Rules of Origin have long featured prominently in preferential trade agreements as they help countries to determine which goods qualify for preferential tariff treatment under an agreement. In effect, they help to determine the economic nationality of a product and the tariff to be applied to it. They also serve other useful purposes, including the implementation of trade policy instruments such as quota allocation, safeguards, anti-dumping and countervailing duties. Depending on how they are structured, they can either be trade creating or trade diverting. The PACER Plus Parties have identified rules of origin as one of the priority issues to be negotiated under the Agreement. They are determined to come up with rules which would reflect the level of processing feasible in the Forum Island Countries, which tend to rely on imported inputs for the basic processing occurring in their countries.
When a good is imported into a country, the duty rate applied may vary depending on three main considerations: the tariff classification of the product in the importing country’s tariff nomenclature using the Harmonised Commodity Description and Coding System as a basis, the country where the good is considered to have “originated” from and whether or not the exporting country has preferential tariff treatment under a Preferential Trade Agreement (PTA) or under the importing country’s Generalised System of Preferences for developing countries, including least-developed countries.
When seeking to establish the origin of a good, countries usually consider whether the imported product is wholly obtained or produced in one country. Where this turns out to be the case, the product will be given preferential tariff treatment which can take the form of a reduction of the MFN tariff rate (for example from 10% to 5%) or an exemption from the payment of duty (0%). Examples of wholly obtained goods include raw agricultural products, live animals and minerals. Where an imported product is not wholly obtained or produced in the sense of containing third party inputs and material, countries will resort to the three principal criteria used in determining origin in such circumstances. These are the change of tariff classification (CTC), regional value content (RVC) and specific processes carried out in the exporting country.
Under the CTC approach, the inputs will have to be transformed so that the intermediate or final product comes under a different tariff chapter, heading or sub-heading. For example, whereas fresh tuna comes under tariff heading 0304 of the HS Code, canned tuna falls under 1604. Thus, if fresh tuna is imported from Country A and is processed and exported as canned tuna from Country B, the canned tuna will be considered to originate in Country B. There would have been a change from Chapter 03 to Chapter 16.
Under the RVC methodology, raw materials and inputs imported from other Parties to the PTA are considered to be originating goods. For example, if in the manufacture of canned tuna in Country A, the live tuna is imported from Country B which is also a party to the PTA, the canned tuna will be deemed to originate from Country A and will qualify for preferential tariff treatment, provided the value of the live tuna and the processing in Country A meet the stipulated threshold in the PTA. In other words, if the RVC is set at 40%, for example, then insofar as the cost of the live tuna and the cost of processing the tuna in Country B represents at least 40% of the final value of the product, then it would be considered an originating product and benefit from preferential tariff treatment in the other Parties to the PTA.
Under the specific process methodology, a prescribed activity has to take place in the exporting Party. If it is, for example, cooking oil, “refining” could be the process which has to be carried out in the exporting Party. If it is the production of cotton shirts, the process could be “cut and sewn” into shape.
The PACER Plus Parties have agreed to negotiate rules of origin which would be trade creating and ensure that the Forum Island Countries derive significant benefits from the Agreement.