO Agreement on Rules of Origin:
– Application of Most Favoured Nation Treatment;
– Anti-Dumping and Countervailing Duties;
– Safeguard Measures;
– Origin Marking Requirements;
– Quantitative Restrictions or Tariff Quotas;
– Government Procurement; and
– Trade Statistics.

Non-Preferential Rules of Origin are used to determine the country of origin of
goods when it comes to the application of the above-mentioned trade policy
instruments. Until the harmonization of the non-preferential rules of origin by
the WTO Members, each country is free to implement and apply its own set of
non-preferential rules of origin.

The probative value of non-preferential origin is not guaranteed since each country
applies its own legislation for non-preferential rules of origin which may well be
different from those of another country.

Preferential Rules of Origin

According to paragraph 2, Annex II of the WTO Agreement on Rules of Origin,
“preferential rules of origin” are:
“Those laws, regulations and administrative determinations of general
application applied by any Member to determine whether goods qualify for
preferential treatment under contractual or autonomous trade regimes leading
to the granting of tariff preferences going beyond the application of paragraph 1
of Article I of GATT 1994”.

Preferential rules of origin respond to specific trade interests linked to a preferential
trade arrangement and they clearly reflect these specific interests.

Preferential rules of origin are therefore patterned after the economic interests of the
involved parties with the result that preferential rules of origin are unavoidably
individualistic and differ from arrangement to arrangement.

Preferential rules of origin are designated to ensure that free trade agreements and
trade preference programs benefit only the intended countries

The remanufacturing of goods has received considerable attention in
recent years in terms of reducing stress on the environment.

The TPP origin legislation has a separate provision for the treatment of recovered materials.
The TPP Article 3.4  and The USMCA Article 4.4  stipulate that recovered materials used in the
production of a remanufactured product are  considered as originating materials,
allowing more remanufactured goods to be considered  as originating.

Unlike the TPP and USMCA origin system, there is no specific article dealing with the
treatment of recovered materials used in the production of a remanufactured product
in the ATIGA, and the PAN-EURO-MED.

In the ATIGA, the PAN-EURO-MED, theUSMCA and the TPP origin legislations, the articles for
Wholly Obtained Products include used products or waste and scrap; however, these only
include goods which fit solely for the recovery of raw materials. In addition,
once the materials are considered as wholly obtained, the usage of such materials is
not limited to the production of remanufactured goods

The way to handle with packing/packaging materials and containers for
origin determination purposes is related to the application of the Harmonized System.

The Harmonized System coding of a good also constitutes the basis for
origin determination.

Comparison of “Packaging Materials” rules for FTAs

In the PAN-EURO-MED system, the treatment of packaging materials for origin purposes is
directly linked to the issue of classification, meaning that when packaging is included with
the product for classification purposes, it is also included for origin determination purposes
(Article 7).

Whereas in the ATIGA (Article 34) , the USMCA (Articles 4.15) and
the TPP (Articles 3.14 and 3.15) contexts, packing materials for shipment are explicitly
disregarded in the determination of origin.
Furthermore, packaging materials for retail sale are disregarded for certain types of
origin determination (depending on the exact provision).There are no such exclusions in
the PAN-EURO-MED legislation.

With regard to the ad valorem calculation in the ATIGA, NAFTA and TPP origin systems,
the value of the packaging materials for retail sale which is classified with the good is
taken into account as originating or non-originating materials, as the case may be.