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THE continued deadlock in the World Trade Organization (WTO) negotiations has resulted in the rise of bilateral and regional Free Trade Agreements (FTAs) in recent years. One of the objectives of the WTO is to provide fair, transparent and uniform trading rules among member economies. Unfortunately, with the numerous FTAs being entered into by many countries, trading arrangements are becoming more complex, with each FTA providing its own set of trading rules.

Preferential Trading

FTAs generally provide the framework for preferential trading among member economies. Under the ASEAN Free Trade Agreement (AFTA), substantial reductions in applicable duty rates are available for goods traded among member countries. Rules of Origin (ROO) provide the specific guidelines for granting ‘origin’ to a product. If a product is deemed as ‘originating’ from an ASEAN country, a lower duty rate will apply.

ROO, however, can be difficult to understand especially for manufactured or processed articles using both local and imported raw materials. Except for products wholly produced or obtained in the country of origin, the rules of origin are principally based on the concept of “substantial transformation”, which assigns origin to the country where the last substantial transformation occurred.

Substantial transformation is roughly defined on the basis of a change in tariff classification, achieving a threshold of proportion of value-added, or on the basis of certain manufacturing processes. Until recently, the principal rule under AFTA is the 40% threshold level of the value of the product. Meaning, manufactured or processed products are considering as ‘originating’ if 40% of the FOB export price is deemed as local or ASEAN in origin.

Revised Rules of Origin

In August of this year, ASEAN issued its revised rules of origin. While the principal rule is still the 40% regional value content rule, the revised rules now allow the use of the change in tariff heading rule as well as additional product specific rules. Under the revised rules, a product may be deemed as ‘originating’ even if it falls below the 40% threshold so long as it qualifies under the alternative rules provided for the tariff heading of the product.

In brief, products traded among ASEAN countries will have to satisfy the following guidelines to avail of preferential rates under AFTA:

  1. The product must be wholly obtained or produced in the exporting country, or more specifically, it must be entirely grown, extracted or harvested within the exporting country or manufactured without any imported components or materials.
  2. If the product has been manufactured using both local and imported components or materials, the product must have an the aggregate ASEAN content of not less than 40%; or it must have undergone a change in tariff classification at the 4-digit level (change in tariff heading) of the Harmonized System.
  3. If the product does not fall under any of the rules provided above, the product must qualify with the product specific rules provided under Annex C of the Revised AFTA Rules of Origin.

Product Specific Rules

The revised AFTA Rules of Origin provide the detailed formula for calculating the 40% threshold. The 40% local content (as against the total FOB export price) is computed by adding the value of ASEAN and local materials, direct labor costs, direct processing costs, overhead cost and margin.

The value of imported materials is computed based on the CIF value of the material at the time of importation. When computing the 40% content of the exported product, the rules also allow the cumulation of imported materials with less than 40% but more than 20% ASEAN content. In other words, the value of the ASEAN content of imported materials with less than 40% but more than 20% ASEAN content may be added to arrive at the regional value content of the exported product.

Under the revised AFTA Rules of Origin, additional origin rules are provided for specific tariff headings. These product specific rules may provide for additional rules such change in tariff classification at the 2-digit level or at the 6-digit level of the Harmonized System. The additional rules may also provide for a specific process rule used for a particular tariff heading.

Understanding the Trade Rules

Understanding these new rules can be a challenge to most importers and exporters. For those who can immediately learn the new rules, this can provide an opportunity for reducing import costs or for expanding the export market.

As international trade rules evolve, companies must now include trade planning when formulating their annual strategic plans.

The author is an international trade consultant and a licensed customs broker. He is a lecturer on logistics, indirect tax and customs, and a lecturer of Ateneo and BayanTrade on Supply Chain Management. Please contact agatonuvero@yahoo.com for your comments.

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