Home » Across Borders » Rules of Origin Under the Various FTAs

In our column last August 27, 2007, we provided an update on the latest duty concessions under the ASEAN Free Trade Area (AFTA) and the status of the various bilateral (Japan) and regional (China, Korea, Japan, India, New Zealand and Australia) Free Trade Agreements (FTAs). Similar to the AFTA-CEPT, the various FTAs provide for specific Rules of Origin (ROO) for availing of preferential duty rates.

Rules of Origin (ROO). As mentioned, each of the FTAs provides for its own ROO to avail of preferential duty rates. ROO generally refer to the laws, rules and regulations of one country to determine the country of origin of imported goods. These rules set the principles to determine the economic content and nationality of the imported product. Country of origin normally refers to the country where a particular product is obtained, produced or manufactured. In principle, the origin of the article can affect tariff rate, tariff preference, safeguards or dumping duty, import quota, admissibility, marking and, in some countries, procurement by government agencies. ROO may be categorized into two:

(a) Non-Preferential Rules of Origin:
Certificate of Origin (CO) for General Merchandise (White CO)

(b) Preferential Rules of Origin:
Generalized System of Preferences GSP (Form A)
ASEAN-Common Effective Preferential Tariff (Form D)
ASEAN-CHINA Free Trade Agreement (Form E)
ASEAN-KOREA Free Trade Agreement (Form AK)

Preferential and Non-Preferential ROO. Non-Preferential rules refer to rules applicable for the application of the most-favored nation (MFN) treatment or to implement measures and instruments of commercial policy (e.g., anti-dumping, countervailing, safeguards, marking requirements and tariff quotas). Non-preferential rules also normally apply in the absence of bilateral or multilateral agreements.

Preferential rules refer to such rules that grant tariff preferences under certain trading arrangements among trading partners, bilateral and multilateral agreements, or special laws. These rules determine whether imported products shall be subjected to MFN treatment or preferential treatment [e.g. AFTA-CEPT, Japan’s Generalized System of Preferences (GSP)]. Preferential rules use two basic criteria, i.e., “wholly obtained” or “substantial transformation”.

ROO Criteria. For goods that are wholly the growth, produce or product of a country, the “wholly-obtained” criterion is normally applied. For those that consist in whole or in part of materials from more than one country, the “substantial transformation” is generally applied.

Products entirely grown, extracted from the soil or harvested within the exporting country, or manufactured there exclusively by virtue of the total absence of the use of any imported components or materials may be considered “wholly-obtained”. On the other hand, products manufactured from wholly or partly from imported materials or components, including materials of unknown origin, are considered as originating in the exporting country if these materials, parts or components have undergone “substantial transformation” there. This criterion has three rules:

  1. Value Added (VA) Rule
  2. Change in tariff classification (CTC) Rule
  3. Process Rule (“chemical reaction rule”)

Under the various FTAs, the rules of origin may provide for a general criterion/rule (e.g. VA or CTC rule) as well as product-specific rules.

Varying ROO. Under AFTA-CEPT, the basis of substantial transformation is based on the tariff shift or the 40% threshold level of the value of the product. In other words, at least 40% of the value of the imported product must be considered as originating from ASEAN to avail of the preferential tariff rates under AFTA-CEPT. 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 for a Certificate of Origin (Form E) to be 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 undergo substantial transformation (e.g., change of tariff heading up to the 4th digit or at least contain 40% regional value content) for a Certificate of Origin (Form AK) to be 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).

Transaction Costs. Accordingly, the ongoing negotia-tions between ASEAN and other countries (Japan, India, New Zealand and Australia) should be finished before the end of the year. With four more FTAs to be agreed soon, we expect additional rules of origin under these various agreements. For the trading community, the concern now is that the growing complexity of trade rules will likely increase the transac-tion cost of doing business across borders, notwithstan-ding the decreasing tariffs.

The author is an international trade 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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