RESTRICTEDWORLD TRADE
ORGANIZATIONWT/REG/W/45
5 April 2002
(02-1781)
Committee on Regional Trade Agreements
RULES OF ORIGIN REGIMES IN
REGIONAL TRADE AGREEMENTS
Background survey by the Secretariat
1. The Chairman of the Committee on Regional Trade Agreements, in his Guidelines on
"Further Work on Systemic Issues" (document WT/REG/W/38, dated 20 June 2000), proposed that
the Secretariat provide "the Committee with basic material for a detailed horizontal exploration of the
treatment of various policy provisions or measures" in regional trade agreements (RTAs).
2. The Chairman's Guidelines specified that "Secretariat papers would consist of thematic
surveys of RTA provisions, based on available information", and should have the objective of
enabling "the Committee to identify patterns and, whenever appropriate, to compare RTA provisions
across the RTA universe and vis-à-vis the relevant multilateral disciplines".  The Guidelines also
contained an illustrative list of themes which could be studied.
3. At the 26th Session of the Committee, the Secretariat was instructed to start a horizontal
survey on the internal trade liberalization in RTAs, th at is on coverage, rules of origin regimes, denial-
of-benefits rules, as well as liberalization process and transitional provisions.
4. The present document presents the outcome of a survey conducted by the Secretariat on the
rules of origin regimes of a number of RTAs which are presently in force and have been notified to
the GATT/WTO.  The survey was based on information available up to August 2001.
5. The survey aims at providing Members with as detailed information on RTA rules of origin
regimes as allowed by data availability and the technical nature of the issues involved.  Particular
attention has been devoted to the definition of a general framework for comparison purposes.WT/REG/W/45
Page 2
RULES OF ORIGIN REGIMES IN
REGIONAL TRADE AGREEMENTS
Background survey by the Secretariat
A. I NTRODUCTORY REMARKS
1. Rules of origin are necessary to administer differentiated trade regimes.1  They are used,
inter alia , to ensure that products entering a country receive the correct import treatment, when this is
differentiated among trading partners;  to enforce trade-restrictive or contingency measures such asquotas or tariff quotas  allocated among suppliers, or anti-dumping measures;  and to manage public
procurement policies.
2. The WTO Agreement on Rules of Origin establishes disciplines on rules of origin which "are
not related to contractual or autonomous trade regimes leading to the granting of tariff preferences
going beyond the application of paragraph 1 of Ar ticle I of GATT 1994" (Article 1.1), often referred
to as "MFN rules of origin".  Annex II to the Agreement contains Members' commitment to  inter alia
ensure transparent administration of the origin rule s related to the implementation of their preferential
schemes.  Apart from the Declaration contained in that Annex, there are no multilaterally-agreed
disciplines on such "preferential rules of origin".
3. Preferential origin regulations are deemed an essential element of all RTAs except fully
implemented customs unions.  Whenever parties grant each other preferential market access but have
not (yet) harmonized their treatment for goods imported from third countries, determination of theorigin of an imported good is needed to ascertain whether such a good is eligible for preferential
treatment in the importing country.  Origin rules may also be justified to prevent products from
                                                     
1 The definition of the origin of traded goods is also important for other purposes, e.g. for gathering
trade statistics and for  the application of labelling and marking requirements.Highlights of the Survey
1. Rules of origin are a necessary part of regional  trade agreements.  But no single method for origin
determination is applied within all agreements and to all products.
2. Various criteria for determining origin exist.  Only in a few cases are rules of origin based on a single
criterion;  normally two or more cr iteria are combined.  In addition, e xceptions to and derogations from the
general criteria – for example, differing tolerance or abs orption rules in sensitive products – are manifold.  In
some  cases these significantly modify what appear s at first sight to be simple origin regimes.
3. Some rules of origin with a development-oriented focus are simple and liberal (e.g. COMESA).  Other
regimes containing multiple exceptions and tailor-made product provisions appear in themselves to act as
potential barriers to trade.
4. Two major models of rules of origin currently exist: the "pan-European" (PANEURO)-model and the NAFTA-
model of rules of origin, which differ significantly from each other.  While variations within the PANEURO-
model are very limited, significant differences apply in re lation to the NAFTA-model of rules of origin (e.g. on
the percentage of regional-content requirements and of tolerance rules, sector-specific exceptions).
5. Harmonization or "networking" of rules of origin shoul d act as a positive force for the multilateral system and
lead to greater integration of international trade.  A balance needs therefore to be struck between simplicity
and efficacy.WT/REG/W/45
Page 3
non-parties to an RTA to gain preferential access to the market through the party which maintains the
lowest external import restriction (i.e. to avoid "trade deflection").2
4. The diversity of RTAs (or "RTA-families") results in a lack of uniformity in preferential rules
of origin regimes world-wide.3  As a corollary to the increased overlapping membership of RTAs or
RTA-families, the coexistence of different origin rules in a single country is a frequent feature.  Thevast majority of RTAs presently in force, as well as those currently under negotiation, include origin
requirements where product-specific rules of origin are often supplemented by other provisions which
can either add to or diminish their flexibility.
5. In principle, RTA origin regimes are of a technical and objective nature;  therefore, they
cannot be considered as creating unnecessary obstacles to trade or as trade policy instruments per se .
However, their often insufficient transparency and considerable complexity can generate important
administrative and operational costs.  Producers bear a significant burden in getting acquainted with
them and meeting the requirements, especially when confronted with a multiplicity of rules of origin.
For national customs authorities, additional costs ar e also associated with managing various rules of
origin and verifying the accuracy of origin via certificates.
4
6. The potentially restrictive distortive or disruptive trade effects of the formulation and
application of preferential origin regimes have recently attracted the attention of economists as the
scope and number of RTAs grows.5  These have observed that preferential origin regulations are
usually more stringent than MFN rules of origin, and the more so for products for which the margin of
preference between the MFN and the preferential tariff is larger.  They argue that this may alter
substantially the level and effective structure of the preferences established and result in potential
inefficiencies in the allocation of resources among the preference-receiving trading partners;6 it may
also increase the possibility of trade (or investment) diversion.7
                                                     
2 Not only MFN duty rates applied by the countries participating in a given preferential arrangement
will usually not be the same, but each of these countries may also participate in separate arrangements with third
countries under different preferential conditions.
3 Mention should be made here of the "pan-European" (PANEURO) system of rules of origin, applied
to preferential relations between the European Community (EC), the EFTA States and the Central and EastEuropean countries, within a network of free-trade agre ements.  PANEURO provides for the application of a
single set of rules of origin and of diagonal cumulation of origin.  This system is also used by the participating
countries as a basis ("PANEURO- model") for most of the other RTAs they have concluded worldwide.
4 Some RTAs provide for trade facilitation measures which tend to minimize certification and
verification costs.
5 See, in particular, Garay, L.G. and Estevadeordal,  A. "Protection, Preferential Tariff Elimination and
Rules of Origin in the Americas", Integration and Trade , N. 0, pp. 2-23;  LaNasa III, J.A, "An Evaluation of the
Uses and Importance of Rules of Origin, and the Effectiveness of the Uruguay Round's Agreement on Rules of
Origin in Harmonizing and Regulating Them", Harvard Jean Monnet Working Paper  No. 1/96.
6 In an extreme illustrative scenario, the elimination of trade-restrictive measures (such as tariffs and
quantitative restrictions) could be counteracted by rules of origin to such an extent that there would be a de facto
nullification of the trade lib eralization provided under the RTA (that has been mentioned by LaNasa III).  In
such a case, the costs incurred for the final product to be granted originating status would not be compensated
by the benefits derived from the use of the preference, either because the margin of preference would be not
significant, or because the market would not be big enough, or because the product would be exported to anumber of countries with differing rules of origin.  Or igin rules would then have the same effect as a trade
barrier protecting domestic production of final goods.
7 The increasing importance of rules of origin may eventually lead certain producers to consider them
as a factor of production per se  that would be analyzed in the same manner as the availability and cost of inputs,
labour costs, infrastructure, etc.  In that sense, rules of origin can influence investment decisions, both with
respect to sourcing of various inputs and location of production and result in producers increasing both inputsand processing within a preferential area at the expense of third parties that would otherwise have a comparativeadvantage.WT/REG/W/45
Page 4
B. RTA P ROVISIONS RELATED TO THE DETERMINATION OF ORIGIN
7. When a product is wholly obtained in one of the pa rties to an RTA, the country of origin of such
product is generally evident.  However, such a situation, though still applying mainly to a number of
agricultural and mining products, has grown to be ex ceptional in modern trade.  Technological change
and the globalization of production have resulted in greater specialization within manufacturing
processes and increasingly geographically separated stages of production.  Today, a traded product
usually incorporates imported inputs or has undergone part of its processing outside the exporting
country; the determination of the origin of the pr oduct is thus less obvious.  Rules of origin have become
increasingly complex in order to take account of this phenomenon.
8. The main proposition underlying origin determinatio n is that the country of origin is the last
country where a substantial transformation took place.8  Three main methods (which may also be
combined) are used to establish whether such substantial transformation occurred:
• Under the change in tariff heading method  (CTH, or CTC for change in tariff
classification), origin is granted if, after transformation of one or several importedinputs in the exporting (originating) country, the processed product exported falls
under a different heading of the customs nomenclature than that under which the
imported inputs were classified.  Normally, such origin assessment is done on the
basis of the headings of the Harmonized System (HS) – i.e. at the four digit level.
• Under the percentage criterion method , the substantial transformation requirement is
expressed in terms of either (i) a minimum percentage of value that must have been
added in the exporting country, or (ii) a maximum percentage of value accounted for
by imports.  If the prescribed percentage is either not reached or exceeded, the
process which the product has undergone in the exporting country is not deemed torepresent a substantial transformation; the product will then not be eligible for
preferential treatment when entering the market of other RTA parties.
The percentage criterion may be formulated in terms of import content (MC),
imposing a ceiling on the value or quantity of imported parts and materials allowable
for the goods to be considered as originating;  domestic content (DC), requiring a
minimum percentage of domestic value-added (or regional value-added if cumulation
applies) for conferring origin; or  the value of parts , which provides that originating
status is granted for products meeting a minimum percentage of originating parts out
of the total.
The basis on which the percentage is to be calculated, and in particular the question
of how originating/non-originating materials are valued, constitutes an important
element in the modalities of application of this method, as well as in its potential
effects.  Valuation of non-originating materials may be based on ex-works, f.o.b.,
c.i.f. or into-factory prices, each basis providing for a different allocation of
originating/non-originating costs and leading, in ascending order, to higher import
prices.
9  Domestic materials are usually valued on an into-factory basis (i.e. as
delivered).  These various ways of valuing materials may add to producers'uncertainty, but also increase the restrictiveness of the basic origin rule itself.
                                                     
8 "Sufficient working or processing" is a comparable concept us ed in this context.
9 A product valued ex-works  (at the moment it leaves the factory) includes the cost of all the materials
used minus any internal taxes which may be repaid when the product is exported.  In a  f.o.b. valuation the costsof ocean freight and insurance are also treated as originatin g.  In a c.i.f. valuation, originating costs also include
all costs incurred after the imported material has crossed the border (customs duties, inland freight in the
importing country).  For example, in the case of an import-content origin rule that would allow valuation on anybasis, the value of non-originating material allowed would be the highest in the case of the into-factory basis andthe lowest in the case of the ex-works basis.WT/REG/W/45
Page 5
• The technical test method  is based on manufacturing or processing operations.  It
prescribes certain production or sourcing requirements that may (positive test) or maynot (negative test) confer originating status.  Sourcing requirements may place a
number of restrictions on the inputs – either by establishing an obligatory input (a
particular input must be originating) or by specifying restrictions on non-originating
inputs (e.g., a maximum value for a certain non-originating material).
9. Given the wide use of the HS throughout the world,
 the CTH method offers the possibility of
a uniform determination of origin, and it limits administrative discretion.10  However, the HS was not
designed to serve the purpose of conferring origin; its basic aim is commodity classification and
statistics.  A simple change in tariff heading may therefore not be an adequate measure for fulfilment
of the substantial transformation requirement; conversely, certain substantial transformations may not
entail a change in tariff heading.
10. Problems put forward in relation to the use of the percentage criterion in origin determination
mainly derive from the complexity of the origin rules and from the costs associated with compliance
and verification operations, which require sophisticated accounting systems.  From an economic
viewpoint, two main flaws of the me thod have been identified.  First, it tends to penalize low-cost,
efficient production operations where labour or assembly costs are lower than in high cost inefficient
facilities.  Second, its restrictiveness is highly sens itive to changes in factors determining differential
production costs among countries, such as relative exchange rates, wages, or raw material prices.11
11. The technical test is the best option to deal with specific situations and allows producers to
know from the outset the origin of the final produc t.  However, it also has recognized limitations.
First, to prepare and keep up-to-date an inventory of production processes is a difficult and costly
task.  Second, it may open the door to abuse by domestic producers, since these are in the bestposition for supplying information concerning the technical requirements and thus have greater
latitude for protecting their own interests.  Thir d, in cases where a negative test would apply, a very
difficult situation would arise if a definition only existed for the processes which did not confer
originating status without mentioning which conferred it.12
12. In sum, there is no fully satisfactory methodolo gy for origin determination, applicable to all
products and serving all purposes.  Rules of origin architects have a panoply of methods and sub-
methods at their disposal when setting the origin rules in RTAs, and tend to make full use of these
possibilities.  Thus, in practice, RTA rules of origin combine the various methods to create almost
unique rules of origin systems in each case.
13. While the method used for conferring origin to a product constitutes the central element of an
RTA origin regime, another important element is the extent of cumulation, if any, provided.
14. RTA cumulation provisions set the conditions under which inputs imported from certain
sources may be counted as domestically supplied in the (preference-receiving) exporting country.
There are three possible types of cumulation.  When bilateral cumulation  is provided, materials
supplied by any of the parties to the RTA will be reckoned "domestic".  If diagonal cumulation  is
possible, materials supplied by specific countries not members of a given RTA may be counted, under
certain conditions, as "domestic".  Under full cumulation  provisions, the whole preferential area
                                                     
10 This may explain why this method has been retained as the first-level criterion in the development of
MFN rules of origin.
11 See Garay, L.G. and Estevadeordal, op.cit. 5, LaNasa III, op.cit. 5, and. Vermulst, E.A, "Rules of
Origin as Commercial Policy Instruments? – Revisited", in Rules of Origin in International Trade , Edited by
E. Vermulst, P. Waer and J. Bourgeois, The University of Michigan Press, 1994.
12 This is not a common feature in RTAs, where negative tests are generally used in conjunction with
other tests for clarification reasons or when supplementary information is needed.WT/REG/W/45
Page 6
created by an RTA will be considered as one sing le territory, and thus any working or processing
operations done within the area will count towards the determination of origin.13
15. Cumulation rules are in practice a derogation to the basic origin requirement that only
products wholly obtained or having undergone a substantial transformation in the exporting RTA
party will benefit from the preferential treatment granted by the importing RTA party.  Whencumulation of origin is possible, the degree of processing which is required to take place in the
exporting RTA party for a product gaining originating status will vary according to whether imported
materials have been supplied by countries benefitting from the cumulation or not.
16. The common origin requirement defining substantial transformation will have to be fully met
when imported materials are provided by countries not included in the cumulation system.  If these
same materials come from a cumulation benefitting country, the granting of origin would not require
substantial transformation but would rather be based on other, less strict requirements – e.g. atransformation that goes simply beyond minimal operations (i.e. operations or processes that do not
by themselves confer origin to a good, also refered to as insufficient processing or de minimis
operations)
14 or the granting of origin to the cumulation benefitting country which accounts for the
higher value-added in final product.
17. Three other concepts, which may appear under different forms in various RTAs, have a
bearing in shaping the cumulation rules:
• The absorption/takeover principle  is of relevance for intermediate materials;  it
means that when a non-originating material acquires originating status by meeting the
corresponding processing requirement, this material is considered to be 100 per cent
originating once incorporated into a final product.
• Through the application of the tracing test  concept, all processing done in countries
participating in a cumulation system counts towards the granting of origin.  Thisconcept, which normally surfaces where full cumulation applies, may be seen as
diametrically opposite to the absorption principle:  when a non-originating material
fails to acquire originating status after being processed, the input does not become
100 per cent non-originating;  rather, the value of originating materials andprocessing still count towards the determination of origin of the final product.
• A tolerance rule  found in certain origin regimes allows the use of materials supplied
by non-cumulation-beneficiary countries that would otherwise not be accepted; it isusually expressed as a maximum percentage of non-originating materials.  This
tolerance rule, however, does not act as a lowering of the limitation imposed on the
use of non-originating materials.15
18. Duty drawback  provisions are also related to origin considerations in the context of RTAs,
and are present in a number of RTAs.  Duty drawback allows that tariffs due on non-originating
products incorporated in a final product be either waived or paid back once the final product acquires
originating status.  Traditionally, duty drawback has been presented as providing a cost advantage for
those RTA-based producers which export to another c ountry within the preferential area, as compared
                                                     
13 See Annex 1 for examples on how these types of cumulation apply.
14 Those minimal operations, normally presented as negative tests, relate basically to maintenance and
assembly.  In the context of the work on non-preferential rules of origin, a harmonized list of such operations
has been developed for whole obtained goods;  it includes "(i) ensuring preservation of goods in good condition
for the purposes of transport or storage;  (ii) facilitating  shipment or transportation;  (iii) packaging or presenting
goods for sale. (see G/RO/45/Rev.1)".
15 I.e. the "tolerated" non-originating material will also be included in import content calculations.WT/REG/W/45
Page 7
to producers selling in their own domestic market.16  Recent research has pointed out that duty
drawback can also have a protectionist effect, because it may reduce the interest of producers for
lobbying against protection of intermediate products.17
19. Some RTAs contain a no-drawback rule.  This certainly restores equal treatment between the
production for domestic markets and for exportation, but, in the presence of a cumulation system, mayalso affect the sourcing of materials, shifting it from third countries to countries participating in the
cumulation system, and thus contribute to trade diversion.
20. Finally, RTAs may have provisions on territoriality , relating to the treatment provided to
originating products which temporarily leave the cumulation area.  These provisions are particularly
relevant for defining whether any processing can take place outside the cumulation territory without
the product losing its originating status.
C. S
URVEY OF RTA R ULES OF ORIGIN REGIMES
21. This survey on rules of origin regimes has been conducted on 93 RTAs which were in force in
March 2001.  Of that total, 87 RTAs were notified to the GATT/WTO under GATT Article XXIV
(2 customs unions and  85 free-trade areas);  the remaining six RTAs were notified under the
provisions of the Enabling Clause (four customs uni ons and two preferential agreements).  A list of
the RTAs included in the survey is found in Annex 2 to this document.
22. The PANEURO system deserves a special mention from the outset, since parties to 50 of the
RTAs surveyed here have adopted virtually uniform rules of origin protocols based on the PANEURO
standard; given the importance of that System in the present context, an overview of its main features
is given in Annex 3.  Rules of origin of the North American Free Trade Agreement (NAFTA) are the
basis for the rules applied in other three RTAs; Annex 4 contains a summary of the basic features ofthe NAFTA rules of origin regime.
23. Detailed results of the survey have been organized so as to deal with the different issues
identified in Part B above, which compose the framework of RTA rules of origin regimes.  As far as
possible, results are shown in a tabular format, to facilitate comparisons.  The tables below present the
aggregate results of the survey; details at the level of individual agreements can be found in Annex 5.
24. The issues investigated fall into two broad categories:  (i) the requirements contained in the
product-specific origin rules (i.e. the "general rules of origin"); and (ii) the provisions supplementing
or modifying these requirements, such as the cumulation rules.
1. General Criteria of Rules of Origin
18
25. As can be seen from Table 1, all the three methods for conferring origin are widely used in
RTAs, with the CTH method being the most common one, present in 89 of the 93 RTAs examined.
Another salient feature is that normally, at least two methods for conferring origin coexist at similarlevels of importance, working as complementary methods.
19  That pragmatic approach seems to be a
response to the shortcomings inherent to each particular method, as explained previously.  While the
CTH and percentage methods are generally spread across all HS Chapters, the technical test (TT)
applies more in relation to industrial products, including textiles.
                                                     
16 Given that customs duties would have to be paid on intermediate goods used in the production of
goods for domestic consumption but would be waived if goods are for export.
17 Cardot, O., de Melo, J. and Olarreaga, M. Can Duty Drawback Have a Protectionist Bias? , World
Bank Policy Research Working Paper no. 2523 (The World Bank, January 2001).
18 The figures on the tables do not add because RTAs may have more than one general method for
conferring origin or more than one type of exception.
19 In the case of European agreements, all the three methods coexist.WT/REG/W/45
Page 8
26. A common feature of all RTAs using the CTH method is that the substantial transformation
operates at the HS heading level (i.e. 4 digit).  However, also common to all the RTAs using that
method is that in specific cases the CTH rule allows the use of materials classified under the same
heading of the customs nomenclature (a "soft" CTH test);  in many instances, that exception is either
subject to limitations on the maximum value of those materials or to a change of tariff classification atthe level of HS sub-headings.
20  In the case of NAFTA and similar agreements, the change in tariff
classification may also specify a change in tariff classification at the level of HS chapters.21
Table 1 – Frequency of Various General Criteria and Tolerance Rules
Criterion
Percentage22 RTAsCTHTotal MC DC VPTTTolerance
Rule
Customs unions (6) 6 22
(40%-60%)2
(35%-60%)-- 3
FTAs and other preferential
RTAs (87)83 7568
(60%-30%)7
(60%-25%)67 74 85
27. With regards to the percentage criteria, the import content method is much more frequent than
the domestic content method in the universe of RTAs surveyed here, due to the fact that the
PANEURO is based on it.  The value of parts test is used only in agreements involving European
countries.  On average, it could be said that a threshold on domestic content varying from 40-
60 per cent tends to be normal, as well as its equivalent of 60-40 per cent on import content.  Cases
which differ significantly from that norm can be ea sily identified in Annex 5B.  Among these, it is
worth noting the more liberal rules of origin requirements found in the Canada-Chile FTA - domestic
content of 25-35 per cent depending on the method used for calculation - and in the Common Market
for Eastern and Southern Africa (COMESA) - 35 per cent domestic content.  As shown in Chart 1, the
case of the Canada-Chile FTA stands out as containing particularly low regional content thresholds
among the four "NAFTA-like" agreements.
28. The technical test criterion is used as a general method for conferring origin in a majority of the
RTAs surveyed (74 out of 93),23 in particular in the most recently concluded ones.  This method is
widely used in sectors such as textiles and chemicals and in all the cases analysed, positive tests are used
– with the exception of minimal operations which do not confer origin.  In some cases, the substantial
transformation requirements are such that, in addition to the fulfilment of other basic criteria, threeRTAs also require that the last process of manufacture take place in one of the RTA parties.
24
                                                     
20 While in the case of European agreements limitations on the value of material generally apply, in the
case of NAFTA and NAFTA-like agreements, generally changes at the level of subheading are required.
21 In their research, Garay, L.G. and Estevadeordal, op.cit. 5, indicated that for the NAFTA agreement,
the use of the CTC method exclusively applies at the level of chapters, headings and sub-headings for around
respectively 24 per cent, 9 per cent and 12 per cent of  tariff lines.
22 The maximum and minimum percentages applying to the criterion are indicated in brackets
23 The technical test is also used, as a "secondary" or exceptional rule, in 16 other RTAs.
24 For details, see Annex 5A.WT/REG/W/45
Page 9
Chart 1 - Regional Content Thresholds in the NAFTA Family of RTAs
2. Supplementary Provisions of Rules of Origin Regimes
29. Tolerance rules (see paragraph 17 above) seem to be very frequently included in RTAs:  they
are found in 88 out of 93 RTAs surveyed.  Generally, tolerance rules are expressed as a percentage of
the value of the final product.  Among the RTAs considered here, the tolerance allowed corresponds
to between 2 and 15 per cent of (otherwise not accepted) non-originating materials.  Chart 2 shows the
percentages of value attached to tolerance rules in a number of RTAs, as well as those provided for in
the PANEURO.
30. Tolerance rules applicable to the textile sector are usually different than those applying to
other sectors:25
• in most surveyed RTAs (84), the tolerance represents the maximum weight (instead
of value) of non-originating materials;
• in some instances, the tolerance rule remains based on the value of the final product
but the threshold for non-originating materials is lower (72 RTAs);
• in the case of two RTAs, tolerance rules do not apply to textiles; and
• there are twelve RTAs in which tolerance rules only apply to the textiles sector.
By contrast, for the agricultural sector (another sensitive sector), exceptions to the general  tolerance
rules exist only in six RTAs.26
                                                     
25 These exceptions may coexist in individual RT As, with different exceptional rules applying to
different textile products.
26 Of relevance here is the fact that, for most of these RTAs, agriculture is fully integrated into trade
liberalization.  This is not the norm, since, contrary  to textiles, which are covered by all RTAs, trade in
agricultural products is far from benefitting from such liberalization.  This may provide a partial explanation forthe identified different treatment.Canada – Chile
Mexico-Chile NAFTA
Mexico-Israel0%10%20%30%40%50%60%
Regional
content
Net cost method* Transaction value method**
* The net cost method calculates the regional value content as a percentage of the net cost to produce the
good.
** The transaction value method calculates the value of the non-originating materials as a percentage of
the GATT transaction value of the good.  Because t he transaction value method permits the producer to
count all of its costs and profit as originating, t he required percentage of regional value content under this
method is higher than under the net cost method.WT/REG/W/45
Page 10
Chart 2 - Type of General Tolerance Rules in Selected RTAs
0% 2% 4% 6% 8% 10% 12% 14% 16%PANEUROPE- EC - OCTsEC - MexicoEC - South AfricaCanada - ChileMexico-ChileNAFTACanada - IsraelMexico - IsraelANZCERTASPARTECACACM
% value of final product
31. Table 2 presents a synthesis of the different types of cumulation provisions which are present
in the 93 RTAs considered in this survey.  A ll of them provide for bilateral cumulation.  The
frequency of diagonal cumulation is relatively high, in particular in RTAs involving European
countries (given that the PANEURO uses diagonal cumulation).  Full cumulation is a rare feature in
RTAs (only in eight cases); again, it appears mainly in RTAs involving European countries
(six RTAs). 27, 28
32. Apart from the PANEURO, diagonal cumulation also exists in a number of RTAs: those
between the EC and the Maghreb countries (cumulation among Tunisia, Morocco and Algeria),29 the
                                                     
27 The application, at a later stage, of full cumulation amongst all PANEURO parties has been
discussed.
28 In one of these RTAs - i.e. the European Communities (EC)-South Africa - the "single territory"
concept embodied in the full cumulation applies vis-à-vis  countries which are, jointly with South Africa, parties
to the Southern Africa Customs Union (SACU).  While for all of these eight cases the tracing test also applies, itshould be noted that its implementation differs from one RTA to another.  This is explained in relevant footnotesin Annex 5D.
29 The cumulation applies only when identical rules of origin apply.  Thus, cumulation remains possible
for any products which have identical rules of origin subject to the provisions contained in the RTAs presently
in force (i.e. Euro-Mediterranean Agreements for Mo rocco and Tunisia, and Co-operation Agreement for
Algeria).  It is the intention of the EC to introduce in the Euro-Mediterranean zone the same type of cumulationas the one applicable in the PANEURO area, and under similar criteria.  However, no cumulation is foreseen
between countries of the Euro-Mediterranean and  those of the PANEURO area.WT/REG/W/45
Page 11
Overseas Countries and Territories (OCTs) and South Africa (in both cases cumulation with ACP
countries); between the European Free Trade Association States (EFTA) and Morocco (cumulation
with Tunisia once its agreement with EFTA will be concluded); between Estonia and Ukraine
(cumulation with Latvia, Lithuania and the EC); and between Canada and Israel (cumulation with the
United States) – the only RTA providing for diagonal cumulation which does not involve a Europeancountry.
Table 2 – Frequency of Cumulation Provisions
Type of CumulationRTAsBilateral Diagonal FullAbsorption
PrincipleTracing Test
Customs unions (6) 6 0 0 2 -
FTAs and other preferential
RTAs (87)87 58 8 81 8
33. In some of the cases analysed (eight RTAs), cumulation provisions are accompanied by
restrictions.  In two cases (EC-Algeria and EC-OCTs), the restriction relates to the fact that the
diagonal cumulation is non-reciprocal and the inputs from eligible third-parties cannot be cumulated
with EC products.  Other restrictions identified consist of:
(a) setting a maximum value to the cumulation (United States-Israel FTA, in which
bilateral cumulation is allowed only up to a maximum of 15 per cent of the value of
the final product);
(b) fixing a minimum value for the transformation once cumulation applies (the South
Pacific Regional Trade and Economic Cooperation Agreement, SPARTECA, in
which products from the South Pacific Islands which cumulate with Australia's inputsand are exported into New Zealand have to have a minimum of 25 per cent of South-
Pacific-Island content);
30 or
(c) modifying the general criteria for the rules of origin (in four NAFTA-model RTAs,
whereby if bilateral cumulation is used, the calculation of the regional value content
of the good can only be made on the basis of the net cost method, and not under thetransaction value method).
34. Among WTO Members, views are divided on how diagonal cumulation schemes under
preferential rules of origin regimes affect the mu ltilateral trading system.  While for some Members
such schemes reduce barriers and facilitate trade among participating economies by a simplification
and harmonization of customs procedures, for others diagonal cumulation extends the preferentialnature of any individual RTA to parties to other RTAs, without any legal basis, and introduce another
layer of discrimination, since some third parties to the original RTA – those participating in the
diagonal cumulation scheme – benefit from preferential treatment, while other third parties – those not
participating in the scheme – are not eligible
35. In the vast majority of the RTAs examined, the absorption principle (see paragraph 17 above)
is either an integral part of the cumulation systems (83 RTAs) or does apply as an exception (seven
RTAs).
31  At the same time, however, in two RTAs  (NAFTA and the Southern Common Market,
MERCOSUR), the generally applied absorption principle does not apply to the automotive sector.32
In two other cases (Australia-New Zealand Closer Economic Relations Trade Agreement
                                                     
30 This is the counterpart of (a).
31 Information on that is not available for two of the RTAs surveyed here.
32 The significance of that exception is relatively high, given the importance of intermediate materials
in that sector.WT/REG/W/45
Page 12
(ANZCERTA) and SPARTECA), the absorption principl e only applies if certain origin requirements
concerning the intermediate materials are fulfilled.
36. A number of RTAs provide for a no-drawback ru le – 63 out of 93.  Again, that derives mainly
from the introduction of the no-draw back rule into the PANEURO at the time of its extension to
diagonal cumulation.  The no-drawback rule is also  part of a number of European RTAs which have
rules of origin similar to the PANEURO; in some of  these cases (six out of eleven), the introduction of
such rule benefits from a transition period varying from three months to three years from the entry into
force of the agreement.
37. In the NAFTA, the drawback system has been replaced with a system that provides for the
refund of the lesser of the amount of duties paid on imported goods and the amount of duties paid on
exports of that good, or another good manufactured from that good, to another NAFTA Party.  In
other RTAs, that is those not involving European countries or the NAFTA, drawback is generalized,
though a few exceptions apply:
• in MERCOSUR, a no-drawback rule applies vis-à-vis  imports of intermediate
automotive products by Argentina and Brazil if the final product is exported within
MERCOSUR;
• in the Caribbean Community and Common Market (CARICOM), a member State
may refuse to accept as eligible for prefer ential treatment goods in relation to which
drawback is claimed.  That same rule will apply in COMESA at the end of a ten yeartransition period (i.e. end 2004).
38. As regards provisions on territoriality, 62 RTAs allow a next-to-final product to be subject to
some processing outside the cumulation area without losing its originating status.  That is another
typical provision of the PANEURO, which also applies to other nine RTAs involving European
countries and three RTAs in the Americas.
39. The accepted outward processing is normally limited by the establishment of a maximum
value-added that can be acquired outside the cumulation area (normally 10 per cent).  However, a
further and major limitation applies to such aut horized outward-processing in European RTAs –
namely, the provision does not apply to textiles and clothing.33
40. In other RTAs which do not tolerate outward processing, originating status is kept when there
is direct transportation between parties to the agr eement, or when a product in transit through the
territory of third-parties has not been submitted to operations other than loading, reloading or
operations to preserve it in good conditions.34
                                                     
33  A sector where outward-processing tends to be of very common use.
34  In the case of some RTAs, and in particular all of the European type, customs supervision is
required during transhipment or temporary warehousing.WT/REG/W/45
Page 13
Table 3 – Conditions under which Outward Processing is Accepted
RTAs Outward processing accepted and limitations
PANEURO (50)Maximum value of value-added (VA): 10% (ex-works); not applicable to textiles and
clothing;  the next-to-final product has to be already originating, and that without taking
into account the tolerance rule.
PE-, of which:
PE- (9)aMaximum value of VA: 10% (ex-works);  not applicable to textiles and clothing;  the next-to-final product has to be already originating, and that without taking into account the
tolerance rule.
Canada – IsraelOnly for minor processing in cumulation area.  Other processing may be authorized on
certain goods upon agreement by Parties.
Mexico-IsraelMaximum value of VA: 10% (f.o.b);  only minimal operations;  benefitting product/sectors
to be identified.
CARICOMb Maximum value of non-originating material: 65%/80% of cost of the processingc
aOnly available in the following RTAs: EC-Israel , Czech Rep.-Israel, Slovak Rep.-Israel, Hungary-
Israel, Slovenia-Israel, Turkey-I srael, EFTA-Palestinian Authority, EFTA-FYROM, Bulgaria-FYROM.
bThe rule does not refer to processing outside t he zone, but rather to a processing (defined as
covering the "repair, renovation or improvement" of a good) done in a CARICOM member State using
non-originating material in the cont ext of a re-importation transaction.
c65 per cent applies to CARICOM's more developed countries (i.e. Barbados, Guyana, Jamaica,
Suriname and Trinidad and Tobago) and 80 per cent for its less developed countries (all other
members except Bahamas).
3. Exceptions to Rules of Origin Regimes
41. Among exceptions to the rules of origin regimes, those referring to the general criteria for the
origin rules are the most frequent ones, though there may be also exceptional rules on tolerance,
cumulation or absorption in some RTAs.
42. Exceptions vis-à-vis  the criteria themselves have been found in 23 RTAs.  Their main
characteristics are summarized in Table 4.
43. Points of interest in Table 4 include the following:
• In the case of COMESA, the general domestic  content requirement of 35 per cent is
lowered to 25 per cent in cases of "goods of particular importance to the economic
development" of Member States.  Other cases where the exceptions involve a moreliberal content requirement relate to some products under MERCOSUR's automotive
regime
35 and the textiles products imported into New Zealand under SPARTECA.
• Rules of origin in the automotive and te xtiles sector provide in many cases for a
number of exceptions to the general rules of origin regime.
                                                     
35 i.e. automotive products from Uruguay and new models produced in Argentina, Brazil and Uruguay.
However, other exceptions applying to the automotive sector, and in particular the absence of absorption
principle, go in the sense of a more restrictive rules of origin regime.WT/REG/W/45
Page 14
Table 4 – Exceptions to the General Criteria36
Different percentage
RTAsUse of
different
criterionMore restrictive Less restrictiveOther
Customs unions  (5):
sector-specific
due to inadequacy of 
  criteriafor other reasons4
1
a
2b
1c--
-
-2
1
a
-
1d1
1k
--
FTAs and other preferentialRTAs  (18):
sector-specific
due to inadequacy of 
 criteria
for other reasons13
2
e
11i
-2
2f
--1
1
g
--4
2
h
-
4j
a MERCOSUR.
b EC-Cyprus, EC-Malta (customs unions not yet achieved.)
c Central American Common Market, (CACM).
d COMESA
e Canada-Israel, Asean Free-trade Area (AFTA).
f Canada-Chile, NAFTA.
g SPARTECA.
h Canada-Chile and  NAFTA:  in the automotive sector, the calculation of the regional value content can
only be made on the basis of the net cost method (and not also under the transaction value method).
Further,  under NAFTA, no absorption rules for the automotive sector.
i EC-Morocco, EC-Tunisia, EC-Algeria, EC-Egypt, EC-Jordan, EC-Lebanon, EC-OCTs, EC-Syria,
EFTA-Israel, EFTA-Morocco, Estonia-Ukraine
j Canada-Chile, Mexico-Chile, NAFTA, Mexico-Israel. The calculation of the regi onal value content can
only be made on the basis of the net cost method.
k MERCOSUR.  No absorption rules for the automotive sector.
                                                     
36 The PANEURO, and other PANEURO-like rules of origin regimes have not been taken into account
in that table given that they are by definition product-specific.  The general exceptions to these regimes applymainly vis-à-vis  the tolerance rules.WT/REG/W/45
Page 15
Annex 1
Examples of Cumulation Types
Countries A, B and C have bilateral FTAs with each other, but they are not parties to a single
agreement.  Countries D, E and F are parties to a single FTA, and each of them has bilateral
FTAs with countries A, B and C.  Country G has no agreement with any of the other countries.
Example 1
A table is produced in country A using wood from countr y B and glass from the country C.  Subsequently the
table is exported to country C.
Under the FTA between A and C, the application of the bilatera l cumulation will mean that the glass is originating.  I f
diagonal cumulation exists among those three countries, the wood will also be originating even if B is not a party to that
FTA.  The table will thus be granted originating status and wil l receive preferential treatment when entering C.  If only
bilateral cumulation exists, the table will onl y be ori ginatin g if substantial transformation takes place in countr y A.
Example 2
A lamp is produced in D using some imported material s.  The rules of origin, which provide for diagonal
cumulation among countries A, B, C, D, E and F, require  only more than minimal operations on materials from
the cumulation area but substantial transformation from outside the cumulation area.
If all imported materials are from a country benefiting from  diagonal cumulation (e.g. from A or E), the lamp will be
originating.  Normally, the lamp will acquire origin fr om D if the transformation held therein goes beyond a minimal
operation (e.g. if the lamp is assembled and painted in D).  If  that is not the case, the final origin will depend on thedetailed rules applied in the cumulation system.  But in all cases it will be originating .  However, if the lamp also makes
use of non-originating materials, then t he relevant requirement for substantial transformation will have to be met for the
lamp to be originating.
Example 3
A bike is manufactured in D with the following breakdown of ex-works price:
• country G parts:  15 per cent
• assembly done in country E:  30 per cent (of which 40 pe r cent from G and 60 per cent of value-added in E)
• country D origin parts, labour and other costs (i.e. value-added in D): 55 per cent1
Substantial transformation requirements apply given that  non-originating materials are used in the final
product.  The specific requirement applying to bikes is:  "the value of all the imported materials used does not
exceed 30 per cent of the ex-works price of the product":
If the FTA between D, E and F pr ovides for diagonal cumulation:
Supposing that the substantial transformation rule is such  that the assembly done in E is determined as originating
in country G, when determining whether t he bike originates in D, the following would result:  the bike would have in
total 45 per cent of parts from G and thus be above the 30 per cent ceiling.
Therefore, the bike would not be granted originating status .
If the FTA between D, E and F provides for full cumulation (a ll of its countries count as a single territory and thus
only the origin of the bike is to be determined), the following applies:
parts from G in the bike:  15 per cent + (40 per cent of  30 per cent) = 27 per cent
parts from E in the bike: 60 per cent of 30 per cent = 18 per cent
value-added in D: 55 per cent
The non-originating parts from G ar e below the 30 per cent ceiling and the bike is originatingWT/REG/W/45
Page 16
Annex 2
List of RTAs Included in the Survey1 2
Agreements notified under Article XXIV  (87)
Euro-Mediterranean Region
EC - Cyprus EC - Malta
EC - Bulgaria  (PANEURO) EC - Czech Republic  (PANEURO)
EC - Estonia  (PANEURO) European Economic Area, EEA  (PANEURO)
EC - Hungary  (PANEURO) EC – Iceland  (PANEURO)
EC - Latvia  (PANEURO) EC – Lithuania  (PANEURO)
EC - Norway  (PANEURO) EC – Poland  (PANEURO)
EC - Romania  (PANEURO) EC – Slovak Republic  (PANEURO)
EC - Slovenia  (PANEURO) EC – Switzerland  (PANEURO)
EC - Israel Euro-Mediterranean Agreement (PE-) EC – Morocco Euro-Mediterranean Agreement
EC - Palestinian Authority Euro-Mediterranean Agreement
(PE-)EC – Tunisia Euro-Mediterranean Agreement
EC - Algeria Co-operation Agreement EC – Egypt Co-operation Agreement
EC - Jordan Co-operation Agreement EC – Lebanon Co-operation Agreement
EC - OCTs EC – Syria Co-operation Agreement
EC - Faroe Islands (PE-) European Free Trade Association, EFTA  (PANEURO)
EFTA States - Bulgaria  (PANEURO) EFTA  States - Czech Republic  (PANEURO)
EFTA States - Estonia  (PANEURO) EFTA States - FYROM (PE-)
EFTA States - Hungary  (PANEURO) EFTA States - Israel
EFTA States - Latvia  (PANEURO) EFTA States - Lithuania  (PANEURO)
EFTA States - Morocco EFTA States - Palestinian Authority (PE-)
EFTA States - Poland  (PANEURO) EFTA States - Romania  (PANEURO)
EFTA States - Slovak Republic  (PANEU RO) EFTA States - Slovenia  (PANEURO)
EFTA States - Turkey  (PANEURO) Central European Free-Trade Area, CEFTA  (PANEURO)
Bulgaria - FYROM (PE-) Bulgaria - Turkey  (PANEURO)
Czech Republic - Estonia  (PANEU RO) Czech Republic - Israel (PE-)
Czech Republic - Latvia  (PANEURO) Cze ch Republic - Lithuania  (PANEURO)
Czech Rep.-Turkey  (PANEURO) Hungary - Latvia  (PANEURO)
Hungary - Lithuania  (PANEURO) Hungary - Israel (PE-)
Hungary - Turkey  (PANEURO) Poland - Israel (PE-)
Poland - Latvia  (PANEURO) Poland - Lithuania  (PANEURO)
Poland - Turkey  (PANEURO) Romania - Turkey  (PANEURO)
Slovak Republic - Estonia  (PANEURO) Slovak Republic - Israel (PE-)
Slovak Republic - Latvia  (PANEURO) Slovak Republic - Lithuania  (PANEURO)
Slovak Rep.-Turkey  (PANEURO) Slovenia - Croatia (PE-)
Slovenia - Estonia  (PANEURO) Slovenia - FYROM(PE-)
Slovenia - Israel (PE-) Slovenia - Latvia  (PANEURO)
Slovenia - Lithuania  (PANEURO) Turkey - Estonia  (PANEURO)
Turkey – FYROM (PE-) Turkey - Israel (PE-)
Turkey - Latvia  (PANEURO) Turkey - Lithuania  (PANEURO)
Estonia - Latvia - Lithuania  (PANEURO) Estonia - Ukraine
                                                     
1 Agreements in bold are customs unions.
2 The abbreviation "PE-" has been used to refer to those rules of origin similar to the PANEURO,
including practically identical product -specific working or processing requirements to those of the PANEURO,
but which differ from the PANEURO regulations on cumulation provisions and/or territoriality/drawbackprovisions.WT/REG/W/45
Page 17
Americas
Canada - Chile NAFTA
Mexico - Chile
Oceania
ANZCERTA
Cross-regional
EC - Mexico Mexico - Israel
EC - South Africa United States - Israel
Canada - Israel
Agreements notified under the Enabling Clause  (6)
AFTA – Asean Free Trade Area COMESA
CACM – Central American Common Market MERCOSUR
CARICOM SPARTECAWT/REG/W/45
Page 18
Annex 3
Short Description of the Pan-European System of Cumulation of Origin
Since the beginning of 1997 rules of origin based on the concept of pan-European cumulation
have been applied in a number of Free Trade Agreements (FTAs) within Europe.1  Through these
provisions on cumulation of origin, separate free trade areas established under a number of FTAs have
been merged into a Europe-wide network.  The three basic aspects of the system are: (i) semi-finished
material originating in any country of the system and which are further processed or assembled in any
other partner country may always be considered as originating products;  (ii) originating products can
be traded between any of the countries involved in  the system;  (iii) the introduction of a tolerance
rule for third country materials.
Advantages of the system of cumulation of origin for producers and traders include: (i) the
simplification of customs procedures (once a product has been given “European origin” there is no
need for the origin to be verified again), (ii) mo re freedom in using input material or deciding in
which country to invest their production facilities,
While in practice only one cumulation system applies, a complete harmonization of all the
ROO Protocols has not been possible and at least three types of Protocols co-exist: one applying to the
EEA and providing for full cumulation, one that applies to trade among EFTA countries and the other
which applies for the rest of the FTAs covered by the system.
General requirements
Originating products are defined in accordance to two basic requirements:
− Products wholly obtained in the EC, EEA or another partner country (hereinafter the
"participating countries") are originating2
For products not wholly obtained, originating status is granted if the imported material
have undergone sufficient working or processing in one of the participating countries.3
Annex II to the ROO Protocol contains, for each tariff heading, an harmonized list of
working or processing required to be carried out on non-originating materials in order for
the manufactured product to be granted originating status.
− The list of working or processing required makes use of all of the criteria described above for
conferring origin, in many cases requires the fulfilment of more than a single criterion. For
products classified under Chapters 28, 29, 31-39, 84-91, 94, an alternative criteria is also
provided, which in all cases provides for a import content test.4
The cumulation rules
The Pan-European system of cumulation provides for bilateral and diagonal cumulation (full
cumulation applies in the case of the EEA).  It works as if semi-finished materials imported from any
                                                     
1 Since that date, a number of amendments have been made to the relevant Protocol "concerning the
definition of the concept of 'originating products' and methods of administrative cooperation".  This note takesinto account amendment made up to December 2000 wh ich have entered into force up to 1 January 2001.
2 Whole obtained products are defined in Article 4 or 5 of the Protocols and are generally agricultural,
fisheries or mining products.
3 The cumulation rules soften that requirement, as explained below.
4 In cases where the first method also provides for a import content limitation, the alternative criteria
always provides for a lower limit of non-originating products.WT/REG/W/45
Page 19
of the participating countries (EC(15) as a whole plus 15 countries)5 and incorporated in a final
product were of domestic origin, and that without any limitation.
In practice, the cumulation rules waive the sufficient working or processing requirement with
originating status being granted once the working or processing carried out in a particular
participating country is simply beyond certain specified de minimis  operations. Even if the
transformation is not beyond de minimis , origin can still be granted to that particular country provided
the value-added there is greater than the value of th e materials used originating in any one of the other
participating countries.  If that is not the case,  the final product will be originating from the country
which accounts for the highest value of originating materials used in the final manufacture.
The full cumulation provided for in the EEA modifies a few aspects of the provisions
explained above.  First, in the context of the Agreement, products are of EEA origin; origin is no more
considered in relation to any individual party to the EEA).  Second, and more importantly, theprocessing requirements do not apply to each of the EEA partners individually but to the area as
whole, which means that processing could be combined  in different partners for a final EEA origin.  It
is also important to note that the value added of all processing accounts for the final determination of
origin, including those which are de minimis  and all those processing made on non-originating
material (the "tracing test").
At present, 50 RTAs in Europe apply the System.  These are specified in Annex 2
(PANEURO).
The countries participating in the System are the following:
EC(15) as a whole
Bulgaria
Czech Republic
Estonia
Hungary
Iceland
LatviaLiechtenstein
Lithuania
Norway
Poland
Romania
Slovak Republic
SloveniaSwitzerland
Turkey
                                                     
5 The Spanish autonomous territories of Ceuta & Melilla and Andorra, and San Marino are also
involved in the system through special provisions or Joint Declarations.WT/REG/W/45
Page 20
Annex 4
Short Description of the NAFTA Rules of Origin1
The NAFTA defines originating goods in four ways:
− goods wholly obtained or produced in the NAFTA region;
− goods produced in the NAFTA region wholly from originating materials;
− goods meeting the Annex 401 origin rule. These are commonly called specific rules of origin,
and are based on a change in tariff classification, a regional value content requirement, or
both.
The regional value content can be calculated on the basis of the transaction value method
or the net cost method.  Usually, the exporter or producer can choose between either
method.  However, there are a number of situations where the exporter or producer
cannot use the transaction value method;2  the producer can also revert to the net cost
method if using the transaction value method is unfavourable.  The transaction value
method calculates the value of the non-originating materials as a percentage of the GATT
transaction value of the good, which is the total price paid for the good, with certain
adjustments for packing and other items.  Because the transaction value method permitsthe producer to count all of its costs and profit as territorial, the required percentage of
regional value content under this method is higher than under the net cost method.
The net cost method calculates the regional value content as a percentage of the net cost
to produce the good.  Net cost represents 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.
− under two very specific circumstances, unassembled goods and goods classified with their
parts not meeting the Annex 401 rule of origin but contain 60 per cent of regional value
content using the transaction method (50 per cent using the net cost method).
A good that does not meet these requirements may, in some cases, qualify as originating by
using the additional options described below:
− A producer may designate as an intermediate material any self-produced, originating material
used in the production of a final good.  As long as that material qualifies as an originating
one, its entire value can be treated as originating to determine the regional value content of
the finished good.  This provision covers all goods and materials except automotive goods
and engines and gearboxes.
− Accumulation (cumulation provisions) - allows the producer or exporter of goods to choose to
include as part of the goods' regional value content any regional value added by suppliers of
non-originating materials used to produce the final goods.  A number of restrictions are
attached to the use of this provision.
                                                     
1 Extracted in full from the Trilateral Customs Guide to NAFTA , Canada Customs and Revenue
Agency, at http://www.ccra-adrc.gc.ca/tax/business/smallbusiness/c124-e.html.
2 There is no transaction value, in cases of  some  related-party transactions, for certain motor vehicles
and parts, when a producer is accumulating regional value content, and when determining the regional valuecontent for designated intermediate materials.WT/REG/W/45
Page 21
− De minimis  (tolerance rule) - allows goods to qualify as originating even if not all of the non-
originating materials undergo the required CTC, as long as such materials are not more than acertain percentage (7 per cent in most cases) of the transaction value of the goods adjusted to
a free-on-board (F.O.B.) basis or, in some cases , of the total cost of the goods. Where the rule
of origin contains a requirement for a minimum regional value content, the calculation of that
content is waived if the value of all non-originating materials used in the production of thegoods is not more than the specified de minimis  amount.WT/REG/W/45
Page 22
Annex 5
A.  General Criteria of the Rules of Origin
Criterion Tolerance Rule
RTAsCTH PercentageTechnical
testLimitation
(% of value)Exceptions
EC - Cyprus Association √ Textiles: 10%1
EC - Malta Association √ Textiles: 10%1
PANEURO (50) √√ √ 10% ex-works Textiles: 10%1-8%2
PE- (15) √√ √ 10% ex-works Textiles: 10%1-8%2
EC - Morocco EuroMed. √ Textile: 10%1,2
EC - Tunisia EuroMed. √ Textile: 10%1,2
EC - Algeria Co-operation √ Textiles: 10%1
EC- Egypt Co-operation √ Textiles: 10%1
EC- Jordan Co-operation √ Textiles: 10%1
EC- Lebanon Co-operation √ Textiles: 10%1
EC - OCTs √ 10% ex-works Textiles: 10%1,3
EC- Syria Co-operation √ Textiles: 10%1
EC - Mexico √√ √ 10% ex-works Textiles: 8%1,2
EC - South Africa √√ √ 15% ex-worksTextiles: 10%1-8%2 few
agricultural: 10%
EFTA – Israel √ Textile: 10%1,2
EFTA – Morocco √ Textile: 10%1,2
Estonia-Ukraine √ Textile: 10%1,2
                                                     
1 This tolerance rule only applies to textile products composed of at least two basic textile materials.
Further, generally the tolerance represents the maximum weight (instead of maximum value) of non-originating
basic textile material vis-à-vis  the total weight of all basic textile material.
2  For certain textile products, a tolerance rule of 8 per cent of the ex-works price of the product
applies, provided there is a change in tariff heading.
3 For certain textile products, a tolerance rule of 10 per cent of the ex-works price of the product
applies, provided there is a change in tariff heading.GENERAL NOTES:
1. Customs unions and interim agreements leading to a customs union are presented in bold (the customs
unions between EC-Cyprus and EC-M alta have not been achieved).
2. The abbreviation "PE-" has been used to refer to those rules of origin similar to the PANEURO, including
identical product-specific working or  processing requirements to those of the PANEURO, but which differ from
the PANEURO regulations on cumulation provisi ons and/or territoriality/drawback provisions.
3. In the case of MERCOSUR, the rules of origin apply only for products outside the customs union – i.e. those
products which are exempted from the Common Exter nal Tariff (CET) of MERCOSUR and to products that
have parts exempted from the CET representing at least 40 percent of the value (f.o.b.) of the final product.
Legend:
n.ap. - not applicable. VA - value-added
n.av. – information not available MC - import content
DC - domestic contentWT/REG/W/45
Page 23
Criterion Tolerance Rule
RTAsCTH PercentageTechnical
testLimitation
(% of value)Exceptions
Canada - Chile √√ √4 9%5Textiles:  9%6 Agricultural7, few
industrial prod
Mexico-Chile √√ √4 8%5Textiles: none Agricultural7, few
industrial prod.
NAFTA √√ √4 7%5Textiles: 7%6 Agricultural7, few
industrial prod.
Canada - Israel √ 10%5Textiles: none Agricultural7, few
industrial prod.
Mexico - Israel √√ √4 10%5Textiles: 7%6 Agricultural7, few
industrial prod.
United States-Israel √ No
ANZCERTA √ √8 2%9
SPARTECA √ √10 2%9
AFTA √ √11 No
CACM √ 7% Textiles12
CARICOM √ n.av.
COMESA √√ No
MERCOSUR √√ No
B.  Rules of Origin based on the Percentage Criterion
General criterion and
limitationsBasis for calculation
RTAs
Import contentDomestic
contentValue of
partsc.i.f. f.o.b.Ex-
worksCost
prod.13
PANEURO (50)√ 50%-40% -
30%14√√
PE- (15) √ 50%-40%-30%14 √√
                                                     
4  Used in fewer tariff items than the other two methods.
5 Vis-à-vis  the transaction value of the good adjusted to a f.o.b. basis (or under certain defined
circumstances, vis-à-vis  the total cost of the good).
6  The tolerance rule represents the maximum weight (and not the maximum value) of non-originating
fibers and yarns vis-à-vis  the total weight of the material.
7  In the majority of cases, the exception related to the fact that the tolerance is applied only if the non-
originating material is from a different subheading than the final good.
8 The test - which is in fact a "geographical" test -  requires that the last process of manufacture
(excluding minimal operations) be performed in either Australia or New Zealand.
9 The tolerance rule, which applies to unforeseen circumstances, is subject to approval and is of a
temporary nature (thus it is not a de facto lowering of the limitation).
10 The test requires that the last process of manufacture (excluding minimal operations) be performed in
South Pacific Islands.
11 The test requires that the last process of manufacture be performed in exporting ASEAN member
State.
12 For textile products, the tolerance rule applies with respect to the total weight of basic textile
material.
13  Similar to ex-works but excluding direct labour and manufacturing overheads (e.g. profit).
14  Other percentages also appear at a lesser frequency.WT/REG/W/45
Page 24
General criterion and
limitationsBasis for calculation
RTAs
Import contentDomestic
contentValue of
partsc.i.f. f.o.b.Ex-
worksCost
prod.13
EC - Mexico √ 50%-40%-30%14 √√
EC – South Africa √ 50%-40%-30%14 √√
Canada – Chile√15
35%-25%√
35%√
25%
Mexico-Chile√15
50%-40%√
50%√
40%
NAFTA√15
60%-50%√
60%√
50%
Mexico-Israel√15
45%-35%√
45%√
35%
United States-Israel √ 35% √
ANZCERTA √ 50%16 √17
SPARTECA √ 50%16 √17
AFTA √ 60% √
CACM n.av.
CARICOM n.av.
COMESA √ 60% √ 35% √ 18
MERCOSUR √ 40% √ 60% √
C.  Rules of Origin based on CTH and Technical Test Criterion
CTH criterion Technical test
RTAs Definition of
headingSoft
CTHType
(P/N)Manufact.
requiredObligatory
inputOther restr.
on input
EC - Cyprus Association 4 √ n.ap.
EC - Malta Association 4 √ n.ap.
PANEURO 4 √ P √√ √
PE- (15) 4 √ P √√ √
EC - Morocco EuroMed. 4 √ n.ap.
EC - Tunisia EuroMed. 4 √ n.ap.
EC - Algeria Co-operation 4 √ n.ap.
EC- Egypt Co-operation 4 √ n.ap.
EC- Jordan Co-operation 4 √ n.ap.
EC- Lebanon Co-operation 4 √ n.ap.
EC - OCTs 4 √ n.ap.
                                                     
15 Higher threshold based on the transaction value method (adjusted to a f.o.b. basis), lower threshold
based on the net cost method.
16 The domestic content requires that at least 50 per cent of the cost of manufacture consist of
"qualifying expenditure".  The definition of qualifying expenditure is different for each Party to the Agreement.
17  Factory cost – i.e. similar to cost of production but including some (but not all) labour and
manufacturing overheads.
18 C.i.f. less the amount of any transport costs incurred in transit through other COMESA member
States.WT/REG/W/45
Page 25
CTH criterion Technical test
RTAs Definition of
headingSoft
CTHType
(P/N)Manufact.
requiredObligatory
inputOther restr.
on input
EC- Syria Co-operation 4 √ n.ap.
EC – Mexico 4 √ P √√ √
EC – South Africa 4 √ P √√ √
EFTA – Israel 4 √ n.ap.
EFTA – Morocco 4 √ n.ap.
Estonia-Ukraine 4 √ n.ap.
Canada – Chile 4 √ P √√
Mexico-Chile 4 √ P √√
NAFTA 4 √ P √√
Canada – Israel 4 √ n.ap.
Mexico-Israel 4 √ P √√
CACM 4 √ n.ap.
CARICOM n.av. n.ap.
COMESA 4
MERCOSUR 4N o
D.  Cumulation Provisions of Rules of Origin
TypeRTAsBilateral Diagonal FullProcessing under
cumulationAbsorption
principleTracing
test
EC - Cyprus Association √ more than minimal No19
EC - Malta Association √ more than minimal No19
PANEURO, of which:
    EEA √ √ (PE) √more than minimal , or
any under full cumul.√√
    Other PANEURO (49) √√ more than minimal √
PE- (15) √ more than minimal √
EC - Morocco EuroMed. 20√√ (Algeria,
Tunisia)√more than minimal for
cumul. of materials;
any for  cumul. ofprocessing (full)√√
EC - Tunisia EuroMed. 20√√ (Algeria,
Morocco)√more than minimal for
cumul. of materials;
any for  cumul. ofprocessing (full)√√
                                                     
19  However, the absorption principle applies to some of the products listed in Annex 5A which have to
meet specific requirements (instead of the general CTH requirement).
20 The diagonal cumulation applies only when identical rules of origin apply.  Thus, cumulation
remains possible for any products which have identical rules of origin subject to the provisions contained in the
agreements presently in force - i.e. Euro-Mediterranean  Agreements for Morocco and Tunisia, and Co-operation
Agreement for Algeria.  Finally, under full cumulation, while the cumulation of materials require more thanminimal operations, the cumulation of processing only applies if the product undergoes subsequent processingin either Parties to the Agreement.WT/REG/W/45
Page 26
TypeRTAsBilateral Diagonal FullProcessing under
cumulationAbsorption
principleTracing
test
EC - Algeria Co-operation20√√
(Morocco,
Tunisia)21√more than minimal for
cumul. of materials;
any for  cumul. ofprocessing (full)No
19√
EC- Egypt Co-operation √ more than minimal No19
EC- Jordan Co-operation √ more than minimal No19
EC- Lebanon Co-operation √ more than minimal No19
EC - OCTs √ √ (ACP)21 √ any √√
EC- Syria Co-operation √ more than minimal No19
EC - Mexico √ more than minimal √
EC - South Africa √ √ (ACP) √22 more than minimal √ √22
EFTA – Israel √ more than minimal √
EFTA – Morocco √√
(Tunisia)23more than minimal √
Estonia-Ukraine √√
(Lithuania,
Latvia,
EC)more than minimal √
Canada – Chile √24 any √
Mexico-Chile √24 any √
NAFTA √24 any√ except for
automotive
Canada – Israel √ √ (US) any √
Mexico-Israel √24 any √
United States-Israel √25 more than minimal √
ANZCERTA √√ any √26 √26
SPARTECA √27 √ any √28 √28
AFTA √ √29
                                                     
21 Non-reciprocal diagonal cumulation – i.e. Alge ria can cumulate with inputs from Morocco and
Tunisia, PTOM can cumulate while with inputs from ACP, but such cumulation does not apply for products
from the EC.
22 Within SACU countries only.
23 Cumulation with Tunisia will take place only once relevant Euro-Mediterranean Agreements will be
concluded.
24 If the producer/exporter make use of the bilateral cumulation, the domestic content of the good (i.e.
the "regional value content") can only be calculated on the basis of the net cost method.
25 Cumulation is allowed only up to a maximum of 15 per cent of the value of the final product.
26 If the last process of manufacture (excluding minimal operations) is not performed in Australia or
New Zealand, the absorption principle/tracing test does not apply and the input will be considered 100 per cent
imported.  Further, the tracing test calculated differently in Australia and New Zealand.  Also,
27 In the case of products from the South Pacific Islands being exported into New Zealand which
cumulate with Australia's inputs, a minimum of 25 per cent of South Pacific Islands "qualifying expenditure" is
necessary.
28 In the case of imports into New Zealand, the absorption principle/tracing test do not apply for
materials imported from Australia which are not of ANZCERTA origin;  in that case, the input will beconsidered as imported.WT/REG/W/45
Page 27
TypeRTAsBilateral Diagonal FullProcessing under
cumulationAbsorption
principleTracing
test
CACM √ n.av.
CARICOM √ any n.av.
COMESA √ any √
MERCOSUR √ any√ except for
automotive
E.  Exceptions to the General Criteria of the Rules of Origin
Criterion for exceptions
RTAsCTH PercentageTechnical
testSector-specific
EC - Cyprus Association √ (MC-40%30, VP) √
EC - Malta Association √ (MC-40%30, VP) √
EC - Morocco EuroMed. √ (MC-40%30, VP) √
EC - Tunisia EuroMed. √ (MC-40%30, VP) √
EC - Algeria Co-operation √ (MC-40%30, VP) √
EC- Egypt Co-operation √ (MC-40%30, VP) √
EC- Jordan Co-operation √ (MC-40%30, VP) √
EC- Lebanon Co-operation √ (MC-40%30, VP) √
EC - OCTs √ (MC-40%30, VP) √
EC- Syria Co-operation √ (MC-40%30, VP) √
EFTA – Israel √ (MC-40%30, VP) √
EFTA – Morocco √ (MC-40%30, VP) √
Estonia-Ukraine √ (MC-40%30, VP) √
Canada – Chile √31,32 Yes (auto)
Mexico-Chile √32
NAFTA √31, 32 Yes (auto)33
Canada – Israel √Yes (textiles, machinery &
mechanical)
Mexico-Israel √32
SPARTECA √ (DC, 45%) Yes (textiles imported into NZ)
                                                                                                                                                                    
29 In this case, the tracing test - which applies without full cumulation – may "compensate" the absence
of the absorption principle.
30 Various other percentages (mainly 50 per cent) appear at a lesser frequency.
31 Higher regional content requirements for automotive goods on the net cost method  - which is the
only method accepted for such calculations on these goods (30 per cent - instead of 25 per cent - for Canada-
Chile, and between 55 per cent and 62.5 per cent - instead of 50 per cent - for NAFTA).
32 Under certain circumstances, only the net cost method can be used for calculating the regional
content (e.g. use of cumulation provisions, sales to related persons, goods which are intermediate materials).
33 Absorption rules do not apply to the sector concerned (automotive sector).WT/REG/W/45
Page 28
Criterion for exceptions
RTAsCTH PercentageTechnical
testSector-specific
AFTA √34 Yes (textiles)
CACM √ (DC)
CARICOM n.av.
COMESA √ (DC, 25%)35
MERCOSUR√ (DC, 33%-60% for
certain automotive)36√Yes (dairy, chemicals, steel,
auto33)
F.  Drawback provisions
No-drawbackRTAsAllow for
drawback37 Rule Derogation38Drawback not
mentioned
EC - Cyprus Association √
EC - Malta Association √
PANEURO (50) √
PE-, of which: PE- (11)39
PE- (4)40√ (11) √ (6)41
√
EC - Morocco EuroMed. √
EC - Tunisia EuroMed. √
EC - Algeria Co-operation √
EC- Egypt Co-operation √
EC- Jordan Co-operation √
EC- Lebanon Co-operation √
EC - OCTs √
EC- Syria Co-operation √
EC - Mexico √ 2 years
EC - South Africa √
EFTA – Israel √
                                                     
34 These are alternative rules to the general rules, which can still be used for textiles.
35 That lower threshold (25 per cent instead of usual 35 per cent) applies to "goods of particular
importance to the economic development" of COMESA member States.  These goods are included in a listagreed by the COMESA Council of the Common Market.
36 Lower regional content requirements apply for automotive products from Uruguay and new models
produced in Argentina, Brazil and Uruguay.
37  Either explicitly mentioned in the Agreement or as a general practice of the countries involved.
38  Time-period from the entry into force of the agreement.
39 EC-Faroe Islands, EC-Palestinian Authority, EC-Israel, Czech Rep.-Israel, Slovak Rep.-Israel,
Turkey-Israel, Slovenia-Israel, EFTA-Palestinian Authority, EFTA-FYROM, Bulgaria-FYROM, Turkey-
FYROM.
40 Hungary-Israel, Poland-Israel, Slovenia-Croatia, Slovenia-FYROM.
41 EC-Palestinian Authority (2 years), EFTA-Palestinian Authority (21/2 years), EFTA-FYROM (3
years), Bulgaria-FYROM (1 year), Turkey-FYROM (3 months), Israel-Slovenia (2 years).WT/REG/W/45
Page 29
No-drawbackRTAsAllow for
drawback37 Rule Derogation38Drawback not
mentioned
EFTA – Morocco √
Estonia-Ukraine √
Canada – Chile √
Mexico-Chile √√
NAFTA42√ 2 y. (Canada, US), 7 y. (Mex.)
Canada – Israel √√
Mexico-Israel √√
United States-Israel √
ANZCERTA √
SPARTECA √
AFTA √
CACM √
CARICOM √43
COMESA √44
MERCOSUR √ √45
__________
                                                     
42 The drawback and duty deferral programs on products imported, processed and then exported into
another NAFTA Party have been replaced with a new system that provides for the refund of the lesser of theamount of duties paid on imported goods and the amount of duties paid on exports of that good, or another goodmanufactured from that good, to another NAFTA Party.  This new system is being applied to Canada-US tradesince 1.1.96, and to Canada-Mexico and Mexico-US trade since 1.1 01.  Few exceptions to that apply.
43 A CARICOM member State may refuse to accept as eligible for preferential treatment goods in
relation to which drawback is claimed.
44 At the end of the ten year transition period (i.e. end 2004), COMESA member States may refuse to
accept as eligible for preferential treatment g oods in relation to which drawback is claimed.
45 The "no-drawback" rule applies only to imports of automotive products by Argentina and Brazil if
the final product is exported to one of the MERCOSUR Parties.