Report of the OTO Advisory Council (April 12, 1993)

2-(3) Changing the two-process rule for textiles articles and apparel enjoying preferential tariffs

1. Complainant: Keidanren

2. Ministry concerned: Ministry of International Trade and Industry, Ministry of Finance

3. Complaint:

Considering the aim of the preferential tariff system, products which are eligible to preferential tariffs must be limited to those which are actually manufactured and processed in the beneficiary country. Decisions as to whether products meet this provision are made according to the standards for certifying country of origin.

In the case of textiles articles and apparel, manufacturing is divided into four processes:

1) obtaining or manufacturing base fibers;
2) manufacturing thread;
3) manufacturing cloth; and
4) manufacturing sewn products.

Products which have undergone two or more processes are subject to certification of country of origin (two-process rule).

The complainant states that in the case of articles of apparel, (Chapter 62 in the tariff schedules), under the current two-process rule, if manufactures in Thailand or another ASEAN country, for example, depend on parts from NIEs, the preferential tariff cannot be applied. Therefore, the current standards for certifying country of origin should be changed to make it easier for producers to avail themselves of preferential tariffs.

4. Results of deliberation:

The current two-process rule is also used in European countries and is not unusual in international terms.

But where articles of apparel (Chapter 62) are concerned, offshore production in developing countries is becoming more prevalent and the two-process rule might be able to respond to these changing conditions. Accordingly, it's desired that articles of apparel manufactured not only in a single country but using offshore production are to be eligible for preferential tariffs.

The concerned ministry or agency has stated that it will undertake a review of the current standard for certifying country of origin for articles of apparel (Chapter 62) taking into consideration how this works within the system as a whole and conditions in the domestic industry.

Government decision (May 27, 1993)

In view of the progress made by the international division of labor within developing countries, the current standard for certifying country of origin for articles of apparel will be reviewed by taking into consideration how this works within the special treatment tariff system as a whole and the conditions of the domestic industry.