Understanding rules of origin in Trade by Mr. Chea Socheat

Understanding Rules of Origin
in International Trade Policy
Mr. CHEA Socheat, Director of Europe,
Middle East, and Africa Department
Ministry of Commerce
Email: cheasocheat@gmail.com
03-04 June 2015
Phnom Penh
1

Objectives
• Is it an Originating Product? Cambodia?
• Terminologies of Origin and Rules of
Origin
• The Use of Rules of Origin in Trade
• Technical Elements of Rules of Origin:
WO and ST (VA, CTC, SP)
• Self Certification
• Economic Effects of Rules of Origin
2

Is it an Originating Product?
Cambodia?
• Is it originated in this country? It may be wrong if one
says country of origin of a product is:
– Country where the goods are purchased or purchase is paid
– Country where the company’s or factory head office is based
– If two countries of origin: the one where we buy most
– Where the goods are shipped from
– Where the product is made
• Country of origin of a product can only be determined by
Rules of Origin.
3

Originating Products
7
CAMBODIA
USA
CHINAKOREA

Terminologies of Origin and ROO
• Origin: born from a particular ancestor or, more generally it is
the act or fact of beginning from something, source or cause,
starting point.
• It can be your nationality which is determined by your place
of birth, by the origin or your parent, by your marriage with
someone or by your prolonged residency in a given country.
Your origin grants certain benefits like being able to live,
work, access social security or run for elected posts.
• The origin of goods determines the nationality of a good or
the country where a good was obtained or where it was
manufactured. ROO defines the conditions under which a
product is deemed as originating and therefore suitable for
preferential treatment.
8

The Use of ROO in Trade
• Rules of Origin are used in international trade every
time the treatment of an imported item varies
depending on where it was produced; that is every
time there needs to be a distinction based on the
country of origin.
• Most commonly, this happens at the importation of a
good, to determine which tariff rate should apply.
• However, certain countries may also apply other trade
policy measures which require the utilization of rules
of origin for the implementation.
9

• Customs treatment: import duties or tariffs
• Quotas/quantitative restrictions
• Anti-dumping or countervailing duties
• Sanitary measures (inspection, quarantine)
• Trade statistics
• Country of origin marks in labels
10

• Two types of RoO: preferential (preferential trade
agreement) and non preferential (MFN treatment)
• The justification for preferential RoO is to ensure that non-
members do not obtain access to regional preferences
(avoid trade deflection or free rider). All preferential trade
agreements have rules of origin to ensure that the benefits
of an agreement are only given to those products which
originate in one of the parties to the agreement.
• The aim of preferential ROO is not so much to determine
the real origin of a good, but rather to confirm that a good
claiming preferential status actually meets the conditions
set in the agreement.
• Non preferential roo involves no tariff concession. The
determination of the origin is for trade policy measures
(embargo, quota,..)

The Use of ROO-Trade Creation and
Trade Diversion
• prevent deflection of trade and transhipment in an effort to
(falsely) obtain origin and therefore preferential treatment
13

Trade Deflection
Country C
Country B
Country A
Free trade agreement/
Preferential access
Rest of
the world
Rest of
the world
Rest of
the world
Trade deflection
Tariff=10%
Tariff=0%
Tariff=20%Tariff=20%
14

Trade Creation and Trade
Diversion: An Example
• Suppose we have three countries:
Cambodia, Laos, and Thailand.
• Initially, Cambodia imports textiles and
applies a 50% tariff to textiles from
both Laos and Thailand.
• Suppose that Laos is able to produce a
unit of textiles for $1, whereas it costs
Thailand producers $1.20 per unit.

Production
Costs
Price with
50% Tariff
Laos $1.00 $1.50
Thailand $1.20 $1.80
17-16

• Prior to integration, Cambodia imports
from the most efficient supplier, Laos.
• Suppose now that Cambodia enters
into a free trade agreement with
Thailand, but not Laos.
• That is, Laos textile imports are
dutiable, but Thailand textiles can
enter duty-free.

Production
Costs
Price with
50% Tariff
Price with
FTA
Laos $1.00 $1.50 $1.50
Thailand $1.20 $1.80 $1.20
17-18

• Notice that Cambodia will now import
from Thailand, although Laos is the
more efficient producer.
• Cambodia loses tariff revenue

The USE of ROO in FTAs
• General Rule (GR)
– Applied to all products if it is not otherwise
specified
• Product Specific Rules (PSR)
– Wholly obtained or produced
– Value Added Rule
– Change of Tariff Classification
– Specific Manufacturing Process, Chemical
Reaction Rule, or Combination of Rules
21

Example of GR and PSR
• In ASEAN, the value content is at least 40% either
on the "Single Country Content" or "AFTA
Cumulative Content" basis and the final process
of the manufacture is performed in country (40%
value-added rule) and CTH as co equal 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), foreskins' (14 ) and footwear (4).
22

Goods underwent substantial
transformation process
Technical Elements of ROO-Originating Goods
Products manufactured from exporting country wholly or partly
from imported materials or components, including materials of
undetermined or of unknown origin, are considered as
ORIGINATING in that country if its materials, parts or
components have undergone SUBSTANTIAL WORKING OR
PROCESSING there.
24

Technical Elements of ROO-Originating
Goods
• Wholly obtained (WO)/EP
• Substantial Trasformation-ST
– VA, Value Added
– CTC, Change of Tariff Classification
– SP, Specific Process
25

Technical Elements of ROO- Wholly Obtained Definition
Wholly obtained products (1)
 Mineral products extracted within the country
 Vegetable products harvested in the country
 Live animals born and raised in the country
 Products derived from live animals raised in the
country
 Products of hunting or fishing in the country
26

Technical Elements of ROO- Wholly Obtained
Wholly obtained products (2)
 Products of sea-fishing and other products taken from the
sea outside a country’s territorial sea by vessels registered or
recorded in the country concerned and flying the flag of that
country
 Goods obtained or produced on board factory ships from
the products above provided that such factory ships are
registered or recorded in that country and fly its flag
 Products taken from the seabed or subsoil beneath the
seabed outside the territorial sea provided that that country
has exclusive rights to exploit that seabed or subsoil
27

Examples of WO
• Rice
• Maize
• Born and raised animal
• Mining
• Fishing with ship flying Cambodia flag and crew
of Khmer national

Value Added Rule-VA
• The value of non-originating materials used should
not exceed a given percentage of the ex-fac price of
a product
• The value of the local content should not be lower
than a given percentage of the ex-fac price of a
product
• Import Content Rule (MC) or Regional Value Content (RVC)
Requires a MIN % of local value added in the originating
country (or a MAX % of value originating in non-member
countries)
29

Value Added Rule
- at least 40% of its content originates from any Member States.
- 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.
- 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%.
30

Calculation of Value Content
31

 CC – Change of Chapter –
Change to this Chapter from any
other Chapter
 CTH – Change of Tariff Heading –
Change to this heading from any
other heading
 CTSH – Change of Tariff Subheading –
Change to this subheading from any
other subheading
 Based on HARMONIZED SYSTEM (HS)
Change in Tariff Classification
39

Change of Tariff Classification
• Rules presented at chapter level (2 digits)
• Rules presented at heading level (4 digits)
– For a whole heading:
• CTH Change to this heading from any other heading
– For a split heading
• CTHS Change to this split heading from any other split of this heading or any
other heading
• Rules presented at subheading level (6 digits)
– For a whole subheading
• CTSH Change to this subheading from any other subheading or from any other
heading
• CTH
– For a split subheading
• CTSHS to this split subheading from any other split of this subheading, or any
other subheading or heading
• CTSH and CTH
40

44
The manufacture of a straw basket, classified under heading 4602 of the HS.
As the basket is classified under 4602, while the straw material was imported
under 1401, the origin criterion is clearly satisfied.
Heading 4602Heading 1401

A Cambodia oil factory buys copra from various farmers as a raw material for the
production of a refined oil to be exported to Australia.
Cambodia
Coconut / Copra
H.S. 801.19
Refined Oil H.S.
1513.19
Exported
Australia
45

For purposes of determining origin of the refined
oil:
• The coconut (801.19) is an originating material. The heading of the finished product
(refined oil) 1513.19 is different from that of the coconut. The required change has
occurred.
The product refined oil is an ”originating goods” of Cambodia, hence this qualify for
PREFERENTIAL TARIFF TREATMENT.
46

The HS code of refined oil is 1513.19 and its origin rule under
ATIGA is “A regional value content of not less than 40 percent;
or
A change to subheading 1513.19 from any other. The rule
requires that the 6-digit (i.e. subheading) code of the refined
oil be different from those of the materials used in its
production in Cambodia.
47

Specific Process
Articles of Apparel
Chapter 62 of the HS, for which (most
headings) the rule is "manufacture from
fabric".
This means that you can import fabric. Sewing
and possible other subsequent manufacturing
stages must be carried out in the beneficiary
country in order to obtain origin.
The so called ”single transformation rule”
48

Specific Process
rule for the same chapter (62) was
"manufacture from yarn"
Weaving and sewing, plus all
subsequent manufacturing stages
must be carried out in the
beneficiary country in order to
obtain origin.
The so called ”double transformation
rule”
49

Some Other Important Features
• Cumulation
• Tolerance or de minimis
50

De minimis Rule
• The Tolerance rule:
– Non-originating materials may be used in the
manufacture of a product, even if the rule of sufficient
working is not fulfilled, provided that their total value
does not exceed 10% of the ex-works price of the
product. (specific product rules for textiles)
• Examples:
– Parts of same heading as end product, so no CTH.
However, permitted under tolerance rule if not more
than 10% of total value
51

Requirement on Transportation
Direct transport rule
 Goods should be transported directly between the
countries involved in the agreement
 Exceptions when the territory of another country is used:
 Trans shipment or warehousing
 Under Customs surveillance
 Proof needed
52

Non Originating Operation-Minor Process
Minimal operations – not conferring origin (1)
 Operations to ensure the preservation of goods in good
condition during transport and storage (ventilation, spreading
out, drying, removal of damaged parts and like operations)
 Simple operations consisting of removal of dust, sifting or
screening, sorting, classifying, matching (including the making-
up of sets of articles), washing, cutting up
 Changes of packing and breaking-up and assembly of
consignments
53

Non Originating Operation-Minor Process
Minimal operations – not conferring origin (2)
 Simple placing in bags, cases, boxes, fixing on cards or
boards, etc., and all other simple packing operations
 The affixing of marks, labels or other like distinguishing signs
on products or their packaging
 Simple assembly of parts of products to constitute a
complete product
 A combination of two or more operations specified above
 Slaughter of animals
54

The Effects of Rules of Origin
• ROO have a direct impact on market access
conditions because importing country sets the
conditions for the entry of goods in its territory.
• Encourage foreign and domestic investment
where the rules facilitate international trade.
• Influence the capacity for firms to integrate
international value chains.
• Influence the ability of firms to benefit from
regional or preferential trade agreements
• Encourage or discourage linkages between
export sectors and national industries.
57

Effects of Rules of Origin
• ROO may require producers to change their suppliers to
qualify for regional or preferential trade agreements.
• ROO could have a significant impact on the cost of producing
a good and might therefore affect its competitiveness and
trade opportunities.
• If the rules is not clear, exporters and importers may have
great difficulty predicting which treatment their goods will
receive, making it more difficult to make business plans and
decisions. If the rules are complex, companies may need to
hire and dedicate staff specifically to understand them and
reduce the risks associated with regulatory uncertainty which
increase their costs.
58

Understanding rules of origin in Trade by Mr. Chea Socheat

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