FREE TRADE AGREEMENTS and the Harmonization of Rules of Origin Copyright ⓒ 2013 Yulchon LLC. All Rights Reserved. Presentation by Eki Kim

1.Free Trade Agreements 2.WTO Harmonization Work Programme 3.Rules of Origin-Machinery 4.Agricultural Products Table of Contents

1. Free Trade Agreements

World Exports of Merchandise and Services (2012) (billion $) Merchandise 18,323 Services Transport 885 Travel 1,105 Other 2,350 4,345 4

World Merchandise Exporters (2012) (billion $) China 1 2,049 United States 2 1,547 Germany 3 1,407 Japan Netherlands France Korea

World Service Exporters (2012) (billion $) United States United Kingdom Germany China Korea (billion $) 6 France 4 208

Trade Regimes Contractual Preferential Trade Regime: Autonomous Preferential Trade Regime: Bilateral FTAs (US-Korea, EU-Chile), Regional FTAs (NAFTA, Pan-European System, ASEAN, COMESA etc.) GSP, US Caribbean Basin Initiative, EBA, etc. 7 MFN Trade Regime

Proliferation of FTAs Multilateral approach stumbled Surge in FTAs in 21st century 70 FTAs in force in 1990, 350 by 2012 Expansion of market Alliance with anyone you can 8

Key Facts and Findings All WTO Members (except Mongolia) belong to at least one FTAs. Intra-FTA trade represents 35 % of total world merchandise trade in 2008 (excluding intra-EU trade). 13 is the average number of FTAs that a WTO Member is party to. 9

Causes and Effects of FTAs Earlier times: to avoid relatively high tariffs. Recently: tariffs have fallen markedly new regulatory matters are increasingly on FTA agendas (investment, competition policy, government procurement and services). 10

Causes and Effects of FTAs Only 16 % of global imports are qualified as preferential trade. Preferential tariffs reduce average tariff by 1 percentage point (US 2.5 %, Korea 8.1%). Less than 2 % of world trade is eligible for preference margins above 10 percentage points. 11

Avoiding “Trade Deflection” in FTAs The partner with the lowest external tariffs would serve as “port of entry” for the whole bloc. Stringent Rules of Origin (“ROO”) is required. C A External tariff: 20% B External tariff: 5% 12

Diverse and Complex ROO Origin criteria: Value Added Rules, Change of Tariff Classification Value thresholds: 35 % ‒ 80 % Calculation methods (ex-work price, gross factory cost, FOB price, averaging costs, etc.) 7 % of global products are excluded (agricultural, food, footwear and textiles). Managed trade: nothing free about free trade Compliance cost: more than 5% 13

Supply Switching More trade diversion, less trade creation More stringent ROO favours intermediate goods originating in the region to inputs from outside the FTA Less industry protection, more access to cheaper inputs Less stringent ROO 14

Example: ROO with respect to Yarn 15

Impact of Yarn-forwarding Rule in NAFTA Increased use of American yarn in the region Increased investment into Mexican textile industries Decreased use of cheap Asian yarn Decreased import of cheap Asian clothing 16

2. WTO Harmonization Work Programme

What is the rule of origin for a ball point pen? Rules of Origin: Agreement on Rules of Origin 18

“CTSH provided at least one part is originated in the country of assembly” The Rule of Origin for Subheading (Ball Point Pens): Source: Agreement on Rules of Origin 19

Rules of Origin: 20 Tariff classification of a ball point pen HS Code

A.Tariff shift rule at chapter level: B.Tariff shift rule at heading level: CTH – “change to this heading” from any other heading CC – “change to this chapter” from any other chapter Agreement on Rules of Origin 21 Terminology of the Harmonized Rules of Origin C.Tariff shift rule at subheading level: CTSH – “change to this subheading” from any other subheading or from any other heading

(i) CTSH (Change to this subheading) (ii) provided at least one part is originated in the country of assembly The Rule of Origin for Subheading Revisited: Agreement on Rules of Origin 22

Example (Case of Cement Industry) Agreement on Rules of Origin 23

Article 3 of Agreement on Rules of Origin Agreement on Rules of Origin Members shall ensure, upon the implementation of the results of the harmonization work programme, that: a) They apply rules of origin equally for all purposes as set out in Article I; 24

Harmonization Work Programme Agreement on Rules of Origin PRINCIPLES OF HARMONIZATION WORK I.wholly obtained goods; and II.last substantial transformation HARMONIZATION WORK PROGRAMME: to be completed within three years of initiation; to be conducted by the WTO Committee on Rules of Origin and the WCO Technical Committee on Rules of Origin 25

Implications Issue New rules do NOT apply to anti-dumping circumventionNew rules do NOT apply to anti-dumping circumvention Preference for Tariff shift rulePreference for Tariff shift rule USA New rules APPLY to anti- dumping circumventionNew rules APPLY to anti- dumping circumvention Preference for Tariff shift rulePreference for Tariff shift rule Developing Countries New rules APPLY to anti- dumping circumventionNew rules APPLY to anti- dumping circumvention Preference for Value added rulePreference for Value added rule EU 26

HWP (Harmonization Work Programme) has not been completed. Text contained origin rules endorsed by the CRO and CRO Chair’s proposal. Text reflects the collective efforts of origin experts from all over the World. The most comprehensive and least ‒ restrictive rules of origin. Consolidated Text (G/RO/W/111/Rev.6) 27

3. Rules of Origin ‒ Machinery

Rules of Origin ‒ Machinery MACHINERY 29

A change of classification which results from the disassembly of goods shall not be considered as the change required by the rule set forth in the matrix. The country of origin of the parts recovered from the goods shall be the country where the parts are recovered, unless the importer, exporter or any person with a justifiable cause to determine the origin of parts demonstrates another country of origin on the basis of verifiable evidence such as origin marks on the part itself or documents. Primary Rule/Note A(a) of Chapters Goods Obtained by Disassembly 30

Disassembly 31

Primary Rule/Note A(b) of Chapters Where a change in classification results from the application of HS General Interpretative Rule 2(a) with respect to collections of parts that are presented as unassembled articles of another heading or subheading the individual parts shall retain their origin prior to such collection. Collection of Parts 32

Collection 33

Primary Rule/Note A(c) of Chapters A change of classification which results from the recertification or retesting of the good shall not be considered as the change required by the rule set out in the matrix. Recertification or Retesting 34

Goods assembled from a collection of parts classified as the assembled good by application of General Interpretative Rule 2 shall have origin in the country of assembly, provided the assembly would have satisfied the primary rule for the good had each of the parts been presented separately and not as a collection. Assembly of the Collection of Parts Primary Rule/Note A(d) of Chapters

Assembly 36

Primary Rule/Note A(e) of Chapters The country of origin of goods that are produced from blanks which, by application of the HS General Interpretative Rule 2(a), are classified in the same heading or subheading as the complete or finished goods, shall be the country in which the blank was finished provided finishing included configuring to final shape by the removal of material (other than merely by honing or polishing or both), or by forming processes such as bending, hammering, pressing or stamping. Parts and Accessories Produced from Blanks 37

(b)The following rules apply only to goods classifiable under provisions for “parts” or “parts and accessories” and which are not described by name in the Harmonized System, applied in sequence. (1) Goods produced by assembly of 5 or more parts (whether or not originating), other than parts provided for in rule C (b)(3) shall have origin in the country of assembly. 38 Additional Primary Rules/Notes C ((b) Parts Rule)

4. Agricultural Products

Example 40

[The origin shall be the country where the animal was fattened for at least 6 months; otherwise the country where the animal was born.] Origin Criteria: 41 Live Horses, Asses, Mules and Hinnies (HS 01.01)

42

43 Athenians Applied 20% imported duties on corn & other goods Romans Depended upon customs revenues to support the expansion & maintenance of their empire The Roman customs collector was accused of “unfair conduct”

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