Asian Experience with RoO with the emphasis of China (LU Bo) Workshop on the Importance of Rules of Origin and Standards in Regional Integration Boao,Hainan, China, June 27, 2006

“ Rules of origin (ROO) are the criteria needed to determine the national source of a product. ” Certificate of Origin (CO) is not only a trading document, but one of the most important trade administrating measures. It can be the trade barrier to protect the importing market. ROO is not only a confused factor in trade statistics, but also an important factor in anti-dumping, countervailing and other non-tariff trade barriers. Trade partners formulate many preferential ROO under GATT/WTO framework rules. Preferential ROO ensure the reduced rates of duty in PTA/FTA. Disputes or discussions on ROO itself are focused on non-wholly obtained or partly obtained products, which are becoming very popular in the economic globalization. Understanding of Rules of Origin

----No dispute, no request to visit!!! Enforcement of NAFTA Rules of Origin: In NAFTA preferential treatment, a Certificate of Origin must be filed with the import broker, certifying that the goods are originating. If a U.S. company has evidence to show that a foreign company's products do not satisfy NAFTA ROO, U.S. Customs will contact the Canadian/Mexican company with a request to visit (audit). Where a visit takes place, and Customs auditors find a violation of a rule of origin, the goods will be denied NAFTA duty preference. Depending on the circumstances, civil or criminal penalties may be assessed.

China ’ s Experience with ROO Most of the trade frictions and disputes between China and its trade partners were caused by the different standards of ROO. 1. When labor can not move freely out of China as goods can, investors move in. If a product only added value less than 10% in China, who will issue the certificate of origin for it? According to the research paper of General Administration of Quality Supervision, Inspection and Quarantine (File K , December of 2001), in 1990, China issued 2 million of CO valued US$ 40 billion, which shared 77% of China ’ s total export. Some products with only 7-8% value added were also recognized as products made in China (substantial transformation). (p.27 of the paper 2001) As the Chinese work for foreign companies, the Authority issue Certificate of Origin. (China importing parts and exporting assembled products, SH code number changed). If Chinese authority refused to issue the CO, how can the products be exported?Can the exporters in China request other authority outside China to issue CO for them? Can Chinese authority issue CO to confirm the products were made in Japan or US? 2. When Quota for textiles and garments trade is still used in 1996, US changed its standard of ROO to textiles and clothing. Many products used to be “made in HK” (cutting place as the Origin) became the products “made in China”(sewing place as the Origin).

China’s Experience with ROO 3. Many products like mobile phone, only processed in China, but can be sold in China market as products “made in China”. 4. In 2005, without the exports of foreign invested companies, China’s trade surplus with US will declined 73.4% to US$ 30.4 billion instead of US$114.2 billion in Without the exports of processed products, China’s trade surplus with US will decline 91% to US$ 10.3 billion in 2005 (Ministry of Commerce, PRC estimated. Bo). 5. Since 1995, 1/7 of the anti-dumping cases are related to Chinese companies. EU, the US and some other countries have considered China as a “non-market economy (NME)”. When calculating dumping margin, they use the price of a third country, the so-called “surrogate country” or “reference country”, instead of the actual domestic price of China. Such a discriminatory practice has greatly encouraged foreign industries to apply for the use of antidumping investigations against China, making Chinese companies very difficult and costly to respond.

China’s Trade in Goods (January to April, 2006) US$ billion ItemsAprilJanuary to April ValueChange(%)ValeChange(%) Total Value of Export and Import Total Export Total Import Balance Source: Ministry of Commerce, PRC

China’s imports and exports by form and by ownership, 2005 (US$100 million) Item ExportsImports Value Change （ % ） Share (%) Value Change （ % ） Share (%) Total7, , By form Ordinary trade 3, , Processing trade 4, , Others , By ownership SOEs1, , FIEs4, , Others1, Source: Ministry of Commerce, PRC In 2005, China’s trade surplus is US$ billion, 1.4 times. China get only 3- 5% profit from the processing trade. Chinese company can get only US$ 15 from the US$ 700 of a exporting notebook computer.

China’s Labour Force and Employment in the Rural Area （ 2001 ） Farming (Million ） Share % 2001Other Business (Million) Share % 2001 East middle West Total Total Million (120 million work in cities in 2005 ， almost the total population of Japan) 2004 (Million)%2005 (million)% Total Employment (6.3+)100.0 Agriculture % Industry % Service % Urban Area (9.7+)36% At present, China still has over 200 million unemployed labor in the countryside. China’s unemployment rate is 4% in 2004 and 2005.

China’s Main Trade Partners in 2005(US$ Billion) PartnersExport Share (%) Change (%) Import Share (%) Change (%) Balance Total US EU HK Japan ASEAN Singapore ROK TW Russia Subtotal Others Source: Ministry of Commerce, PRC

TDC 1 Offshore Trade ( HK$100 Million) Trade in Total Offshore Trade Entrepot Trade Offshore trade/ Entrepot Trade Offshore trade/ Entrepot Trade Annual Increase TDC: Trade Development Council

Since 1980s, most HK manufacturing industry moved out to mainland China. Local manufactured product exports shared 81% of the total in 1970s, 35.3% in 1990s, and 8.7% in In 1990s, 50% of China’s trade is with HK, the share declined from 44% of 1997 to 31% of 2001, and to 9.5% in In 2002, HK’s re-export of mainland made products increased to 75% of its total export (70% of re-export of mainland made products are actually processed products.). Re-export of products made in other countries is estimated 15% of the total export. From 1999 to 2001, share of entrepot trade in HK’s total trade reduced. Re-export of mainland made products increased only 4.6% when HK-China trade increased 7.8%. Share of processing trade also reduced, from 68.4% in 1999 to 64.5% in 2001 and to 7.8% in 2002 (In 2002, Non-processed products trade between HK and China increased 21.2%).

, annual increase of HK’s re-export is 3.8% in average while offshore trade increased much higher (the service on trade increased 11.4%). Offshore trade of HK is calculated as trade in service instead of trade in goods. HK’s service on trade in goods are finance (80%), test/certificates, arbitration, insurance and transportation (20%). Offshore trade is expected to increase to 70% of the total in 2010, and the processed trade will decline from 64.5 in 2001 to 50% of 2010.(TDC) 60% of China’s export to Singapore is machinery and electric equipment. Most of them could not be used in Singapore. Advanced financial service, efficient management of shipment are advantages of Singapore. China imports 21% of ROK’s total export and 13.4% of Japan’s total export. Asia becomes the manufacturing centre for the world, especially for US and EU. (“ 美欧消费、亚洲加工 ”), This situation can not change soon.

PartnersExportShare (%) Change (%) ImportShare (%) Change (%) Balance Total Per Capita HK Singapore China’s Trade with Hong Kong and with Singapore (US$ Billion; Per capita, US$) Population: China, 1.3 billion, Hong Kong, 7 million; Singapore, 4 million. Import per capita Times of China’s export Per capita Export per capita Times of China import Per capita HK Singapore Trade per capita of Hong Kong and Singapore with China

East Asian Regional Economic Integration After the United States initiated in 1991 to establish NAFTA with Canada and Mexico, ASEAN member states started to establish the first FTA in Asia, AFTA in ASEAN completed most negotiations on trade and investment in 1990s, especially on tariff and non-tariff arrangements. As soon as China became the WTO member, ASEAN agreed to establish ASEAN-China FTA in 10 years from Source: Ministry of Commerce, PRC China’s Trade with ASEAN and with the World ( ) (US$ billion)

China accepted 25% value-added standard in In 2004, China formulated the simple standard of ROO with 40% value-added or 4-digit Tariff Heading Change (THC, 四位数级品目 改变） in Source: Ministry of Commerce, PRC

ASEAN & China – (ACFTA) ACFTA rules of origin is negotiated with AFTA standards, CEPT (Common effective preferential tariff) Scheme - the content is at least 40% either on the "Single Country Content" or "ACFTA Cumulative Content" basis and the final process of the manufacture is performed in one country (40% value-added rule). - a number of products which satisfy product specific rules (PSR) can also qualify for tariff concessions. These include textiles (424 items in 6-digit HS code), fish(2), wool (6), leather goods (22), furskins (14 ) and footwear (4). - The Certificate of Origin (CO) is issued by the authorities. (Annex 3 of the Trade in Goods Agreement)

CEPT SCHEME FOR AFTA - at least 40% of its content originates from any Member States. - have fulfilled the CEPT origin requirement. - products worked on and processed as a result of which the total value of the materials, parts or produce originating from non-ASEAN countries or of undetermined origin used does not exceed 60% of the FOB value of the product produced or obtained and the final process of the manufacture is performed within the territory of the exporting Member State. - The formula for 40% ASEAN Content is as follows: Value of Imported Non-ASEAN Materials,Parts or Produce + Value of Undetermined Origin Materials, Parts or Produce X 100% ≤ 60% If the material has less than 40 percent ASEAN content, the qualifying ASEAN national content shall be in direct proportion to the actual domestic content provided that it is equal to or more than the agreed threshold of 20%.

Implementing Guidelines for Partial Cumulation under ASEAN Cumulative Rules of Origin (a) to be considered for partial cumulation, the local/ASEAN content of the materials, parts or produce originating from the country of last manufacture should not be less than 20%; (b) the formula to be used in the calculation would be similar to the formula for calculating the 40% local/ASEAN content; (c) no CEPT preference shall be extended by the importing member country for that particular intermediate goods; (d) the export of the intermediate good shall be accompanied by a valid CO Form D duly prominently marked or stamped “FOR CUMULATION PURPOSES ONLY”; (e) the relevant sections of the Operational Certification Procedures, including Rule 17 on verification, shall be applicable to CO Form Ds issued for partial cumulation purposes.

Rules of Origin in Singapore ’ s PTA agreements In the East Asia region, Singapore is the most active promoter of PTA or FTA, it signed the agreement with Australia, New Zealand, Japan, ROK and the US. The preferential ROO is not simple. Singapore – Australia Free Trade Agreement (SAFTA) All products need only fulfil a general rule of a specified threshold of local value content of either 30% or 50%. Generally, the ROO requires that the content is at least 50% of the cost price. For selected products listed, the content is 30% of the cost price. Singapore manufacturers that source inputs from overseas can include the Australian component of these inputs as part of the Singapore content. New Zealand and Singapore on a Closer Economic Partnership (ANZSCEP) - A product will qualify for preferential treatment if at least 40% of the ex-factory or works cost is of New Zealand or Singapore origin, and if the last place of manufacture is in New Zealand or Singapore. Manufacturers that source inputs from overseas can include the New Zealand or Singapore component of these inputs towards the 40%. Outward Processing (OP) is recognised in the agreement.agreement

Japan and Singapore Economic Partnership (JSEPA) - Each product has at least one corresponding specific rule of origin. - a substantial transformation is deemed to have occurred if the CTC (Change in Tariff Classification) rule is met. The final product must have undergone a change in tariff heading (CTH; a different 4 – digit heading) from the materials used in its production. - additional flexibility for 264 products of interest to Singapore, with the provision of two alternative specific rules. Each of these products will qualify for preferential tariff treatment if: i. it has undergone the requisite change in tariff heading; or ii. Singapore content is at least 60% of the selling (FOB) price. (It’s difficult) - Manufacturers that source inputs from overseas can include the Japan or Singapore component of these inputs towards the 60%. - Outward Processing (OP) is recognised in the agreement.agreement

United States – Singapore Free Trade Agreement (USSFTA) - The ROO for certain products require that imported inputs used in the manufacture of the final product within Singapore are classified under a different tariff classification from the final product. - For some electronic products, a VA rule of 30 – 60% must be satisfied. - For certain chemicals/petrochemical products, a specified process must occur in Singapore, such as a specific chemical reaction. - The concepts of OP and ISI ( The Integrated Sourcing Initiative ) are recognised in this agreement. How can rules of origin be simplified? How has harmonization of standards been achieved? European Free Trade Association – Singapore Free Trade Agreement (EFTA) - the final product change in tariff heading (CTH; a different 4 – digit heading) from the materials used in its production. - VA rule: manufacturers that source inputs from overseas can include the component of these inputs towards the specified percentage. The specified local content ranges from 40% to 80% ex-works price. - For some chemicals/petrochemical products, Singapore process will be considered Singapore origin.

Some Other Value-added Standard: Considering the factor of ROO, free trade is not free, preferential treatment may not preferential. WCO, 45% value-added is popular, sometimes 50% is used, 60% value-added for motor-vehicles; Canada, 50% (cost excluding manufacturer’s profit, transportation, etc). Taiwan, 35%; US, 35%; In 1980s, Photocopy machine made in Japan or US. (to EU)?It’s difficult to calculate the value added. Value-added standard is clear and simple, but the calculation of cost is difficult because of price changing of materials and other reasons.