RESTRICTEDWORLD TRADE
ORGANIZATIONWT/REG/GEN/M/4
14 June 1999
(99-2364)
Committee on Regional Trade Agreements
EXAMINATION OF THE SYSTEM OF EUROPEAN CUMULATION OF ORIGIN1
Note on the Meeting of 30 April 1999
Chairman: Mr. Chul-Ki Ju
1. The Chairman said that the newly elected Chairman of the Committee on Regional Trade
Agreements (hereinafter the Committee or CRTA), Mr. Krirk-Krai Jirapaet, had requested that he
chair this third meeting dealing with the pan-European system of cumulation.  The Committee had
held its last discussion on the item in December 1998 under the Chairmanship ofMr. Carlos Pérez del Castillo.  That meeting had he ard the contributions of experts from some of the
countries involved in the system and provided an opportunity for Members to clarify the practical
changes introduced by the new system.  The summary records of the first two meetings, documents
WT/REG/GEN/M/1-2, as well as documents WT/REG/G EN/1 and Add.1, contained replies to written
questions posed by the delegations of the United States, Japan and Korea and provided a completerecord of the discussions held up to that point on the system.  Welcoming the presence of rules of
origin experts, the Chairman expressed the hope that the Committee would be able to conclude its
discussions by the end of the day.
2. The representative of Hong Kong, China said that, in light of the discussions of 23 September
and 1 December 1998, she would make a number of observations.  First, paragraph 2 of the joint
notification stated that before the introduction of  the pan-European system of cumulation, trade in
originating products was seriously limited.  She wondered how far the new system had contributed tothe increase of such trade between its Parties and the extent to which the trade in originating products
had diverted trade from third parties.  Second, paragraph 3 of the same document stated that the new
system provided significant advantages to producers and traders both within and outside the
pan-European area.  She wanted to know which exact provisions were regarded as more flexible with
regard to the use of third-country materials;  for example, elaboration of how the alternativeprocessing rule was applied (with illustrations).  Third, her delegation had found that the
pan-European system of cumulation had, in fact, turned the pan-European area into a single free-trade
area (FTA).  She wondered whether a pan-European FTA had been effectively formed without the
need to meet the requirements of GATT Article XXIV, and invited the Parties to the system to
comment.
3. Regarding the organization of the meeting, the representative of Korea wondered whether oral
responses would also be provided to questions alr eady answered in written form.  The representative
                                                     
1 This is of relevance for the examination of the following agreements: the Free-Trade
Agreements (FTAs) between the European Communities (E C) and Bulgaria, Czech Republic, Estonia, Hungary,
Latvia, Lithuania, Poland, Romania, Slovak Republic and Slovenia;  the FTAs between EFTA and Bulgaria,
Estonia, Hungary, Latvia, Lithuania, Poland, Romania and  Slovenia;  the Central European Free-Trade Area(CEFTA);  the FTAs between the Czech Republic and Estonia, Latvia and Lithuania; the FTAs between Polandand Lithuania;  the FTAs between the Slovak Republic and Estonia, Latvia and Lithuania;  the FTAs between
Slovenia and Estonia, Latvia and Lithuania;  and the FTAs between Turkey and the Czech Republic, Estonia,
Hungary, Lithuania, Romania.WT/REG/GEN/M/4
Page 2
of the United States said that given the complexity of the issues involved, questions should be posed
and replied to one-by-one.  The representative of Switzerland said that, since very detailed minutes
were available on the last discussion of the issue, delegations should not repeat what had been said
before.  The meeting should focus on new questions or on clarifications of points that were not clear
from the minutes.  The representative of Hungary said that replies previously provided in a written
form should not be repeated orally.  In light of the comments made and given the documentation
available, the Chairman said that the meeting would be devoted to new questions and further
clarifications, to be taken one at a time.
4. Thanking the Parties to the system for the written replies provided to his delegation's
questions, the representative of Korea said that he was looking for further clarification on some
points.  To that end, a new example on the tolerance rule, which raised two of the concerns of hisdelegation, had been distributed to delegations.  First, the new cumulation system could not justify thegranting of preferential treatment to a material unless there was a FTA between the importing and the
exporting country (respectively, Poland and Latvia in the example).  Second, the origin of the product
(canned fish in the example) could be determined differently depending on the country it was
exported to.
5. The expert from the European Communities noted that rules of origin were simply an
instrument of trade policy.  In the absence of a FTA, the rules of origin played no role.  Rules of
origin were difficult legal and economic instruments to handle and no economic operator would
subject himself to them if he could not benefit from any economic advantage.  Before 1997, there
were numerous bilateral FTAs involving the European Communities (EC) and their partner countries.
For example, the EC had a FTA with Switzerland  and Hungary while Hungary and Switzerland had a
FTA between themselves.  A product obtained in the context of the EC-Switzerland agreement and
thereafter exported to Hungary were considered a third-country product.  The new cumulation system
introduced in 1997 took down all those barriers;  an  originating product obtained in the context of
bilateral cumulation now acquired origin of the area and could therefore benefit from preferential
treatment within the whole area.  The dismantling of such barriers was to the benefit of business,
economic operators and traders.  For firms inside the area, there were greater production possibilities,
which could be carried out both with products from inside and outside the area.  Inputs from outside
the area also benefited from the cumulation system.  The new rules of origin were not invented in
1997;  they derived from the FTAs that the EC had maintained with its partners since the 1970s.
Rules of origin were not a rigid instrument; rather, they evolved and responded to economic and
political needs as well as the links between European countries.  The new system was designed on the
basis of the most modern rules of origin applied before 1997, namely those applied in the context ofthe European Economic Area (EEA), and extended to all the EC partners.  If  the EEA rules of origin
had not been contested in the context of GATT Article XXIV, he wondered whether that question
should be raised at the present time.  Countries in Europe had associated themselves with the
cumulation system at different times, and at present around 35 countries were parties to it.  While the
original requirement for a country to join the sy stem of cumulation was that it had already signed
FTAs with all of the Parties to the system, countries which had a few FTAs still to be negotiated and
signed were nevertheless accepted into the system because the Parties knew that such agreements
would eventually be signed.
6. Referring to the question posed by the representative of Korea on whether, in that context,
such a country would be better treated than Korea,  he said that the truth was between the two.  He
gave a hypothetical example in which the EC had FTAs with Ukraine and Slovenia, but no FTA
existed between Ukraine and Slovenia.  A Slovenian product that entered the EC and was sufficiently
processed would be able thereafter to benefit fr om preferential treatment when entering Ukraine.
While in that case the initial product came from a country which did not have a FTA with Ukraine, a
product coming from Korea would also benefit from the system of cumulation because the systemWT/REG/GEN/M/4
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provided a limit of 40 per cent on inputs from outside the area.  In conclusion, he said that he
preferred to limit himself to real questions otherwise it would be difficult to make progress.
7. The representative of Hungary said that FTAs and customs unions needed rules of origin to
determine which products were eligible for preferential treatment and that, by definition, these rules in
themselves could not be trade distortive.  Concerning the question on whether there existed, in fact, apan-European FTA, he said that was not the case because, although the rules of origin applied by the
FTAs were the same, the FTAs themselves were different.  Common rules of origin were
advantageous for traders.  Reactions from traders ha d in fact been very positive, as the existence of
the pan-European system of cumulation meant that there was no longer a need to deal with roughly
30 different sets of rules of origin and all the pa perwork and conditions associated with them.  The
system also had a net positive effect on investment decisions, third-party delivery decisions and
tolerance rules.  Concerning the whole discussion on the pan-European system of cumulation, he saidthat the Parties to the system had always approached it with the understanding that it was simply a
transparency exercise.  If some Members were looking to them in the hope for the harmonization of
normal rules of origin, they should follow suit.  Detailed information on the system had been provided
because the Parties wanted to raise the level of understanding of the underlying factors behind it, and
not because it was part of an Article XXIV test.  He agreed that the Committee should complete thediscussion during that day's meeting, as his delegation was not sure that the Committee was the right
forum to continue such discussions.
8. The representative of Korea said that while he agreed that no problem would exist with the
system of cumulation once all the bilateral FTAs among its Parties were concluded, his delegation
was concerned with the situation that prevailed until then.  He requested that written replies beprovided to the new questions posed by his delegation.
9. Referring to the comment made by the expert from the EC, the representative of the
United States said that, although the EEA rules of origin had not been contested under Article XXIV
within the context of the EEA, this fact was not re levant to the current discussion which concerned the
examination of a number of regional trade agreements (RTAs).  His delegation did not share the viewof the delegation of Korea that there was no problem with the system of cumulation once all FTAs
were concluded; in fact, it would have a number of concerns regarding the system even after all the
bilateral FTAs were concluded, and even more until then.  Referring to the example provided by the
EC representative involving Ukraine, the EC and Slovenia, he noted that the EC representative had
minimized the discriminatory aspect by saying that Korean products would also benefit from the
system provided they were only 40 per cent.  He asked how, under the EC-Ukraine agreement,
Slovenian and Korean inputs would be treated if they were both at 50 per cent value.
10. The representative of Hong Kong, China said that while she did not expect detailed replies to
her questions, she thought it was important to register her delegation's systemic concerns in the
discussion.  Her delegation believed that rules of origin were highly pertinent to an examination of
agreements under Article XXIV.  She noted that while some Members did not believe that rules of
origin constituted a regulation of commerce, other Members did; that was an open issue in thesystemic discussions.  The system of cumulati on was part of a number of RTAs that were under
examination by the Committee and therefore the Committee had a legal responsibility to look at them.
In the light of the WTO legal obligations which provided for notification of signed RTAs, either to the
Council for Trade in Goods or th e Council for Trade in Services, and for interim agreements to be
completed within ten years, she was concerned about the remark by the representative of the EC thatcountries which still had a few FTAs to be negotiated and signed were nevertheless accepted in the
system because Parties knew that such agreements would be signed.
11. Commenting on the remarks made by the representatives of the United States and Korea, the
representative of the United Kingdom said that he would like to make some comparisons with theWT/REG/GEN/M/4
Page 4
North American Free Trade Agreement (NAFTA).  The WTO Agreement on Rules of Origin required
Members to notify any changes, judicial decisions or otherwise, to both their preferential and
non-preferential rules of origin.  That had been duly done by the EC upon the introduction of the
pan-European system of cumulation.  In doing so, the Parties simply indicated that cumulation had
been extended to all Parties with whom the EC had FTAs.  Should the membership of NAFTA beextended, a similar notification would have to be made and the new parties to the agreement would
then be able to participate in the cumulation prov isions on the same basis as the original parties.
Regarding the example involving Latvia, Slovenia and the EC, the Slovenian input would be treated
in the same way as if it was an input from the United Kingdom.  The pan-European system of
cumulation did not preclude input from third countries; rather, it often provided for ceilings and
required sufficient processing within a Party of the FTA.  There was no inherent discrimination based
on where the inputs were sourced from.  That was a principle similar to that applied by RTAsinvolving countries other than the EC.
12. The representative of the United States said that he did not see a parallel between the system
of cumulation and a hypothetical extension of NAFTA to additional parties, as the latter constituted a
single FTA and the former did not.  The comment regarding Slovenia did not answer his question,
which amounted to whether, in the context of an  EC-Ukraine FTA, Slovenian and Korean inputs
would be treated differently when in two different cases such inputs accounted for more than 40 per
cent, and, if so, why that would happen.  The representative of Korea noted that the written example
provided by his delegation was very similar to that case.
13. The expert from the European Communities said  that since the EC had no FTA with Ukraine,
he would change the example.  In that new example, the EC had a FTA with Egypt and another one
with Israel, but no agreement existed between Israel and Egypt.  In the context of the EC-Israel FTA,
Egyptian inputs would be considered third-party pr oducts and would therefore be treated in the same
manner as inputs from Korea.  In such a case, the agreements were mutually watertight and Egyptian
products would be considered non-originating under the EC-Israel FTA.
14. The representative of the United States said he preferred the Ukraine example, because
neither Israel nor Egypt were parties to the pan-European system of cumulation and because it
involved a country that was in the pan-European system of cumulation but did not have bilateral
agreements with all the Parties.  He requested that a reply be given to his earlier question.
15. The representative of Switzerland said that, as Ukraine was not in the pan-European system of
cumulation, the example was flawed.  Regarding the Korean question, he said that it had already been
submitted in written form to the Parties and the written answer, contained in document
WT/REG/GEN/1, had been "yes".  Further comments from the delegation of Korea were also dealt
with in that document, and he did not know how much further the discussion could continue on that
example.  As the representative of the EC had said, the pan-European system of cumulation was a big
system; while there were relationships that still needed to be finalized, those relationships were
marginal.  The examples provided by Members appeared highly theoretical.  With respect to the
transitional aspects of the pan-European system of cumulation, which covered the linking of morethan thirty countries, there was little more to be said.
16. The representative of the United States wondered if he would receive a response to his
original question.  The expert from the European Communities said that, after having given the
Ukraine example, he noted that it was not real because the EC did not have an FTA with Ukraine and
that for that reason he referred to the example of Egypt and Israel.  However, should the originalexample be maintained, Slovenian imports into the EC would have to be sufficiently processed in the
EC to receive originating status and be exported into Ukraine under preferential treatment.  When
considering that, Members should note that third-part y inputs would also benefit from the opening up
of all frontiers within the entire pan-European syst em of cumulation, even if in some few cases all theWT/REG/GEN/M/4
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bilateral relationships were not yet completed.  That amounted to a better situation as compared to the
previous one where the frontiers were closed.
17. Disagreeing with the comment made by the re presentative of Switzerland, the representative
of Korea said that the question submitted at that day's meeting was not the same as the old one.
Further, the written response to the former example did not fully address his delegations' concerns.
18. The representative of the United States said th at the latest intervention by the expert from the
EC was closer to the issue that both his and the Korean delegations were pursuing.  It was his
understanding that, provided the Slovenian input was sufficiently processed in the EC, originating
status would be given to the final product which could therefore benefit from preferential treatment
under the EC-Ukraine FTA.  The next question would be how that would compare to a case of inputs
from Korea imported into Slovenia if such inputs were above 50 per cent.
19. The expert from the European Communities explained that in the case just provided,
delegations had to assume that Ukraine, while not having a FTA with Slovenia, had FTAs with all the
other Parties to the cumulation system and was part of the pan-European system of cumulation.  If
such latter condition was not met, the example would not work.  Two questions had been posed.  The
first related to the conditions under which Slovenia n inputs coming into the EC would enter Ukraine.
The second related to the conditions under which Korean inputs, which would have gone intoSlovenia and thereafter to the EC, would enter Ukra ine.  It should be noted that cumulation functioned
only among originating products; in that context, a Korean product entering any country within the
area had to be sufficiently processed in order to acquire originating status from the area.  That same
principle applied in the context of the NAFTA.  Replying to the second question, he said that the
Korean input had to be sufficiently processed in Slovenia to acquire originating status and be exportedinto the EC under preferential treatment.  If that pr oduct was sufficiently processed in the EC, it could
also enter Ukraine under preferential treatment. It was clear that, if the product was already of
Slovenian origin no processing was required.  That was also the case for NAFTA, where products
entirely obtained in the United States would not need to be sufficiently processed to enter Mexico
under preferential treatment; while EC products exported into the United States would need to besufficiently processed in the United States to benefit from preferential treatment when entering
Mexico.  He said that it would be helpful if Members could leave aside the technical nature of the
issue and concentrate on the possibilities of economic cooperation that the cumulation system might
engender.
20. The representative of Switzerland said that the pan-European system of cumulation was at a
stage where only few linkages were missing.  The system was however already in force because there
was no other choice, as the management of FTAs had to be done in the light of how business tookplace.  He then proposed a case to illustrate what was involved.  In that case, there was no FTA
between Slovenia and Lithuania but a FTA existed between the EC and Lithuania specifying that a
product with Swiss-originating status could benefit from preferential treatment when entering
Lithuania.  A machine was produced in Switzerland incorporating Slovenian inputs.  Such Swiss
machine was imported into Germany, and it could thereafter be exported to Lithuania underpreferential treatment.  While the German trader would receive a certificate of origin reflecting the
Swiss origin of the machine, he would not know what type of cumulation had taken place in the
production of the machine.  However, if little had been done in Switzerland on the Slovenian product,
it would be exported to Germany with Slovenian origin.  Should that product be exported from
Germany to Lithuania, it would not qualify for preferential treatment as it was a Slovenian product.The system of cumulation, as it stood, was the only pr actical system given that products were widely
traded and the information concerning the kind, source and value of inputs was not always at the
disposal of buyers.  He added that, even taking into account that some linkages were still missing, the
system of cumulation produced no major difficulties or discrimination because those represented a
small percentage of trade.  The missing linkages involved countries in transition which encounteredWT/REG/GEN/M/4
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difficulties in concluding a large number of agreements in a short time, but which had to be helped to
do that and to benefit economically from the advantages brought by the system.  The system of
cumulation, by creating an identical Europe-wide system of rules of origin for countries so tightly
associated, had led to trade facilitation, which was also a WTO objective.
21. The representative of the United States stated that drawing parallels to NAFTA was not
accurate, as the pan-European system of cumulation represented countries that all participated in a
single system, and processing within it was different from that in a number of bilateral agreements.
Also, there was the fact that NAFTA involved a group of countries in a single agreement, while the
system of cumulation involved the granting of preferen tial treatment to countries that were not parties
to an agreement.  Regarding the comment by the representative of Switzerland over the practical
aspects of the system, he said that a practical approach would be the establishment of a single
pan-European FTA.  He suggested that approach as a possible alternative solution to the system of
cumulation, which covered a number of bilateral agreements but also applied to a number of countries
that were not even signatories to those agreements.  The representatives of Korea and Canada  echoed
the view of the representative of the United States regarding the parallel being made between thesystem of cumulation and the NAFTA.
22. Noting that the intention had not been to attack or pass any kind of value judgement on the
NAFTA, the representative of Hungary said that certain similarities existed between the latter and the
system of cumulation.  During the NAFTA examination, some countries had said that the rules oforigin were complicated, but the fact was that good trade was taking place under the NAFTA.  The
two systems had common features and differences; the former being that both systems indicated
which products were eligible for preferential treatment and the latter being that the cumulation systemrequired that two conditions be met.  First, the country had to be listed in the protocol on rules of
origin attached to an agreement.  Second, the agre ement had to provide for the granting of preferential
treatment for the product concerned.  For example,  if Hungary imported a product from Latvia, the
first condition would be met because both countries were listed in the rules of origin protocol; the
remaining question would be whether the product was eligible for preferential treatment.  Differencesin the preferential treatment existed because the cumulation system involved different FTAs, in which
the products included and excluded, as well as the level of the preferences involved, were not the
same in each agreement.  That differed from the NAFTA rules of origin, which handled all the
products in the same way.  He noted that he did not want to refer to the differences between bilateral
and diagonal cumulation, but that he could discuss the matter if there was interest.  Information on all
of that had been provided by the Parties to the system at different occasions, including in the context
of a seminar organized by the European Free Trade Association. He noted that if a clear question had
been asked but a clear response could not be given, that was not because the Parties wanted to hide
something but because many elements involving complicated technical questions had to be
considered.
23. Noting that in his view delegations were simply trying to get clarification on some points
concerning the cumulation system, the Chairman indicated that written explanations would be useful
in dealing with the matters already raised.
24. The expert from the European Communities noted that as the EC was negotiating a FTA with
Mexico, he had studied the NAFTA and all the comments he had made on that Agreement were based
on facts.  The Parties to the system of cumulation would provide replies to written questions;
however, they would not repeat what had already been replied to.  Further, answers could not be
submitted before 25-26 June, when a next meeting dealing with the pan-European cumulation system
was scheduled in Brussels.
25. The representative of the United States said that he had a number of questions to pose orally,
and that those would also be submitted in writing.  While he would be happy to receive writtenWT/REG/GEN/M/4
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replies, he hoped that those could also be answered orally so that the Committee would not need to
address the system of cumulation again.  In posing his questions, he would make reference to the
number of the questions as contained in documen t WT/REG/GEN/1.  Regarding the response given to
question 2(c), the EC, Bulgaria, the Czech Repub lic, Hungary, Iceland, Liechtenstein, Norway,
Poland, Romania, the Slovak Republic, Slovenia and Switzerland stated that in some cases there hadbeen a need for a retrospective application of change s to the preferential rules of origin due to the
adoption procedure.  He requested that a specific explanation of each such case referred to in the
response be given, either orally or in a written form.  He asked for a description of how such a
retrospective application of the changes had been undertaken in consistency with paragraph 3(e) of
Annex II of the Agreement on Rules of Origin.
26. Replying to that question, the representative of Switzerland said that paragraph 11 of
document WT/REG/GEN/M/2 dealt with that point and that the Parties would consider whether
further elaboration on that issue was possible.  Complementing the reply, the representative of the
European Communities said that each country or economic entity had its own rules and that the EC
functioned as indicated in the paragraph referred to by Switzerland.  In that paragraph, informationhad been given on how the EC had informed economic operators of the system and on the modus
operandi  of the EC.  The EC internal rules did not require publication of acts, such as agreements
concluded by the EC, before their application.  In the EC, proposals were made by the Commission
and thereafter transmitted to the Council of Ministers for adoption.  The time elapsed between the
submission of a proposal and its adoption by the Coun cil of Ministers could go up to 10 months.  The
proposal for the system of cumulation was presented to the Council of Ministers one year before its
application.  Given the economic importance of the issue, information had been widely diffused andeveryone was aware of the changes to be introduced.  Should the representative of the United States
not be satisfied with the reply provided at the last meeting, he would like to receive further
clarification on what precisely was being requested.
27. The representative of the United States said that he had taken note that part of the question
had been addressed in paragraph 11 of the minutes.  Concerning questions 7(b) and 7(c), he noted that
the response given indicated that the 10 per cent ceiling of the de minimis  rule applied to all products
that could not be considered as originating according to the agreements between the countries
involved in the system.  He wondered whether that meant that the 10 per cent de minimis  ceiling, used
when determining the eligibility of a particular importation under an individual bilateral preferential
trade agreement, applied only to materials originat ing in certain third countries not a party to that
individual bilateral agreement but not to other certain third countries also not a party to that individual
bilateral agreement.  Providing an example, he  asked whether under the EC-Norway Agreement, the
10 per cent de minimis  rule might apply to materials that originated from the United States but not to
materials that originated from Poland.  He also wondered whether that different treatment depended
on whether such countries participated in the cumulation system, rather than whether they were part
of a single agreement under GATT XXIV.
28. The expert from the European Communities explained that in the cumulation system products
from outside the area could be imported into the area; the 10 per cent rule applied to all products
coming from outside the area.  For example, the rules of origin for fish required that the fish be fully
obtained.  However, the tolerance rule allowed fish from Korea, the United States or Canada to be
used for producing originating canned fish.  He repeated that the 10 per cent rule did not apply to
inputs from within the area but rather to inputs from outside the area.  A similar 7 per cent  de minimis
rule also existed in the NAFTA.
29. The representative of the United States said that the NAFTA de minimis rule applied to
products originating outside the three parties to that single Agreement.  The question he had asked
was different, as it related to products coming from a country that was not a party to a particular
bilateral agreement but which was a party to the pan-European system of cumulation, which in its turnWT/REG/GEN/M/4
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had not been notified to the WTO as a FTA.  That distinction had to be drawn, and he considered the
7 per cent NAFTA de minimis  rule irrelevant to the current discussion.  As a follow-up question, he
wondered whether an input coming from Poland would be eligible for the 10 per cent de minimis
treatment under the EC-Norway Agreement.
30. The expert from the European Communities said that all those agreements worked under the
system of cumulation.  A product originating from Poland was originating for all the other countries,
so it did not make any sense to apply the 10 per cent rule for inputs from Poland because those were
already originating.  The 10 per cent rule applied to countries from outside the area.  In the  fish
example, he had said that producers in the area could use up to 10 per cent of fish from outside the
area, which could have been harvested by Norwegian, Polish or Community boats.  Fish obtained
within the area were originating and thus not subject to the 10 per cent rule, whereas that rule applied
to inputs from outside the area.  Complementing on the reply, the representative of Switzerland noted
that paragraph 26 of WT/REG/GEN/M/2 addressed that issue.  He said that the de minimis  rule was
not designed for Parties to the cumulation system, as their products were cumulated.  For example, if
Poland imported fish from outside the area and the only process involved was adding salt on it, the
fish would not qualify for originating status.  Howe ver, if such third-country fish amounted only up to
10 per cent, the de minimis  rule would apply.  In summary, the rule was cumulation for products from
inside the area and de minimis  only for products from outside the area.
31. The representative of the United States said that he had two follow-up questions concerning
question 8(c).  First, he requested that confirmation be given that his delegation's understanding of the
answer provided was correct, namely that until the commencement of the system of cumulation,
drawback was available for refunds of the duties paid on inputs originating in the United States whenused in a product originating under the individual EC Agreements with Iceland, Switzerland,
Bulgaria, the Czech Republic, Hungary, Poland, Romania, the Slovak Republic and Slovenia.
Second, he requested that information be provided, in writing for the 12 months preceding the
implementation of the system of cumulation, on the value of imports into those countries of products
of United States origin for which duties were refunded under drawback.
32. The expert from the European Communities said that he did not have the statistics on hand,
and he would submit replies later.  The basis of the no-drawback rule was that a third-country product
entering into an area or a country had to pay customs duties somewhere. He also noted that the no-
drawback rule also existed in the NAFTA.  The representative of Switzerland said that he had some
difficulty in understanding the questions just posed, and indicated that replies would be provided oncethe questions would be submitted in writing.
33. The representative of Mauritius suggested that the discussion was moving towards more
detailed aspects of the system of cumulation and away from the original purpose of examining its
larger systemic implications.  His delegation would be interested in having a clarification on how the
questions being raised related to the multilateral trading system (MTS) and how the MTS was actually
being affected by the system of cumulation.  He invited the representatives of the United States,
Korea and Hong Kong, China to respond to the question of how the system of cumulation had
affected the MTS on a systemic level.  Drawing attention to the mandate from the Singapore
Ministerial Conference for the Committee to report on the systemic implications of  RTAs, he said
that it was his opinion that the questions voiced during that meeting had been posed in isolation
thereby obscuring their relationship to systemic issues.  Finally, he appealed to the Members to be
transparent on the reasoning behind their questions, namely how, according to them, the issues raisedby the questions related to the MTS, which were the nature of the distortions created by the system of
cumulation, which was the method in which the distortions operated, what was the extent of the
distortions, which were the measurable effects of these distortions, and which were the negative
consequences of these distortions.WT/REG/GEN/M/4
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34. The representative of the United States noted that the statement made by the representative of
Mauritius raised legitimate concerns.  The discussion of the system of cumulation was by nature
highly technical; his delegation was interested in knowing how it operated given that the United States
did not benefit from it.  He noted however that the system of cumulation was not part of the systemic
discussion, but rather that it related to a different part of the Committee's mandate – namely, theexamination of a number of FTA agreements.  The point raised by the representative of Mauritius on
what was the effect of the system of cumulation on the trade of other Members was a legitimate issue,
and he thought that his earlier request for statistical data on duty drawback would provide some
insights on that.  He agreed that the questions posed thus far had been hypothetical; however, given
the complex nature of rules of origin, concrete examples were needed so that Members could
understand what was at stake.
35. The representative of Korea agreed that the system of cumulation was a systemic issue and
that its implications for the WTO system was the most important point of the debate, as they
concerned the core principle of the WTO system, namely MFN.
36. The representative of Hungary noted that, while the representative of Mauritius had raised a
number of very pertinent questions, he did not agree that the system of cumulation raised a systemic
issue.  The real systemic issue was that raised earlier by the representative of Hong Kong, China,namely whether preferential rules of origin constituted an "other regulation of commerce".  Once a
common interpretation would have been agreed by the Members, then that would become the rule.
Such rule would however only be applicable with respect to RTAs concluded thereafter, and it should
not affect in any way RTAs already concluded and for which examinations were under way.  He said
that while it was important to know how preferential rules of origin operated in the context ofindividual FTAs, he felt that some of the questions posed were not substantiated in real life.  In fact,
experience had shown that traders both from inside and outside the pan-European system of
cumulation were happy with the new system, which made rules more clear and simple, allowed
countries to trade more efficiently and simplified investment decisions.  He agreed with the
representative of Mauritius that the Committee should deal with real life issues and not just theoreticalones.  He noted that the Committee was dealing with that issue for the third time, and that new
questions, most of which simply contained small variations from questions posed earlier, were being
made on the spot; he regretted that those were not submitted in advance to that day's meeting.  It was
for those Members who thought that the system of cu mulation worked to the detriment of third parties
to provide the burden of proof over the matter.  Finally, while he would be ready to continue the
discussion on the cumulation system in another forum, he thought that time had come to put an end to
such debate in the context of the Committee and of Article XXIV.
37. The representative of Hong Kong, China said that she was also participating in the debate
with the aim of understanding how goods from Hong Kong, China would be affected by the system of
cumulation.  The effect of the system of cumulation had not to be seen only in the context of real
trade, but also on the MTS at large and, in that sense, her delegations' interests joined those of the
Mauritius delegation.  While the questions she had posed earlier were general in nature and thereforedifficult to answer, they represented genuine concerns that had emerged when her delegation tried to
understand the system of cumulation.  She did not support the view that inability to understand the
technical nature of the questions involved should prevent any Member from presenting questions
reflecting its genuine concerns.  Noting that the Committee had devoted some time to consider its
mandate relating to the systemic implications of RTAs on the MTS, she observed that the issuesraised in that latter context did not occur out of abstraction but from the examination of RTAs.  As
was well known to the Committee, her delegation was very interested in the systemic discussion,
which provided opportunity to discuss various issues without linkages being made to individual
RTAs, and she would be happy to see the Mauritius delegation also participating actively in such
discussion and contributing to the fulfilment of the mandate of putting up recommendations to theGeneral Council.  She reiterated one of her delegation's major concerns, shared by the delegations ofWT/REG/GEN/M/4
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the United States and Korea, namely that the system of cumulation had turned the pan-European area
into a single FTA and that a pan-European FTA had been effectively formed without the need to meet
the requirements of GATT Article XXIV.  While, based on the comments made by the EC
representative, she thought that consensus over that issue would not be reached, it did reflect a
legitimate concern of a Member which was not a party to the pan-European system of cumulation.
38. Sympathising with the views expressed by the delegation of Mauritius, the expert from the
European Communities stated that the questions raised dealt with immediate issues, without
addressing the repercussions of the system of cumulation on economies across the world.  It was afact that once trade of countries within a FTA increased, that would immediately and directly affect
the trade of third countries.  Members should be clear that the text which established the pan-
European system of cumulation did not provide for merging of the FTAs involved.  Those FTAs,
which were established in accordance with the GATT rules, had to apply rules of origin in order to
function properly.  As mentioned earlier, while before 1997 the rules of origin of those FTAs were
different, the system of cumulation established identical rules of origin for all such FTAs.  The key
point to be examined should be a comparison betw een the new rules of origin and those existing prior
to 1997; such comparison showed that the former were  simpler and less restrictive than the latter. For
example, in the case of industrial products, the new system provided for alternative rules of originrepresenting an advantage for all economic operators, both from inside or outside the area.  Regarding
the question posed by the United States on the no-drawback rule, he stated that the statistics requested
could only be supplied by differentiating impor ts on inward processing and those on outward
processing.  Given the work involved and the fact  that the no-drawback rule also existed in the
context of the NAFTA, he invited the United States delegation to reconsider its request for theprovision of such statistics.
39. Responding to the intervention by the representative of Hungary, the representative of the
United States said that his delegation did not view the system of cumulation as inherently detrimental
to the MTS and that the question of burden of proof was not relevant in the Committee's context.  Theaim of the Committee in discussing the system of cumulation was to provide a better understanding ofthe system to the benefit of the Members as a whole.  With respect to the intervention by the
representative of the EC, he agreed that the examination of the system of cumulation should focus on
rules of origin applied pre- and post-1997 within the pan-European area.  However, he considered the
comparison between the system of cumulation and NAFTA to be a non sequitur,  as no changes had
been made to the NAFTA rules of origin regime since the NAFTA was created and notified to the
GATT.  In contrast, the system of cumulation involved changes to existing bilateral agreements.
Concerning the question of duty drawback, he noted that in the NAFTA the provisions had remainedunchanged since its entry into force, while new provisions on duty drawback had been added through
the system of cumulation to the EC regimes existing prior to 1997.  He then turned to his delegation's
last question, which related to the hypothetical fact scenario provided in question 11.  He noted that
the answer to question 11(a) stated that, when exported to Norway from Poland, the automobile
engine referred to in the question would not receive preferential treatment under the EC-NorwayAgreement.  He requested an explanation of the legal basis for the conclusion that the exceptions set
forth within the Protocol would not be applicable with respect to direct transport and the principle of
territoriality.  He further requested that explanation be provided through examples on why
geographical continuity would make the rule unnece ssary, as stated in the answer to question 11(a).
40. The expert from the European Communities stated that the countries of the area were
considered a single territory because they were geographically contiguous.  The rule of direct
transport was set up so as to ensure that products arriving from one country and in transit to another
country would not be the subject of any handling or processing.  The fact that 35 per cent of the
product was originating in Poland was not relevant because Poland was part of the area.WT/REG/GEN/M/4
Page 11
41. The representative of the European Communities stated that his delegation would do its
utmost to answer to written questions posed, and that the whole exercise had been a learning process
for those delegates who were not experts in rules of origin.  While the Parties to the pan-European
system had introduced a single system of cumulation of rules origin, the aim was to  simplify the
network of rules existing beforehand, and there was no question that a single FTA had beenestablished through that common system.  The pan-European system of cumulation did not in itself
affect the preferential conditions for trade established by the various agreements involved.  He
emphasized that the Parties to the system had participated in the discussions in the spirit of
transparency and cooperation, because they recognized the interest of the system for countries outside
Europe and its relevance to the work of the Committee in examining individual RTAs.
42. The representative of Switzerland stated that the question posed by Hong Kong, China on the
establishment of a single FTA was a complex one.  The pan-European system of cumulation
encompassed very different integration schemes:  customs unions such as the one between the EC and
Turkey; the EEA; a certain number of countries that allowed free movement of services, goods and
capital; association agreements between a number of countries and the EC also providing for further
integration of trade in goods and other areas; and bilateral agreements with various schemes and
degrees of integration.  Therefore, caution should be exercised when stating that the subject underexamination was a straightforward FTA.  Before defining the subject, Members should be clear about
what was meant by, and what was included in the definition of, a FTA.  The Parties to the cumulation
system had always indicated that product coverage wa s not an issue in the context of such discussions,
and, should the discussion turn into the question of whether a single FTA had been established, then
the Committee would have to address product coverage.  At present, it might be too early to take adefinite stand on that point.
43. The representative of Hong Kong, China said that her delegation's comments were aimed at
getting the views of the various delegations over whether there was, in fact, a pan-European FTA.
She noted that the definition of a FTA was embodied in Article XXIV and her delegation would
consider any definition of a FTA in accordance to what was contained therein.
44. The representative of Hungary agreed with the representative of Hong Kong, China that
Article XXIV provided the definition of a FTA;  anything that would go beyond that was not
acceptable.
45. The representative of the United States considered the discussion to have been useful and
thanked the Parties to the pan-European system of cumulation for taking part in the exercise
46. Noting that there were no more questions, the Chairman invited Members with further
questions to submit them in writing to the Secretariat by 14 May 1999 in order to allow time for
Parties to return written replies.  There would be further consultation to determine if there was a need
for further discussion on the pan-European system of cumulation.
47. The Committee took note of the comments made.
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