Territoriality principle under preferential rules of origin

In this paper, we examine the territoriality principle under preferential rules of origin. The territoriality principle under preferential rules of origin provides that when a material is imported from outside the territory of a party, the material would be entirely treated as non-originating regardless of the content in the material originating from the territory of a party. The territoriality assumption constrains the manufacturing process and distorts the international flow of trade and investment. In this paper, we review various outward processing provisions that are adopted as exemptions from the territoriality principle and examine their WTO consistency. We propose that outward processing provisions that conform to substantial transformation rule should be recognized as a suitable remedy for distortion arising from the territoriality assumption