Rules of Origin under the Asia-Pacific Trade Agreement (APTA) Regional Training Program on Enhancing Utilization of ASEAN FTA, Trade Negotiation and Trade Policy Development Dr. Joong-Wan Cho Chief, Trade Policy Section Trade and Investment Division Email: choj@un.org

Rules of Origin Rules of Origin are the criteria used to define where a product was made. Rules of Origin are used:  to implement measures and instruments of commercial policy (e.g., anti-dumping duties, safeguard measures, etc.);  to determine whether imported products shall receive MFN treatment or preferential treatment;  for the application of labeling and making requirements;  for the purpose of trade statistics; and  for government procurement.

Rules of Origin GATT/WTO has no specific rules governing the determination of the country of origin of goods in international commerce. Each contracting party was free to determine its own origin rules. GATT/WTO stated that the rules of origin should be left: “… within the province of each importing country to determine, in accordance with the provisions of its law, for the purpose of applying the MFN provisions (and for other GATT purposes), whether goods do in fact originate in a particular country”. Second bullet point: add “and could even maintain several different rules of origin depending on the purpose of the particular regulation. In 1981, the GATT Secretariat prepared a note on Rules of Origin and, in November 2982, Ministers agreed to study the rules of origin used by GATT Contracting Parties. Not much more work was done on rules of origin until well into the Uruguay Round negotiations. In the late 1980s developments in three important areas served to focus more attention on the problems posed by ROO: (1) Increased number of preferential trading arrangements (spaghetti/noodle bowl effects) – an increased use of PTAs, including regional arrangements, with their various ROO; (2) An increased number of origin disputes growing out of quota arrangements such as the Multifibre Arrangement and the “voluntary” steel export restraints; and (3) an increased use of anti-dumping laws, and subsequent claims of circumvention of anti-dumping duties through the use of third country facilities.

Methods of Determining Product Origin: Wholly Obtained Principle Tradable Type Principle/Criterion Primary Goods Wholly obtained in a single customs territory/country Agricultural Goods Unprocessed and harvested within customs territory/country Marine Fisheries (outside territorial waters of MC) Ownership of vessels/means of catch Forestry Products Mineral Products Extracted within territory or seabed in territorial waters Scrap/Waste Products Collected within and fit only for recovery of raw materials The determination of product origin for primary products and scrap or waste is fairly straight forward and is subject to the criterion of being wholly owned in the territory of the country in question. Several caveats arise in marine fisheries and ocean-bed mining, however. Products obtained outside the territorial limits of a coastal entity may gain the origin of the vessel or platform that is used to extract, capture, or otherwise obtain the product in question. For manufactured and processed goods, the determination of origin is more complex and controversial, particularly for products with intermediate inputs and processing or manufacturing operations taking place in two or more countries or customs territory. The Kyoto convention of the Customs Cooperation council (now known as the WCO) of 1973 set forth the principle of a “last substantial transformation” for determining product origin in the case of processed and manufactured goods. Three types of tests were agreed on as applicable in satisfying (potentially) the principle of a last substantial transformation.

Methods of Determining Product Origin: Tests for Determining Origin of Processes or Manufactured Goods Tests for Processed/Manufactured Goods Principle of Last Substantial Transformation Change in tariff heading (CTH) or change in tariff subheading (CTSH) test A change from any 4-digit HS chapter to any other 4-digit HS chapter (6 digits for CTSH) Specified process test Any manufacturing process deemed to confer origin Value-added (percentage) test Minimum regional content or maximum non-originating content Mixed tests SP test and CTH test; CTH test or value-added test, or both For processed or manufactured goods, rules of origin may be of four basic types: (a) A change in tariff heading (CTH) rule usually defined at the 6-digit level; (b) A value-added (VA) rule, usually defined as a minimum percentage of regional value content necessary to confer origin or by a maximum amount of non-originating content allowed in order to confer origin; (c) A specified process (SP) rule defined as manufacturing operations that must be undertaken in order to confer origin; (d) Mixed tests:- It is noteworthy that CTH and VA or SP rules are frequently combined in rules of origin in PTAs, despite the general preference for using a CTH rule in the Uruguay Round Agreement on Rules of Origin.

Rules of Origin Criteria in RTAs of Asia-Pacific Type Qualifying Criteria Cumulation ASEAN Free Trade Area (AFTA) Regional - Value content needs to be at least 40%. - F.O.B. value calculation basis Full Australia-NZ Closer Economic Relations Trade Agreement - Value content needs to be at least 50%. - Factory cost calculation basis. Bilateral (Full) Asia-Pacific Trade Agreement (APTA) - Value content needs to be at least 45% (35% for LDCs). - Ex-factory price calculation basis

Rules of Origin Criteria in RTAs of Asia-Pacific (Cont’d) Type Qualifying Criteria Cumulation China - ASEAN Regional - Value content needs to be at least 40%. - Elimination of duty rates for products under HS Chapter 07 and 08 (vegetables and fruits) which originate in the party of the agreement. India - Nepal Bilateral - Change in tariff heading (4-digit level; and - Value content needs to be at least 30%. India – Sri Lanka - Change in tariff heading (4-digit level); and - Value content needs to be at least 35%. - F.O.B. calculation basis.

Rules of Origin Criteria in RTAs of Asia-Pacific (Cont’d) Type Qualifying Criteria Cumulation South Asian Preferential Trade Agreement Regional - Value content needs to be at least 40% (30% for goods of LDCs). - F.O.B. value calculation basis. Diagonal Singapore - Australia Bilateral - Value content needs to be at least 50% (product specific rule: 30%). - Factory cost calculation basis. Singapore - Japan - Either change in tariff heading (4-digit level); or - Value content needs to be at least 60%. Full

Rules of Origin Criteria in RTAs of Asia-Pacific (Cont’d) Type Qualifying Criteria Cumulation Singapore – NZ (Closer Economic Partnership) Bilateral - Value content needs to be at least 40%. - Ex-factory cost calculation basis. Singapore – United States - Either change in tariff heading (2,4 or 6-digit level); and/or - For specific products: value content needs to be at least 30-60%. - Highly product-specific. South Pacific Trade and Economic Cooperation Agreement Regional - Value content needs to be at least 50%. - Factory cost calculation basis. - Non-reciprocol. Bilateral (Full)

Rules of Origin Criteria in RTAs of Asia-Pacific (Cont’d) Type Qualifying Criteria Cumulation Thailand - Australia Bilateral - Product-specific change in tariff heading (4 or 6-digit level) and/or for specific products. - Value content percentage of 40-55%. - F.O.B. calculation basis. United States - Australia - Change in tariff heading (2,4 or 6-digit level) and/or for specific products. - Value content needs to be at least 35% 9automotive: 50% net cost). Source: Compiled by Rajan S. Ratna, 2006

Rules of Origin under the APTA Products contained in the National Lists of Concessions shall be eligible for preferential treatment if they satisfy the RoO under the APTA (Article 8 and Annex II of the APTA). Rule 1: Originating Products – (a) Products wholly produced or obtained in the exporting Participating State (as defined in Rule 2); (b) Products not wholly produced or obtained in the exporting PS (provided that export products are eligible under Rule 3 or Rule 4).

Rules of Origin under the APTA Rule 2: The following shall be considered as wholly produced or obtained in the exporting PS of APTA: (a) Raw or mineral products extracted from its soil, its water or its seabeds; (b) Agricultural/forestry products harvested there; (c) Animal born and raised there; (d) Products obtained from animals referred to in (c); (e) Products obtained by hunting or fishing conducted there; (f) products of sea fishing and other marine products taken from the high seas by its vessels; (g) Products processed and/or made on board its factory ships exclusively from products referred to in (f); (h) Parts or raw materials recovered there from used articles which can no longer perform their original purpose nor are capable; (i) Used articles collected there which can no longer perform their original purpose there which are fit only for disposal or for the recovery of parts or raw materials; (j) Waste and scrap resulting from manufacturing operations conducted there; (k) Goods produced there exclusively from the products referred to in (a) to (j).

Rules of Origin under the APTA Rule 3: Not Wholly Produced or Obtained (a) Within the meaning of Rule 1(b), products worked on or processed as a result of which the total value of the materials, parts or produce originating from non-PS or of undetermined origin used does not exceed 55% of the f.o.b. value of the products produced or obtained and the final process of manufacture is performed within the territory of the exporting PS shall be eligible for preferential concessions, subject to the provisions of Rule 3(c), (d) and (e) (b) Sectoral Agreements: Provisions may need to be made for special criteria to apply. Consideration may be given to these criteria as and when the sectoral agreements are negotiated. The formula for calculating the content of non-originating materials, and its requirement for obtaining the originating status referred to in rule 3(a): [(Value of imported non-originating materials, parts or produce + Value of undetermined origin materials, parts or produce) / f.o.b. price ] x 100 ≤ 55% .

Rules of Origin under the APTA Rule 3(d): The value of the non-originating materials, parts or produce shall be: (i) the c.i.f. value at the time of importation of materials, parts or produce where this can be proven; or (ii) The earliest ascertainable price paid for the materials, parts or produce of undetermined origin in the territory of the PS where the working or processing takes place. Rule 3(e): The following operations or processes are considered to be insufficient to confer the status of originating products:- (i) Operations to ensure the preservation of products in good condition either for transportation or storage; (ii) Simple operations consisting of removal of dust, sifting or screening, sorting, classifying, matching, washing, painting, cutting up; (iii) Changes of packaging and breaking up and assembly of consignments; (iv) Simple slicing, cutting or repacking or placing in bottles, flasks, bags, boxes, fixing on cards or boards; (v) The fixing of marks, labels or other like distinguishing signs on products or their packaging; (vi) Simple mixing;

Rules of Origin under the APTA 3(e) continued: vii) Simple assembly of parts of products to constitute a complete product; (viii) Slaughter of animals; (ix) Peeling, unflaking, grain removing and removal of bones; and (x) A combination of two or more operations specified above. Rule 4: Cumulative Rules of Origin Products which comply with origin requirements provided in Rule 1 and which are used by a PS as input for a finished product eligible for preferential treatment by another PS shall be considered as a product originating in the territory of the PS where working or processing of the finished product has taken place provided that the aggregate content originating in the territory of the PS is not less than 60% of its f.o.b. value.

Rules of Origin under the APTA Rule 5: Direct Consignment Directly consigned from the exporting PS to the importing PS: (a) If the products are transported without passing through the territory of any non-PS; (b) The products whose transport involves transit through one or more intermediate non-PS with or without transshipment or temporary storage in such countries, provided that: (i) the transit entry is justified for geographical reason or by considerations related exclusively to transport requirements; (ii) the products have not entered into trade or consumption there; and (iii) the products have not undergone any operation there other than unloading and reloading or any operation required to keep them in good condition. Rule 6: Treatment of Packaging When determining the origin of products, packing should be considered as forming a whole with the product it contains. However, packing may be treated separately if the national legislation so requires.

Rules of Origin under the APTA Rule 8: Certificate of Origin Products eligible for preferential concessions shall be supported by a Certificate of Origin (CoO) issued by an authority designated by the government of the exporting PS and notified to the other PS in accordance with the attached sample (CoO) and notes for the completion thereof. Rule 8: Prohibition and Co-operation (a) Any PS may prohibit importation of products containing any inputs originating from States with which it does not have economic and commercial relations. (b) PS will do their best to co-operate in order to specific origin of inputs in the CoO.

Rules of Origin under the APTA Rule 9: Review These Rules may be reviewed as and when necessary upon request of one-third of the PS and may be open to such modifications as may be agreed upon. Rule 10: Special Criteria Percentage Products originating in least developed PS can be allowed a favorable 10 percentage points applied to the percentages established in Rules 3 & 4. Hence, for Rule 3, the percentage would not exceed 65%, and for Rule 4, the percentage would not be less than 50%.

APTA Supplementary Rules of Origin under Negotiation Alternative criteria under negotiation by the APTA Standing Commmittee: To improve efficiency of origin determination, a change in tariff classifications at four digit-level (CTH) of the Harmonized System (HS) should be added in Rule 3(a) and sectoral agreements of Rule 3(b) should made for specific goods The draft modification of the article of Rule (3a) and 3(b and the sectoral agreement for specific products: Rule 3 (Not wholly produced or obtained) Added to 3(a), “Alternatively, a product which has undergone a change in tariff classification at 4-digit level (CTH) of the Harmonized system shall be eligible for preferential concessions. Added to 3(b), “Within the meaning for Rule 1(b), the products which satisfy the Sectoral Agreements provided in Appendix 1 shall be eligible for preferential concessions. The APTA Standing Committee at its 28th session in March 2008, indicated that the current value-added criteria can be readily applied as a single rule. However, in the case of specific products manufactured through complex procedure, there would problems and difficulties in determination of origin of goods due to price fluctuation, possibilities of price manipulation, etc., which incur considerable administrative expenses for the origin verification process of the Customs.

Rules of Origin under the APTA In conclusion: Simple, Common Rules of Origin with minimum local value content requirement of 45% f.o.b. (35% for LDCs), compared favorably to other RTAs. A set of operational procedures for the certification and verification of the origin of goods was adopted in Oct. 2007, the first time such a common agreement was reached among developing countries in the region. Visit APTA official web site: www.unescap.org/tid/apta.asp

Thank you for paying attention. Your valued comments are welcome! choj@un.org