Home » Across Borders » FTAs: Tariff Reduction and Rules of Origin

IN addition to our regular updates on the ASEAN Free Trade Area (AFTA), we have also written several articles since last year on the status of the various bilateral (Japan) and regional (China, Korea, Japan, India, New Zealand and Australia) Free Trade Agreements (FTAs) with the country’s trading partners.

Of late, the government has reportedly issued (for publication) several Executive Orders (EOs) which implement the commitments under the various FTAs. For importers and exporters, the issuance of the EOs may mean lower duty rates applicable for articles imported into the Philippines or articles exported to other countries included in the FTA.

Zero Rates for AFTA-CEPT. Issued in April of this year and still for publication, EO 617 provides the modified duty rates on certain imported articles to implement the country’s commitment to reduce the AFTA Common Effective Preferential Tariff Rates (CEPT) to 0% under the ASEAN Framework Agreement for the integration of priority sectors. The EO contains hundreds of subheadings with zero duty rates applicable for imports and exports among the ASEAN member countries. Among the controversial subheadings are those which provide for zero duty rates on CKD vehicle units.

Reduced Tariffs under ACFTA. ASEAN-China Free Trade Area (ACFTA) was agreed upon by the member countries about 2 years ago. Under this agreement, tariffs on some 4,000 types of goods will be reduced between 0% and 5% by 2010 for the six most advanced ASEAN members, with tariffs for certain sensitive goods (sugar, iron, steel and car) not subject to steep reductions. In relation to the ongoing implementation of the country’s commitments under the ACFTA, two executive orders have recently been issued but yet to be published – EO 613 and EO 618.

EO 613 provides the modified duty rates for articles included in the normal track of ACFTA. EO 618, on the other hand, provides for the reciprocal tariff rate treatment on tariff headings included in the sensitive track of the agreement.

Implementation of AKFTA. ASEAN-Korea Free Trade Area (AKFTA) was signed by the member economies in May of 2006. The Philippines committed to fully implement the agreement by 2012 which includes tariffs on about 97% of at least 4,000 categories of goods. The sensitive list of the agreements includes products such as rice, fish, beef, chicken, and other agricultural products. To implement the commitments under this agreement, two executive issuances have likewise been issued – EO 638 and EO 639 (still for publication).

EO 638 provides for the reciprocal tariff rate treatment on tariff headings included in the sensitive track of AKFTA while EO 639 provides the modified duty rates for articles included in the normal track of the agreement.

Ongoing FTA negotiations. ASEAN is currently negotiating with Japan, India, New Zealand and Australia and accordingly, the framework agreements with all of these countries should be approved before the end of the year. With regard to the bilateral agreement entered by the Philippines with Japan – Japan Philippines Economic Cooperation Agreement (JPEPA) – the agreement has already been signed and is presently subject to ratification by the Senate.

Different Rules of Origin (ROO). Similar to the AFTA-CEPT, the various agreements provide for specific rules of origin for availing of the preferential duty rates. Otherwise known as Preferential Rules of Origin, these rules provide the specific guidelines for an imported article to qualify for tariff preferences under the various trading arrangements. For AFTA-CEPT, the rule on country of origin is based on a 40% threshold level on the value of the product. The value content rule requires that at least 40% of the value of the imported product must be considered as originating from ASEAN to avail of the preferential tariff rates. A Certificate of Origin (Form D) is issued for qualifying articles.

Under ASEAN-China agreement (ACFTA), articles must either be wholly obtained or produced (e.g. agricultural products) or must at least contain 40% regional value content in order that a Certificate of Origin (Form E) is issued. In addition, there are alternative product specific rules, that is, change of tariff classification for 42 tariff lines and process criterion for additional 320 tariff lines. In the case of the ASEAN-Korea Agreement (AKFTA), articles must likewise be wholly obtained or produced (e.g. agricultural products), or must at least contain 40% regional value content in order that a Certificate of Origin (Form AK) is issued. Additional alternative product specific rules are provided for certain articles such as live animals, meat and milk products (wholly obtained or produced) and steel (change of tariff headings).

Increasing Complexity of Trade Rules. For many companies, the different trading rules resulting from the various bilateral and regional FTAs are slowly increasing the transaction cost of business notwithstanding that tariff rates are actually decreasing. Issues have also been raised that these FTAs prevent the harmonization and simplification of trading rules and result in greater risks for non-compliance with such rules. For domestic manufacturers, the entry of cheaper imported goods will certainly mean greater competition in the market.

While the trading community is certainly looking forward to the publication of the executive issuances that will lower the effective duty rates on imported products under the various FTAs, companies must make sure that articles strictly qualify for tariff preferences under the various rules of origin. Otherwise, importers may be audited and additional taxes and duties may be collected on imported articles found not to have complied with the requirements of the applicable preferential rules of origin.

The author is an international trade and customs consultant, and a licensed customs broker. He is a lecturer on logistics, indirect tax, customs and supply chain. Please contact agatonuvero@yahoo.com for your comments.

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