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Fundamentals of Preferential Rules of Origin 5th Edition Module 4. General Criteria

Fundamentals of Preferential Rules of Origin , 5th edition

Module 4

Author: Inter-American Development Bank (IDB) (www.iadb.org), through its Integration and Trade Sector (INT) Course coordinators: Inter-American Development Bank (IDB) (www.iadb.org), through its Integration and Trade Sector, the Institute for the Integration of Latin America and the Caribbean (www.iadb.org/en/intal/), the Inter-American Institute for Economic and Social Development (INDES) (www.iadb.org/en/indes/), the World Customs Organization (WCO) (www.wcoomd.org), and the General Secretariat of the Central American Integration System (SG-SICA) (http://www.sica.int/) Module authors: Jeremy Harris, Specialist at the Inter-American Development Bank, Integration and Trade Sector, and Rafael Cornejo, Consultant at the Inter-American Development Bank, Integration and Trade Sector. The authors recognize helpful comments and contributions from Colleen Brock.

Teaching and editing coordination: The Inter-American Institute for Economic and Social Development (INDES) (www.iadb.org/en/indes/), jointly with the Economic and Technological Development Distance Learning Centre Foundation (CEDDET) (www.ceddet.org)

5th Edition 2017

Publication property of the Inter-American Development Bank (IDB). All rights reserved. Any partial or total reproduction of this document must be reported to: BIDINDES@iadb.org The opinions expressed herein are those of the authors and do not necessarily reflect the views of the Inter-American Development Bank.

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Table of Contents Contents ..................................................................................... 3 Module Objective ......................................................................... 5 Unit I. Statistical Overview of the Use of Origin Determination Criteria .................................................................................................. 6 Objective .................................................................................... 6 Questions for This Unit ................................................................. 6 I.1. Preliminary Summary .......................................................... 7 Unit Summary ........................................................................... 12 Unit II. Defining Rules of Origin ................................................... 13 Objective .................................................................................. 13 Questions for This Unit ............................................................... 13 Unit Summary ........................................................................... 17 Unit III. Special Treatment Applied to Some Materials and Inputs Used for Manufacturing or Trading Goods ..................................... 18 Objective .................................................................................. 18 Questions for This Unit ............................................................... 18 III.1. Materials and Inputs With Generically Pre-Defined Treatments ............................................................................................. 19 III.1.1. Accessories, Spare Parts and Tools .............................. 20 III.1.2 Packaging Materials and Containers for Retail Sale ........ 23 III.1.3 Containers and Packing Materials for Shipment .............. 25 III.1.4 Indirect Materials ........................................................ 26 III.1.5 Sets Put Up for Retail Sale ........................................... 28 3

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Unit Summary ........................................................................... 33 Unit IV. Remanufactured Products ............................................... 34 Objective .................................................................................. 34 Questions for This Unit ............................................................... 34 IV.1. Concept .......................................................................... 35 IV.2. Scope of Negotiations ...................................................... 39 Unit Summary ........................................................................... 43 Unit V. Accumulation .................................................................. 44 Objective .................................................................................. 44 Questions for This Unit ............................................................... 44 V.1. Purpose of Accumulation ................................................... 45 V.2. Types of Accumulation ...................................................... 47 V.3 How are the Different Types of Accumulation Defined? .......... 53 Unit Summary ........................................................................... 54 List of Figures............................................................................ 56 List of Tables ............................................................................. 57

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Fundamentals of Preferential Rules of Origin , 5th edition

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Module Objective

While previous modules discussed the criteria for defining rules of origin, this module will first provide a brief statistical summary of the application of these criteria to rules of origin in Latin American agreements. It will also include an analysis to determine whether optimal rules of origin exist. Then, some supplementary criteria used to define the treatment usually afforded to certain materials and inputs included in exported and remanufactured products will be addressed. Finally, there will be a review of the various types of accumulation likely to be included in origin regimes. With this module, the analysis and consideration of criteria and facilitative provisions of origin regimes are completed; the next module will deal with the procedures required to implement these regimes.

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Fundamentals of Preferential Rules of Origin , 5th edition

Unit

I.

Statistical

Overview

Module 4

of

the

Use

of

Origin

Determination Criteria

Objective To

overview a

sample

of agreements

representative

of Latin

America’s current origin regimes, with a view to ascertaining the frequency of use of origin determination criteria.

Questions for This Unit •

Are origin determination criteria used similarly in the selected agreements?

•

Is the frequency of application of such criteria balanced in specific agreements?

•

To what extent are materials used for manufacturing a good a decisive factor in complying with origin requirements?

•

Are the means to ease origin determination criteria similar?

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I.1. Preliminary Summary

After developing the various criteria used to define a rule of origin, it is worth emphasising some concepts on their use and impact. This characterisation will be made on the basis of a statistical mapping of rules of origin from a representative set of agreements under various regional integration schemes, and the main Free Trade Agreements (FTA) executed by the most active countries in matters of trade liberalisation.

Regarding the use of each criterion, the annexes to origin regimes in various agreements show that the change in tariff classification is the most widely used criterion. This conclusion is based on the following common features: •

All agreements establish at least one rule of origin for each negotiated product.

•

For certain products, some agreements set forth alternative rules providing two or more possible ways to comply with origin requirements.

Consequently, by identifying the origin determination criteria on which the set of origin requirements with a single rule is based, and by taking into account only the first alternative rule, it can be observed that there is a very high percentage of requirements based on a change in tariff classification.

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Table 1. Criteria Used in the First Rule in Agreements of the Americas Criteria Used Change in Tariff Classification Exception to Tariff Classification Value Requirement Other Requirements Wholly-Obtained Totals

Criteria Used Change in Tariff Classification Exception to Tariff Classification Value Requirement Other Requirements Wholly-Obtained Totals

Criteria Used Change in Tariff Classification Exception to Tariff Classification Value Requirement Other Requirements Wholly-Obtained Totals

Criteria Used Change in Tariff Classification Exception to Tariff Classification Value Requirement Other Requirements Wholly-Obtained

COLMEX(G3) MCCA MEXBOL UEMEX Percentage Quantity Percentage Quantity Percentage Quantity Percentage Quantity 99.42 4,964 99.98 4,874 99.98 5,072 58.79 2,504 34.65 1,730 9.54 465 34.67 1,759 4.04 172 8.75 437 7.92 402 28.03 1,194 6.13 306 1.48 72 6.09 309 40.69 1,733 7.11 303 4,993 4,875 5,073 4,259

MEXJAP MEXURY CHLMEX CHLUSA Percentage Quantity Percentage Quantity Percentage Quantity Percentage Quantity 99.52 5,222 99.68 5,310 99.36 5,146 99.98 5,268 31.12 1,633 25.36 1,351 19.73 1,022 32.43 1,709 3.98 209 0.96 51 2.76 143 2.75 145 5.97 313 0.54 29 0.12 6 8.27 436 5,247

5,327

5,179

5,269

LAIA CANCRI CHLCAN MERCOSUR Percentage Quantity Percentage Quantity Percentage Quantity Percentage Quantity 90.75 4,877 100 5,129 99.96 5,356 81.5 4,917 23.2 1,190 38.99 2,089 0.04 2 3.49 179 4.05 217 21.83 1,317 9.25 497 6.26 321 6.16 330 14.34 865 5,374

5,129

5,358

6,033

MERCOSURCHL CARICOM-CSME P4 CHLJPN Percentage Quantity Percentage Quantity Percentage Quantity Percentage Quantity 56.51 2,883 56.15 2,589 100 5,224 98.3 5,139 1.58 73 6.11 319 19.19 1,003 32.95 1,681 25.87 1,193 16.37 855 0.48 25 21.29 1,086 12.64 583 5.57 291 6.92 362 5.62 259

Another aspect to mention is the use of exceptions. Of the agreements included in Table 1 that make the most use of the change in tariff classification criterion, the table below shows the number of requirements on a six-digit basis that include tariff shift exceptions.

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Table 2. Exceptions to Changes in Tariff Classification LAIA Exceptions defined in: A chapter

%

CHLMEX #

%

COLMEX(G3) #

%

0

0

0.08

4

Several chapters

0

0

0

0

One heading

0

0

3.67

190

Several headings

0

0

10.5

One subheading

0

0

0.17

Several subheadings

0

0

One item

0

0

Several items

0

Partial tariff item

0

Several tariff items Total number of rules with exceptions Total number of rules

Several chapters One heading

MEXJAP #

%

#

1.73

88

2.76

0.48

24

0

0

1.49

78

4.61

230

3.67

186

4.06

213

544

15.5

774

17.29

877

12.1

635

9

0.42

21

0.1

5

0.78

41

0.39

20

1.06

53

0.24

12

0.74

39

1.97

102

0

0

0

0

0

0

0

0.66

34

1.4

70

2.21

112

0

0

0

0

0

0.1

5

0

0

0.08

4

0

0

2.3

119

9.79

489

9.44

479

9.11

478

0

0

19.74

1,022

34.64

1,730

34.68

1,759

31.12

1,633

100

5,374

100

5,179

100

4,993

100

5,073

100

5,247

%

1.28

% 64

CHLMEX Exceptions defined in: A chapter

MEXBOL

#

P4 #

%

CANCRI #

%

MCCA #

%

145

MERCOSUR #

%

#

0.08

4

0

0

0.08

4

0.14

7

0

0

0

0

0.06

3

0.08

4

0.18

9

0

0

92

0

0 0

3.67

190

1.23

64

3.43

176

1.89

Several headings

10.5

544

4.15

217

9.53

489

4.74

231

0

One subheading

0.17

9

0.1

5

0.82

42

0.31

15

0

0 0

Several subheadings

0.39

20

0.42

22

0.8

41

0.47

23

0

One item

1.97

102

0

0

0

0

0

0

0

0

0.66

34

0

0

0

0

0

0

0

0

0

0

0

0

0.64

33

0.29

14

0

0 0

Several items Partial tariff item Several tariff items Total number of rules with exceptions Total number of rules

2.3

119

0.15

8

7.82

401

1.52

74

0

19.74

1,022

6.11

319

23.2

1,190

9.54

465

0

0

100

5,179

100

5,224

100

5,129

100

4,875

100

6,033

To continue this statistical overview it is useful to identify the number of rules including alternative rules in their agreements.

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Table 3. Alternative Rules Acronym LAIA ARGMEX (Partial) CAFTA-RD CANCRI CANDINA CARICOM-CSME CHLCAN CHLCHN CHLJPN CHLKOR CHLMCCA CHLMEX CHLUSA COLCHL COLMEX(G3) COLTN MCCA MERCOSUR MERCOSURBOL MERCOSURCHL MEXBOL MEXJAP MEXURY NAFTA P4 PANCHL PERTAI UECHL UEMEX USACOL USAPAN USAPER

Number of alternative rules 1 2 3 4+ 1,272 4,102 127 1,010 24 3,789 111 602 897 4,300 825 4 257 5,118 4,611 4,171 198 989 5,224 3,707 31 529 961 3,306 481 1,325 2,050 934 511 2,949 146 2,077 7 3,910 907 403 49 1,147 4,078 3,924 1,012 57 3,558 854 4,831 44 2,182 3,851 2,806 2,308 2,764 2,338 3,864 377 832 4,103 1,144 2,905 90 2,317 15 4,046 217 1,131 4,394 830 4,955 60 213 3,907 61 2,875 1,428 13 2,738 1,497 24 3,808 78 436 1,035 3,987 89 423 870 3,808 78 436 1,035

Total 5,374 1,161 5,399 5,129 5,375 4,611 5,358 5,224 5,228 5,112 3,495 5,179 5,269 5,225 4,993 4,412 4,875 6,033 5,114 5,102 5,073 5,247 5,327 5,394 5,224 5,228 3,968 4,316 4,259 5,357 5,369 5,357

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There are similarities and differences between the rules of origin laid down in the selected agreements. In this context and given their various determination criteria, supplementary requirements and degrees of flexibility, it is worth wondering whether there is any kind of rule of origin that may be considered correct or incorrect, or if some rules of origin are better than others.

It has already been said that rules can be classified according to the stringency of their requirements. Therefore, rules of origin may be considered stringent or liberal. This classification is based on the number of originating tariff codes required. The higher the number of tariff codes, the more requirements and, consequently, the more stringent the rule. Conversely, liberal rules offer more opportunities to use non-originating inputs.

There is, however, another criterion offering more flexibility vis-Ă -vis the use of non-originating inputs: value content. In fact, this criterion does

not

require

any

non-originating

material,

thus

giving

manufacturers the flexibility to choose their sources of supplies, as long as the inputs meet the stipulated value content requirements.

There is a third criterion based on technical requirements, which simply ignore or disregard the origin of inputs. In this case, inputs – regardless of their origin – are considered to have undergone substantial transformation that confers the resulting product an identity distinct from that of its components so that the product is considered originating.

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Unit Summary This unit presented a statistical analysis of the use of the different criteria types in the specific rules of origin in different agreements in force in Latin America and the Caribbean. The predominant use of tariff shift rules was highlighted, and secondly, generally as an alternative, some variant of the value content criteria is used.

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Unit II. Defining Rules of Origin

Objective This unit briefly addresses whether there is an ideal model of rules of origin in terms of ease of meeting or stringency.

Questions for This Unit •

Is it valid to determine the usefulness of the rules of origin of an agreement exclusively based on the number of requirements imposed?

•

Are rules of origin always restrictions to trade?

•

Are the restrictions arising from a particular rule the same for every country?

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II.1. Is It Possible to Define “Optimal” Rules?

At this point, some questions arise: what is the best mix of origin determination criteria? In other words, what is the best way to apply these criteria? Is there any definition of “optimal rule”? In fact, the best answer to these questions lies in its application rather than in its specific requirements. Indeed, a rule of origin is good for a country when it can be met by its producers, who can access the benefits set forth in the agreement. When looking into the pros and cons of a rule, the fact that it can actually be complied with by producers is a sine

qua

non

condition.

The

possibility

of

meeting

the

rule

requirements is, in turn, related to input availability in the countries party to an agreement and to the companies’ production structures in such countries. Input availability in the region covered by the agreement is, therefore, independent from the requirements or degree of liberalism of the rule.

There is no use in having an extremely liberal rule requiring the simplest change in tariff classification, such as a change of tariff item (8 digits or more), if companies cannot access the originating inputs required by this rule. This change in tariff classification is highly liberal and poses few requirements, since it just seeks to ensure that the inputs classified in the same tariff item are originating materials.

The change in tariff classification setting out a requirement of this type could be regarded as the most liberal criterion. However, if in the same tariff item there is an input which is inaccessible to manufacturers from a given country to produce certain goods, then the rule becomes a barrier preventing the country from benefiting from the agreement –no matter how liberal the rule might be. The operational restriction is so high that it precludes producers from

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meeting the rule of origin, regardless of its high liberalism and limited requirements.

Consequently, rules of origin must, above all, set out standards that producers can actually meet based on their production structure. With this structure or combination of inputs, they should be able to manufacture goods which can compete on their partner country’s market.

Even in the case of rules imposing many requirements – i.e. most inputs must necessarily be originating materials – if countries party to an agreement can actually access these inputs then rules can be met.

Thus, the rule would not pose a restriction to trade but to the possibility of choosing the sources of the inputs.

However,

to

increase

trade

and

avoid

constraints

within

the

framework of an agreement, it is also important that goods be manufactured competitively and effectively with the inputs supplied.

To that end, originating inputs must be suitable in terms of supply, quality

and

technologies

price

conditions,

applied.

In

an

and

the

extreme

industrial scenario,

processes this

level

or of

competitiveness should make up, by means of tariff cuts, for possible higher costs – if any – arising from the use of regional inputs, instead of cheaper inputs from the extra-zone.

Producers might continue using cheaper inputs for their extra-zone exports. Nevertheless, it is worth noting that when supplies are sourced from so many countries, costs increase, especially those related to administration and planning, and to the preparation of the equipment needed to fulfil different manufacturing orders. Tariff advantages should also compensate for these additional higher costs.

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Control and verification issues should also be taken into account when determining the suitability of a rule. As far as verification is concerned, not all origin criteria pose the same degree of difficulty or simplicity.

The rules based on the value content criterion are less demanding in some ways and easier to meet than those based on the change in tariff classification; however, they are harder to verify and require more stringent procedures of collection and control of the data about the company’s cost structures. Furthermore, the accounting audits performed during visits to production plants are more complex when the rule is based on the value content criterion than when it is based on a change in tariff classification.

Therefore, it is difficult to determine a priori how commercially restrictive a rule is on its own. Its real impact arises from a combination of its requirements and the actual production capacity of the countries party to an agreement. Additionally, it must be taken into account that a country reducing tariffs will bear fiscal costs and will probably want to implement such cuts so that the agreement will prove beneficial. These issues, at times coincidental and at times contradictory, make it difficult to determine beforehand the optimal rule for a given product. This is one of the reasons why countries party to an agreement keep changing the rules of origin applicable to certain products.

Consequently, these variable aspects should be analysed almost on a case-by-case basis to determine the optimal rule, and they somehow explain why it is not easy for many countries negotiating an agreement to establish a general rule with the widest scope.

Regardless of its requirements and restrictions, a rule may be seen as extremely convenient by certain countries, but most inconvenient by others.

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Unit Summary This unit considered the possibility of an "optimal" rule of origin, with the conclusion that the most appropriate rule of origin will vary according to the signatory countries of the agreement, as the availability of key material inputs within the signatory countries will change. Thus, it is important to evaluate the rules of each agreement with respect to the existing industry and the raw materials available in the countries signing the agreement.

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Unit III. Special Treatment Applied to Some Materials and Inputs Used for Manufacturing or Trading Goods

Objective Trade agreements define the treatment for certain inputs used in manufacturing, trading and distribution of products. Such materials include: accessories and spare parts, indirect materials, packaging materials and containers, sets and assortments put up for retail sale, as well as packing materials and containers for shipment and transportation.

Questions for This Unit •

When it comes to origin determination, are these inputs and materials treated similarly?

•

What is the criterion applied to packaging and packing materials?

•

How are containers and indirect materials treated?

•

Does the origin determination criterion on which a product’s rule is based determine whether these inputs and materials impact on the application of this rule?

•

What are sets and assortments put up for retail sale?

•

What treatment is given to sets and assortments?

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Fundamentals of Preferential Rules of Origin , 5th edition

III.1.

Materials

and

Inputs

With

Module 4

Generically

Pre-Defined

Treatments

There is a series of materials or inputs employed by producers in manufacturing or trading their products which may or may not become a part of those goods. Origin regimes in most agreements contain relatively similar provisions applicable to such inputs and materials.

One feature unique to these inputs is that, although they are indispensable to carry out the production or trading processes, they do not directly impact on the originating or non-originating status of a good. For instance, any type of packaging or container employed to protect a good or make it more attractive for their retail sale is independent from the origin status of the product they contain, which may be originating or non-originating.

Such materials include the following: •

Accessories, spare parts and tools.

•

Packaging materials and containers for retail sale.

•

Packing materials and containers for shipment.

•

Indirect materials.

The origin regime chapter of each agreement establishes the criteria according to which these materials must be considered, as well as their impact on the origin status of the produced or traded good.

Overall, these criteria are mostly aimed to offset the impact of these materials on the originating status of the final good, because they are not direct or essential parts of the good.

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The following sections describe the general, most frequently adopted guidelines in relation to these materials in the existing origin regimes applicable in American countries.

III.1.1. Accessories, Spare Parts and Tools Equipment and machinery of a certain degree of complexity are often delivered and sold together with a set of spare parts and/or accessories and/or tools for their proper operation or repair. An example of an accessory is a transformer delivered with a piece of equipment when this is designed for a certain voltage different from that of the country where the equipment is to be installed. There are also pieces or parts which, due to their normal wear and tear, must be replaced regularly. Finally, the specific features of the equipment may require the use of special tools for maintenance or replacement of parts.

What do the materials mentioned in the preceding paragraph have in common? They are all spare parts, tools and accessories related to the use of a piece of equipment or machinery, i.e. to the raison d'être of the trade operation. Therefore, the treatment for accessories, spare parts and tools provided for in the origin regimes of trade agreements is applied to the following materials: •

Those related to the main product that motivated the trading operation.

•

Those delivered together with the good.

•

Those whose quantity is customary for the good.

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In these cases, such materials are not taken into account when determining the origin of the equipment, machinery or vehicle they accompany.

Indeed,

agreements

provide

that

these

materials,

whatever their origin, must not be considered when applying the change in tariff classification criterion. In the case of rules based on or including the value content criterion, some agreements establish that the origin status of these materials must be considered.

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Figure 3.1. Accessories, Spare Parts and Tools by the Change in Tariff Classification Criterion

Figure 3.2. Accessories, Spare Parts and Tools by the Value Content Criterion (Interpretation in Some Agreements)

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Other agreements do not consider them regardless of the rule of origin criterion applicable to the equipment, machinery or vehicle.

Figure 3.3. Accessories, Spare Parts and Tools by a General Criterion Irrespective of Their Rule

III.1.2 Packaging Materials and Containers for Retail Sale 1 A vast majority of origin regimes negotiated in free trade agreements include clauses relative to the treatment to be given to containers and any other packaging material, including cases, wrappings or similar products designed to contain different products or goods.

Overall, under these agreements, these types of inputs are not to be taken into account for origin determination purposes. This criterion is applied in two different ways, depending on the agreement.

“Goods set up for retail sale� are understood to include packaged goods or goods contained in blisters, boxes, bottles, flasks, capsules, cases, tubes, bags, sacks, or in any other wrapping covering the goods entirely or partially, even when such wrapping only consists in paper, fabric, metal sheet or cellophane film, provided that it is the way these are normally put up to be presented in retail stores.

1

Jorge Enrique Vargas MartĂ­nez; MA.D (http://www.itescam.edu.mx/principal/sylabus/fpdb/recursos/r41947.PDF)

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First, the criterion may be used broadly, so that it applies to all these materials, regardless of the rule of origin to be met by the good they contain.

Other agreements establish differentiated criteria depending on the rules of origin of the goods contained. If the rule of origin of the good is based on the change in tariff classification criterion, its containers, whatever their origin, will not be taken into account, i.e., they will not be regarded as non-originating if this is their origin status. On the other hand, if the good’s rule is value content-based, the criterion is different since, in these cases, originating inputs must be considered as such when determining the regional value content of the good.

Agreements further establish that this treatment is to be applied to the containers when these are classified in the same tariff code as / with the goods they contain. This same provision is included in some agreements with a rather different wording but a similar effect. Such is the case of Decision 416 of the Andean Community, which establishes that such provision will not be applicable to containers when these are presented separately or when they make up the essential character of the product they contain.

In other words, these provisions seek to establish a different criterion for the treatment applied to exported cans containing, for example, tomato puree, from that applied when the trading operation consists in exporting tin cans. Empty cans must meet their respective rule of origin, since they are the final product and they hold no goods inside, even though they are containers; in these circumstances, the cans are traded as final products.

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Figure 3.4. Containers and Packaging Materials for Retail Sale (Interpretation in Some Agreements)

III.1.3 Containers and Packing Materials for Shipment

These are materials used to transport and distribute a set of units of a certain product. They are not packages; instead they are packing materials protecting and containing large quantities of units of one same product. Accordingly, they do not participate in the good’s production process but are later used for its storage and distribution.

Packing materials and containers will not be taken into account in determining the origin of such goods.

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Figure 3.5. Packing Materials and Containers

III.1.4 Indirect Materials

Indirect materials are those used in the production, verification or inspection of a good, but not physically incorporated in it. They are goods used in the maintenance of buildings or in the operation of equipment related to the production of a good.

In general, there is broad consensus in considering indirect materials as originating, irrespective of their place of production.

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Figure 3.6. Examples of Indirect Materials

Figure 3.7. Indirect Materials Used in Production

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Sets and assortments are a group of goods that may be traded jointly

and

belong

in

the

same

category,

and/or

they

are

supplementary in terms of use and application.

The distinguishing feature of this transaction is that set components are sold together. There are many examples of this type of goods, such as bedding sets including pillowcases, sheets, pillows, a mattress and a blanket or quilt; or fireplace sets including brooms, stokers, some fuel to light the fire, matches or a lighter, some aromatised wood, fire tongs, among others.

III.1.5 Sets Put Up for Retail Sale 2 Rule 33 of the General Rules for the Interpretation of the Harmonised System provides the definition and tariff classification for sets. There are several publications explaining the scope, requirements and interpretations

of

this

rule,

drafted

by

countries’

customs

departments and international trade organisations.

Among

these

publications

is

the

European

Commission’s

Communication entitled “Guidelines on the classification in the Combined Nomenclature of goods put up in sets for retail sale” (2013/C 105/01).

2

In this unit, the term “set” will be used as a synonym for this concept.

3

Wording of Rule 3b) When by application of Rule 2(b) or for any other reason, goods are, prima facie, classifiable under two or more headings, classification shall be effected as follows: (a) The heading which provides the most specific description shall be preferred to headings providing a more general description. However, when two or more headings each refer to part only of the materials or substances contained in mixed or composite goods or to part only of the items in a set put up for retail sale, those headings are to be regarded as equally specific in relation to those goods, even if one of them gives a more complete or precise description of the goods. (b) Mixtures, composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale, which cannot be classified by reference to 3(a), shall be classified as if they consisted of the material or component which gives them their essential character, insofar as this criterion is applicable, and (c) When goods cannot be classified by reference to 3(a) or 3(b), they shall be classified under the heading which occurs last in numerical order among those which equally merit consideration.

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Fundamentals of Preferential Rules of Origin , 5th edition

In

this

document,

the

Commission

Module 4

establishes

that:

“General

Interpretative Rule (GIR) 3(b) also provides for the classification of goods put up in sets for retail sale. For the purposes of this Rule, the term ”goods put up in sets for retail sale” shall be taken to mean goods which: (a) consist of at least two different articles which are, prima facie, classifiable in different headings; (b) consist of products or articles put up together to meet a particular need or carry out a specific activity; and (c) are put up in a manner suitable for sale directly to users without repacking (e.g., in boxes or cases or on boards).

All the above conditions should be met.”

That is to say, Rule 3 sets forth applicable criteria to determine a set’s tariff classification, which is essential information so as to check whether the tariff code has been negotiated in the agreement, and any tariff preference has been agreed upon. This helps to solve part of the problem, namely, to identify and determine the tariff classification of a set of goods individually classified under different tariff codes.

However, still pending is how the origin regime applies to this product type. In this connection, there are two different actions to take into account: on the one hand, the action of assembling or making-up a set, that is to say, the simple task of grouping the goods and putting them up for sale; on the other hand, the action of clearly determining the rule(s) of origin to be met by the articles making up the set.

In the first case, it may be stated that “the activity of assembling or making up a set” does not confer origin. Most agreements include this activity in the list of minimal operations which typically do not confer origin.

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Secondly, reference can be made to the condition the components of the set must meet, once assembled, to determine whether it is originating or non-originating.

Not all agreements include criteria to define the origin of a set, but those which do4 generally agree on establishing that all set components must be originating, that is to say, each of the articles making up the set must individually comply with the rule of origin applicable to the set. As already stated, one of the features of a set is that its components are included in different tariff codes; therefore, the applicable rules may be different. For instance, the rule on matches may differ from the rule on bronze stokers or the rule on aromatised wood splinters.

Requiring all set components to be originating is undoubtedly a strict criterion. Because of that, many agreements establishing rules of origin for sets also grant a certain flexibility, i.e. they determine that a specific percentage of the value (for instance, up to 15 %) may be non-originating. This percentage results from the regime negotiation.

Generally, the so-called “second-generation agreements� include such regulations. They are, inter alia, the United States agreements, and most of the agreements signed by Canada, Mexico, Chile, Peru, Colombia, and Central American countries after NAFTA, especially in this century.

4

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Figure 3.8. Origin of a Set

Two operational aspects are worth noting regarding the application of this rule. First, when the term “value added” is used, reference is being made to the value resulting from applying permitted origin regime adjustments, as discussed in Module Three.

Second, as regards the rule governing the set, countries negotiating specific rules and regulations – generally included in a separate chapter – also provide in these cases for the alternative of exporting goods as sets. When that is the case, the same maximum percentage of non-originating components may be granted, or textile products and clothing may have access to a different percentage than that allotted to any other goods.

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Figure 3.9. Set of Garments

Figure 3.10. Set of Garments With Non-Originating Components

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Unit Summary This unit presented the different treatments that are given to certain classes of products and/or inputs that are generally included in FTA origin chapters. These additional criteria for evaluation of the origin of goods permit a more balanced and transparent treatment.

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Unit IV. Remanufactured Products5

Objective By way of introduction, this unit discusses some features of a new type of product increasingly introduced by the United States in its Free

Trade

Agreements,

the

remanufactured

product.

A

remanufactured product has specific features, some of which pose a challenge to origin control and verification. Indeed, using recovered inputs and regarding them as originating – provided recovery takes place under certain conditions – is a novel approach. This novelty also poses greater challenges when it comes to adequate control.

Questions for This Unit •

What is a recovered good?

•

What is a remanufactured product?

•

What is the treatment of a remanufactured product under the United States trade agreements?

•

Are products subject to remanufacturing always the same in all agreements?

•

What changes are there in origin requirements when the rule is applied to a remanufactured product?

Part of this unit has been taken from Cornejo, Rafael (2006). “Recientes innovaciones en los Regímenes de Origen y su incidencia en el proceso de verificación: El caso del CAFTA, Banco Interamericano de Desarrollo, Departamento de Integración y Asuntos Regionales, Documento de Divulgación N°33, page 19 and following pages.

5

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IV.1. Concept

Free trade agreements negotiated between the United States and Latin American countries after NAFTA include a new product category among their articles and definitions. Usually these products were not covered in previous FTAs or did not benefit from the preferential treatment obtained in transactions taking place pursuant to the agreement. Such an innovation coincides with the multilateral negotiations among countries conducted within the framework of the WTO regarding these products. Below is a description of some negotiation developments, their implications, and the challenges or concerns posed by this innovation.

Under CAFTA, a product is regarded as remanufactured when it is entirely or partially comprised of recovered goods, and has a similar life expectancy and enjoys a factory warranty similar to such a new good.6 This product receives a similar treatment in United States agreements with Colombia, Panama and Peru, and also in previous agreements signed by the United States with Singapore, Australia, and Chile. Similar treatment is accorded to remanufactured products and

recovered

goods

in

Canada's

agreement

with

Colombia.

Interestingly, information dealing with its treatment is quite scattered and not easily accessible, although it is a constantly expanding type of product, as evidenced by the number of subheadings included.

This type of product is only dealt with in Article 4.22 “Definitions� of the chapter containing the rules of origin.

6

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Indeed, all such relevant concepts are analysed in the section devoted to definitions, i.e. no article in any agreements deals with remanufactured products. Within this context, collecting regulations requires thoroughly searching in the agreements.

Figure 4.1. Definition of Remanufactured Products

• Goods classified in the HS under Chapters 84, 85, 87 or 90, heading 94.02 • with the exception of those under heading 84.18 or 85.16, which: Remanufactured goods

Guarantee

Composition •(a) Are made, either in part or in full, of recovered goods; and

•b) Have a life expectancy and

Life expectancy

•b) A manufacturer’s guarantee similar to brand-new goods

The term “recovered goods” means materials in the form of individual parts, obtained in the territory of one of the parties, that result from the disassembly of used goods into individual parts and the cleaning, inspecting, testing, or other processes as necessary for improvement to sound working condition of such individual parts.

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Figure 4.2. Definition of “Recovered Goods”

Obtained from • Materials in the form of individual parts resulting from:

Definition

• (a) the disassembly of used goods into individual parts; and

• (b) the cleaning, inspecting, testing or other processes as necessary for improvement to sound working condition of such individual parts

Requirements

Pursuant to the foregoing definitions, recovered goods may form part of any good regardless of its origin. They may have been originally manufactured in extra-zone countries; however, they are granted the status of originating goods simply because they have been recovered in one of the countries party to an agreement and later incorporated into a remanufactured good. The individual part, simply for having been used and disassembled, is granted the status of originating good despite having been manufactured in a country non-party to the agreement. This way of granting origin status to recovered goods makes it easier for remanufactured goods containing them to meet origin requirements.

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The origin condition of recovered goods is listed in the definitions section, under the concept of “goods wholly obtained or produced entirely in the territory of one or more of the parties;” raw materials from different origins are also identified and recovered goods are addressed in a subsection, as outlined in the figure below: Figure 4.3. Definition of Wholly-Obtained Goods (subsection on recovered goods)

• (k) Goods obtained from used products in the territory of one or both Parties,

Origin condition

Place of use • and used in the territory of one or more Parties to produce remanufactured goods;

• Trade of recovered goods • How they are imported

Consequence

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IV.2. Scope of Negotiations

In the agreements signed by the United States with Chile and Singapore, the scope of the “remanufactured goods” concept is limited to the products included in 45 subheadings of different chapters. Furthermore, these agreements restrict subheadings in part, because “goods to be exclusively used in automotive goods” are excluded.

In the CAFTA agreement and in the agreement with Australia, this scope is considerably extended to include products such as machine tools, electronic machinery and devices, sound and TV equipment, computers, mobile phones, cars and tractors, among others. All in all, this wider coverage includes 870 subheadings, almost 2,000 % more than the Chile and Singapore agreements. It is worth noting that, unlike these two agreements, the CAFTA and Australia agreements do not

include

the

above

restriction

on

automotive

goods,

thus

increasing the number of products allowed to be remanufactured. In the latest negotiations between the US and Colombia, Peru and Panama, the number of headings increased, since 1,033 subheadings were negotiated to fall under the category of products allowed to be remanufactured.

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Remanufactured goods are those products that can be classified neither as new nor as used. In fact, they are a hybrid between these two categories. They are not new – they may contain one or more recovered parts – nor can they be considered used goods, since used goods must have suffered wear and tear. Remanufactured goods may contain just one or some recovered good(s) and the rest may be new; therefore, they differ from used goods in that many parts may have suffered no wear and tear at all.

Table 4. Differences in the Treatment of Remanufactured Products Product

Condition

CHILE (1)

CAFTA (2)

PANAMA (3)

Used goods

Disassembly

Complete

Unspecified

Unspecified

Recovery process

Identified

YES

NO

NO

Recovered materials

Use requirement

Recovered and used in the same part

Recovered and used in one or more parts

Recovered and used in one or more parts

Recovered materials

Export allowed

NO

YES

YES

Recovered materials

Tariff-free import

YES

YES

Remanufactured goods

Requirement levels

Guarantee and life expectancy similar to brand-new goods

Guarantee and life expectancy similar to brand-new goods

Guarantee and life expectancy similar to brand-new goods

Remanufactured goods

Products allowed

43 subheadings

870 subheadings

1,033 subheadings

Remanufactured goods

Chapters included

In part chapters 84, 85, 87, 90

Chapters 84, 85, 87, and 90 (in part)

Chapters 84, 95, 87, 90, and 94 (in part)

Remanufactured goods

Products excluded

Automotive parts

8418 Refrigerators 8516 Home appliances

8418 Refrigerators 8516 Home appliances

1) Same as Singapore; 2) Same as Australia; and 3) Same as Peru and Colombia.

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IV.3. Scope and Concerns

Remanufactured goods will be regarded as “recovered used goods� and, in certain cases, equivalent to second-hand products, eligible for tariff-reduction benefits. This possibility to trade semi-used or semi-new goods subject to the same treatment as brand-new products is rather unusual in the market access agreements entered into by countries in our hemisphere. However, some origin regimes, such as the Central American Common Market (CACM), allow for the import of used goods.

Figure 4.4. Remanufactured Goods: Aspects to Take Into Account

Economic impact

Possibility to be exported

Trading under the umbrella of a free-trade agreement

Same as recovered goods

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Trading this kind of product may bring about some economic consequences

and

will

certainly

impact

on

origin

verification

procedures. The creation of a new market for goods, currently considered practically disposable, will foster recycling initiatives. Not only will such goods reacquire commercial value, as their shelf life or that of their parts is extended, but this will also help to partially solve problems of storage and waste disposal of disused materials.

But remanufactured goods are so new in trade that there are still some concerns about their use and impact. Concerns vary in nature and mainly relate to the import of goods to be disassembled, origin verification of remanufactured goods, their subsequent trading, guaranties, to name but a few. The following figure summarises some of these concerns or questions, which in some cases remain unanswered.

Figure 4.5. Remanufactured Goods: Concerns

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Unit Summary This unit analyzed a more modern class of goods, those that are remanufactured. These products present challenges in matters of origin, affecting both producers and customs when applying the rules of origin.

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Unit V. Accumulation

Objective Cumulative rules of origin are key in origin regimes, since they allow production structures from countries party to an agreement to interrelate, thus increasing trade effectively. This unit delves into the different kinds of accumulation. Please note that the application and impact of extended accumulation will be analysed in the sixth – and last – module.

Questions for This Unit •

Why is accumulation important?

•

How can “accumulation of goods” be defined?

•

What

is

the

relation

between

production

processes

and

accumulation?

•

In what countries is extended accumulation applied?

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V.1. Purpose of Accumulation

The

accumulation

principle

allows

a

country’s

producer

to

manufacture its goods using originating inputs of other countries party to an agreement; these inputs, under certain conditions, may be considered originating in the producer’s country for origin determination purposes. Due to the growing globalisation and the resulting production interdependence, the definition and scope of the concept of accumulation are key in origin regime negotiations. In fact, both national and transnational companies’ production policies increasingly build the architecture of their production processes based on

the

geographic

distribution

of

their

inputs

supply

and/or

processing. Accordingly, the admission of cumulative treatment in free trade agreements is considered one of their building blocks, and a fundamental goal of any integration scheme, given its contribution to improving trade flows among countries party to an agreement.

This claim is ratified by the fact that all agreements now in force in the hemisphere admit accumulation to a greater or lesser extent.

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Indeed, trade agreements seek to encourage the integration of the production processes within countries party to an agreement via the application of the concept of accumulation, one of the most prominent features of origin regimes. While accumulation can be applied in different ways, one of them prevails in all agreements; and that is the possibility of regarding as originating in one country the originating inputs sourced from another country party to that agreement.

This recognition is vital for the agreement to be applied equitably among their different member countries, and it is instrumental in promoting trade and the integration of production chains within the territory of the agreement.

Why does accumulation promote equitable application of agreements?

This question may perhaps be best answered by a reductio ad absurdum argument. Let us assume the inexistence of accumulation, i.e., it is not possible to consider the originating inputs of a country and the originating inputs of another country party to the same agreement to be originating and on an equal footing. In practice, this would imply that each producer should meet the origin requirements applicable to its products by using inputs sourced from its own country. Asymmetries in the development of the different countries party

to

an

agreement,

with

vertically

integrated

economies

presenting marked differences across member countries, would be placing the stronger, more developed economies in a much more favourable position to meet the requirements of the different rules.

Reliance on imported inputs is heavier in small economies, which would thus not be standing on an equal footing with the more developed ones.

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This is the reason why accumulation is indispensable to ensure that rules impact equitably on all countries as, in its absence, the impact of

originating

inputs,

production

process

or

originating

value

requirements would be clearly inequitable and disproportionate, favouring larger countries to the detriment of the smaller ones.

V.2. Types of Accumulation7

Nowadays, in the agreements entered into among Latin American countries and between these and North American countries, and even Asian nations, a certain pattern can be traced regarding the different types of accumulation defined. Specifically, all apply what is known as goods accumulation, only a few provide for process accumulation, and some are now starting to adopt extended accumulation fairly and squarely.

This section focuses on the accumulation concepts typically used in agreements among Latin American countries, as well as between these and Canada and the United States.

Accumulation-related terminology employed by the European Community, such as total accumulation or diagonal accumulation, is not included because i) in other modules the Community’s specific and particular requirements were not included, and ii) although the Community agreements present similarities in terms of accumulation concepts, their impacts and modes of application are not always the same.

7

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Figure 5.1. Accumulation Types

Accumulation of goods or materials enable, as mentioned above, the producers of a member country to regard as originating all the originating

inputs

sourced

from

their

partner

countries

when

determining whether the manufactured product meets its rule of origin. Additionally, the producer using this type of accumulation, if it is the importer of the inputs, may use the certificates of origin of the inputs sourced from its partner countries.

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Process accumulation entails considering the territories of the countries party to an agreement as a single territory; for purposes of rule of origin application, they are considered to be integrated into only one country. Thus, in a figurative sense, each country party to an agreement would acquire a status equivalent to that of a province or department within the territory of the agreement. Process accumulation allows production processes carried out in the countries party to an agreement to become integrated. Compared with goods accumulation, this type of accumulation prioritises processes and does not take into consideration the originating or non-originating status

of

the

inputs

imported

from

partner

countries.

When

determining whether the good meets its rule of origin, the producer of the final good only considers the non-originating inputs imported by this “great territory” from extra-zone countries.

Thus,

the

producer

of

good X

may

import

originating

and

non-originating inputs from its partner countries (A, B and C). These three inputs may, in turn, contain non-originating inputs (D and E) sourced from extra-zone, which are included or have been used to make inputs A, B and C. When determining whether good X meets its rule of origin, the producer will consider only inputs D and E to be non-originating, as they are sourced from extra-zone, and will not include in its calculations the originating or non-originating status of the inputs containing them (A, B and C). This type of accumulation imposes an operation restriction on the producer of the final good, since it may not necessarily be able to readily access the information about what non-originating inputs are contained in the inputs it is importing from other countries in the region. This limitation, however, will be more easily overcome in the case of legally or commercially related companies, as these are in a better position – in operating terms – to obtain these data.

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Figure 5.2. Advantages of Process Accumulation

Extended accumulation allows countries party to an agreement (for instance, agreement between A and B) to accumulate inputs from countries non-party to the agreement, provided that these third countries have agreements in force with each of the countries party to the agreement (A-B). This accumulation may be extended to all products or may only be sectoral. Experience shows that many agreements have opted for giving it sectoral scope, mostly for textile and apparel products. It is further worth noting that including extended accumulation provisions does not entail that these provisions will become effective the moment the agreement enters into force. On the contrary, agreements generally set forth that it will become effective on a later date, after certain recognition procedures and activities are completed.

Full Cross-cumulation In its recent free trade agreements (FTAs), Canada has negotiated a form of extended accumulation which is set out in process or full cross-cumulation provisions, which build linkages between FTAs that would otherwise operate independently. Its main benefit is to provide producers with more options for sourcing input materials. Unlike the 50

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European diagonal accumulation approach, full cross-cumulation is more flexible as it does not require that the free trade agreements among the participating countries incorporate the same rules of origin.

Canada has supported full cross-cumulation, on the condition that it is reciprocal - that is, that Canadian content could count towards the production of originating goods in the other Party to the FTA or any third country with which both Canada and the other Party have FTAs, now or in the future. This would mean that a material sourced, or process carried out, in any country with which both Canada and the other Party have or will have an FTA could count towards the production of an originating good in any of these countries under any of the FTAs. All of this, of course, would be dependent on all these countries taking part in such an endeavour; that is, cross-cumulation must be reciprocal so that all countries may benefit from this provision.

In order to ensure that the benefits of a cross-cumulation provision are available reciprocally to all countries that are eligible to take part in implementation of cross-cumulation, it would be necessary that each eligible country wishing to participate in cross-cumulation incorporate into its FTAs, and implement into its related domestic legal authority, provisions specifically enabling cross-cumulation for purposes of determining the origin of goods.

As well, if the application of cross-cumulation between a Party and a non-Party were to be limited to certain goods, the other Party to the FTA should be able to limit its application of cross-cumulation to the same goods. However, the cross-cumulation provisions would need to be sufficiently generic so as to permit broadening the application of cross-cumulation to other goods, should that be agreed between all Parties and non-Parties concerned.

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Under the Canadian approach to cross-cumulation, the “free trade area� of an FTA would be expanded to include all countries that are party to the cross-cumulation endeavour. Accordingly, the free trade area of one FTA, e.g., the Canada-Peru FTA, could be expanded to include, for example, Colombia, as well as any other country with which Canada and the other Party both have an agreement that includes cross-cumulation provisions. Consequently, in the example given, any production done on a material in any of these countries would count towards the originating status of a good for export from Canada to Peru or to Colombia. Similarly, any production done on a material in any of these countries could count towards the originating status of a good for export from Peru to Canada or to Colombia. In other words, the only rule of origin that would come into play in determining the origin of the final good would be that of the FTA between the country from which the final good is exported and the country into which the final good is imported.

While it is not considered necessary to include provisions in the FTAs on the procedures necessary to implement cross-cumulation, a provision could be included in the Customs Procedures chapter of an FTA, or in any agreement or understanding related to crosscumulation implementation, to provide for cooperation in developing customs procedures for goods considered originating as a result of cross-cumulation. This provision would simply act as a marker to add clarity and permission to create procedures for the administration of cross-cumulation,

if

required.

However,

if

cross-cumulation

provisions are included in the rules of origin chapter, the customs procedures related to the rules of origin would apply; accordingly, additional procedures would not really be necessary.

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V.3 How are the Different Types of Accumulation Defined?

How are these different forms of accumulation typically defined in the agreements

employing

them?

Although

there

is

no

one

pre-established way of drafting the origin chapter of an agreement using

similar

or

different

wording,

the

countries

wishing

to

incorporate these features in their agreements use definitions more or less similar to those shown in the following figures: Figure 5.3. Accumulation of Goods

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Figure 5.4. Process Accumulation

Figure 5.5. Sectoral Extended Accumulation (Textiles) in the Agreement Between A and B

Unit Summary

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This unit developed the concept of cumulation and the different ways in which it can be applied. This concludes this module and the presentation and analysis of origin qualification criteria. The next module will address aspects of customs procedures in the declaration and verification of compliance with origin requirements, and the verification process more broadly.

This module and the preceding ones are essential for understanding the next, as it would be impossible to certify or verify compliance without understanding the criteria applied in the determination of origin.

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List of Figures Figure 3.1. Accessories, Spare Parts and Tools by the Change in Tariff Classification Criterion Figure 3.2. Accessories, Spare Parts and Tools by the Value Content Criterion Figure 3.3. Accessories, Spare Parts and Tools by a General Criterion Irrespective of Their Rule Figure 3.4. Containers and Packaging Materials for Retail Sale Figure 3.5. Packing Materials and Containers Figure 3.6. Examples of Indirect Materials Figure 3.7. Indirect Materials Used in Production Figure 3.8. Origin of a Set Figure 3.9. Set of Garments Figure 3.10. Set of Garments With Non-Originating Components Figure 4.1. Definition of Remanufactured Products Figure 4.2. Definition of “Recovered Goods�

Figure 4.3. Definition of Wholly-Obtained Goods (subsection on recovered goods) Figure 4.4. Remanufactured Goods: Aspects to Take Into Account Figure 4.5. Remanufactured Goods: Concerns Figure 5.1. Accumulation Types Figure 5.2. Advantages of Process Accumulation Figure 5.3. Accumulation of Goods Figure 5.4. Process Accumulation 56

Fundamentals of Preferential Rules of Origin , 5th edition

Figure

5.5.

Sectoral

Extended

Accumulation

Module 4

(Textiles)

in

the

Agreement Between A and B

List of Tables Table 1. Criteria Used in the First Rule in Agreements of the Americas Table 2. Exceptions to Changes in Tariff Classification Table 3. Alternative Rules Table 4. Differences in the Treatment of Remanufactured Products

57