TPP and the EU VN FTA march 2016

CUSTOMS, TRADE & RISK MANAGEMENT SERVICES (VIETNAM) CO., LTD TPP: The Most Comprehensive and Complex NAFTA - model FTA Trade in Goods Chapters – Part I November, 2015 Summary The long-awaited full text of the Trans-Pacific Partnership Agreement (“TPP”) was published on the website of the Office of the U.S Trade Representative (“USTR”) and sites of TPP countries on November 5, 2015 “Full text” does not mean “final text” as, the following disclaimer appears at the top of pages of the text, with an additional caution about the extremely important Annexes containing the complex Product-Specific Rules of Origin (“PSR”) to Chapter (Rules of Origin and Origin Procedures) and Chapter (Textiles and Garments): “…Subject to Legal Review in English, Spanish and French for Accuracy, Clarity and Consistency Subject to Authentication of English, Spanish and French Versions The product-specific rules of origin (PSR) Annex and its Appendix are subject to transposition and legal verification by the Parties The only authentic PSR are those that are set out in the PSR Annex and Appendix that accompany the final, signed Agreement.” © CTRMS Vietnam Despite the qualification, the TPP is a very big, very complex, very technical and, very comprehensive agreement As predicted in our July newsletter, it’s trade in goods provisions and origin procedures are based on the North American Free Trade Agreement (“NAFTA”) model in its most recent version, the Korea-US FTA, with the exception of provisions for trade in textiles and garments that more closely resemble the U.S Central America – Dominican Republic Free Trade Agreement (“CAFTA-DR”) Companies and professionals with experience of these agreements will recognize its structure, however, the TPP reflects years of hard negotiations by many countries and contains many new provisions, Chapters, intertwining rules, numerous exceptions and differences from previous agreements It is not possible to summarize the many parts of this agreement in general terms in any single document As a result, this newsletter will introduce key elements concerning practical topics that are most important to companies and traders, for strategic planning, implementation and compliance purposes Subsequently, future newsletters will be devoted to more detailed analyses of specific Chapters and new rules, as a continuing series As predicted by many, Vietnam negotiated special allowances in the TPP by winning important concessions with respect to “Non-Conforming Measures” involving periods of transition that will allow for the many changes it must make with respect to laws, regulations, practices and trade facilitation reforms More importantly, Vietnam not only gained very important benefits in terms of tariff elimination for Vietnam’s exports - it even received a special “Earned Import Allowance” program from the United States with respect to textile products, providing an encouragement to make use of imported U.S textile materials Companies already operating in Vietnam and those planning trade operations involving goods from Vietnam should begin their detailed © CTRMS Vietnam analyses and strategic planning for how to benefit from TPP now It will take time, effort, specialist expertise and resources for companies and traders to successfully implement the benefits of TPP with respect to their goods TPP: Relationship to Other Agreements Some commentators have written that TPP will supersede or “take the place of” other trade agreements – it does not Article 1.2 (1) of Chapter (Relations to Other Agreements) provides: “Article 1.2: Relations to Other Agreements … Recognizing the Parties’ intention for this Agreement to coexist with their existing international agreements, each Party affirms, (a) in relation to existing international agreements to which all Parties are party, including the WTO Agreement, its existing rights and obligations with respect to each other; and (b) in relation to existing international agreements to which that Party and at least one other Party are party, its existing rights and obligations with respect to such other Party or Parties, as the case may be…” For companies and traders, this means that goods exported to other countries continue to be eligible for preferential treatment under existing FTA’s, multilateral or bilateral trade agreements, if they independently fulfill the origin eligibility rules of such other agreements Because the rules of origin of other FTA’s involve different standards for Regional Value Content (“RVC”) percentages and different rules for calculation of these, as well as, different “exceptions” or additional rules, it is often the case that a good may qualify for preferential treatment under one such agreement and not others © CTRMS Vietnam For example, goods produced in Canada or Mexico and exported to the United States may not qualify under NAFTA but, may qualify under TPP It is why global companies invest considerable resources and efforts in developing FTA Certification of Origin databases and supporting recordkeeping procedures, along with use of experts and compliance staffs These are necessary to maximize the ability to take advantage of the benefits of these agreements while mitigating multiple customs and trade compliance risks Scope of TPP Customs Duty Tariff Benefits The most significant benefits of TPP are found in the Tariff Elimination Schedules that each member country has negotiated and filed with the agreement These list by all of the Harmonized System’s (“HS”) customs tariff classifications the schedule of duty rates in effect for goods imported into each TPP member country, along with codes that indicate the timing or “staging” of reductions of such duties from the time the agreement enters into force These are found in Annex 2-D of Chapter of TPP (National Treatment and Market Access for Goods) and may be reviewed at the website of USTR at: https://ustr.gov/trade-agreements/free-trade- agreements/trans-pacific-partnership/tpp-full-text Readers are advised to review these schedules with great care and conduct due diligence with qualified professional experts before relying upon these schedules, with respect to application to their own goods or products This is because accurate HS customs tariff classification codes for goods involve the very technical rules of the Harmonized System as implemented in each TPP member country’s customs law and, differing applications of these frequently result in disputes, customs rulings and court cases in a number of countries Readers should also carefully review the General Notes of each TPP member country that will appear in each country’s customs tariff – these explain the timing or “staging” of tariff elimination and © CTRMS Vietnam may contain additional individual country Notes which can contain exceptions that can result in a different HS classification for a good, than that used in the exporter’s country TPP provides that producers and exporters will be able to seek advance customs rulings from the customs authorities in TPP countries to avoid such issues and, it will be prudent to so in certain circumstances The timing or “staging” of tariff elimination involves codes such as “EIF” which means that customs duties will be eliminated immediately upon entry into force of the TPP A code such as “B2” indicates that customs duties will be eliminated in two equal installments divided between the year of entry into force and on January of the second year “B3” provides for duty elimination in three equal installments over a three-year period, and so on Vietnam’s staging schedule provides for items that will stage down over sixteen years, while still other categories exist with a staging schedule that differs in terms of when reductions occur What customs duties will be eliminated? Article 1.3 (General Definitions) makes this clear: “Article 1.3: General Definitions …customs duty includes any duty or charge of any kind imposed on or in connection with the importation of a good, and any surtax or surcharge imposed in connection with such importation, but does not include any: (a) charge equivalent to an internal tax imposed consistently with Article III:2 of GATT 1994; (b) fee or other charge in connection with the importation commensurate with the cost of services rendered; and (c) antidumping or countervailing duty…” © CTRMS Vietnam This means that, while duties and taxes on imports will be eliminated, domestic national taxes such as VAT will not be eliminated Customs user fees will also not be affected (with the exception of the Merchandise Processing Fee method used by the United States) and, antidumping and countervailing duties are not included The TPP does not change the statuses of either the Agreement on Implementation of Article VI of GATT 1994 (WTO Antidumping Agreement) nor, the Agreement on Subsidies and Countervailing Measures of GATT 1994, both of which continue to be applicable to trade in goods by WTO members under TPP Rules of Origin – Goods Eligible for Preferential Treatment Only goods that can be certified to “originate” in TPP countries will qualify for the preferential treatment of TPP, when imported into TPP countries from other TPP countries The rules for qualifying goods are found in Article 3.2 of Chapter (Rules of Origin and Origin Procedures) of TPP “…Article 3.2: Originating Goods Except as otherwise provided in this Chapter, each Party shall provide that a good is originating if it is: (a) wholly obtained or produced entirely in the territory of one or more of the Parties as established in Article 3.3 (Wholly Obtained or Produced Goods); (b) produced entirely in the territory of one or more of the Parties, exclusively from originating materials; or (c) produced entirely in the territory of one or more of the Parties using non-originating materials provided the good satisfies all applicable requirements of Annex 3-D (Product-Specific Rules of Origin), and the good satisfies all other applicable requirements of this Chapter.” © CTRMS Vietnam The first two of these rules (Article 3.2(a) and Article 3.2(b)) are called “general rules of origin” by practitioners These involve only goods that are either the agricultural, animal, sea products and mineral commodities, as well as, scrap, listed in Article 3.3 or, to goods produced exclusively from originating materials in TPP countries There can be no non-originating materials used to produce goods that are to qualify under these rules and, the producer or exporter must have supporting documentation to prove these facts in the event of a customs verification (audit) of a certification Because the majority of manufactured goods in global trade involve intermediate goods or finished goods, the number of such goods or products that are produced with no non-originating materials or components is limited As a result, the majority of traded goods will instead either qualify for eligibility under the Product-Specific Rules of Origin contained in Annex 3-D of Chapter of the agreement and, in the case of automotive goods, the additional rules contained in Appendix to this Annex In the case of textile and apparel goods, the requirements of Chapter of the agreement and the Product-Specific Rules of Origin contained in Annex 4-A of Chapter 4, as well as, the Appendix to the Annex that provides for certain exceptions to these for non-originating materials in a “Short Supply List of Products” involving such goods The technical complexities of the Product-Specific Rules of Origin require the application of professional expertise and experience with the rules of the Harmonized System of customs tariff classification to both finished goods and to all non-originating materials used to produce these, as well as, application of Customs Valuation rules for determination of Regional Value Content percentages under one of several specified methods of calculation that are subject to specified definitions of the values to be used for such calculations These are far beyond the scope of any newsletter and, it is strongly recommended that a qualified professional be © CTRMS Vietnam engaged to assist producers, exporters or importers with determinations of the rules applicable to specific goods or products and, with origin certification procedures and related compliance requirements Origin Procedures and Compliance Certification of Origin Procedures and related compliance processes are extremely important for companies to understand and prepare for Selected provisions concerning these are reproduced below to make it easier for readers to find these, with highlights and notes added for emphasis “…Article 3.19: Application of Origin Procedures Except as otherwise provided in Annex 3-A (Other Arrangements), each Party shall apply the procedures in this Section Article 3.20: Claims for Preferential Treatment Except as otherwise provided in Annex 3-A (Other Arrangements), each Party shall provide that an importer may make a claim for preferential tariff treatment, based on a certification of origin completed by the exporter, producer or 23 importer _ Nothing in this Chapter shall prevent a Party from requiring an importer, exporter or producer in its territory that completes a certification of origin to demonstrate that it is able to support that certification For Brunei Darussalam, Malaysia, Mexico, Peru and Viet Nam, implementation of paragraph with respect to a certification of origin by the importer shall be no later than five years after their respective dates of entry into force of this Agreement.” Please note that Vietnam will not allow importers to make claims for TPP preferential treatment of goods based upon a certification of origin © CTRMS Vietnam completed by an importer in Vietnam, for a period of up to five years after TPP enters into force with respect to Vietnam “Article 3.20: Claims for Preferential Treatment (Continued) An importing Party may: (a) require that an importer who completes a certification of origin provide documents or other information to support the certification; (b) establish in its law conditions that an importer shall meet to complete a certification of origin; (c) if an importer fails to meet or no longer meets the conditions established under subparagraph (b), prohibit that importer from providing its own certification as the basis of a claim for preferential tariff treatment; or (d) if a claim for preferential tariff treatment is based on a certification of origin completed by an importer, prohibit that importer from making a subsequent claim for preferential tariff treatment for the same importation based on a certification of origin completed by the exporter or producer Each Party shall provide that a certification of origin: (a) need not follow a prescribed format; (b) be in writing, including electronic format; (c) specifies that the good is both originating and meets the requirements of this Chapter; and © CTRMS Vietnam (d) contains a set of minimum data requirements as set out in Annex 3-B (Minimum Data Requirements) Each Party shall provide that a certification of origin may apply to: (a) a single shipment of a good into the territory of a Party; or (b) multiple shipments of identical goods within any period specified in the certification of origin, but not exceeding 12 months Each Party shall provide that a certification of origin is valid for one year after the date that it was issued or for such longer period specified by the laws and regulations of the importing Party Each Party shall allow an importer to submit a certification of origin in English If the certification of origin is not in English, the importing Party may require the importer to submit a translation in the language of the importing Party Article 3.21: Basis of a Certification of Origin Each Party shall provide that if a producer certifies the origin of a good, the certification of origin is completed on the basis of the producer having information that the good is originating Each Party shall provide that if the exporter is not the producer of the good, a certification of origin may be completed by the exporter of the good on the basis of: (a) the exporter having information that the good is originating; or (b) reasonable reliance on the producer’s information that the good is originating © CTRMS Vietnam 10 Annex C: Exceptions to Article 3.11 (De Minimis) Each Party shall provide that Article 3.11 (De Minimis) shall not apply to: (a) non-originating materials of heading 04.01 through 04.06, or nonoriginating dairy preparations containing over 10 percent by dry weight of milk solids of subheading 1901.90 or 2106.90, used in the production of a good of heading 04.01 through 04.06 other than a good of subheading 0402.10 through 0402.29 or 0406.307; (b) non-originating materials of heading 04.01 through 04.06, or nonoriginating dairy preparations containing over 10 percent by dry weight of milk solids of subheading 1901.90, used in the production of the following goods: (i) infant preparations containing over 10 percent by dry weight of milk solids of subheading 1901.10; (ii) mixes and doughs, containing over 25 percent by dry weight of butterfat, not put up for retail sale of subheading 1901.20; (iii) dairy preparations containing over 10 percent by dry weight of milk solids of subheading 1901.90 or 2106.90; (iv) goods of heading 21.05; © CTRMS Vietnam (v) beverages containing milk of subheading 2202.90; or (vi) animal feeds containing over 10 percent by dry weight of milk solids of subheading 2309.90; (c) non-originating materials of heading 08.05 or subheading 2009.11 through 2009.39, used in the production of a good of subheading 2009.11 through 2009.39 or a fruit or vegetable juice of any single fruit or vegetable, fortified with minerals or vitamins, concentrated or unconcentrated, of subheading 2106.90 or 2202.90; (d) non-originating materials of Chapter 15 of the Harmonized System, used in the production of a good of headings 15.07, 15.08, 15.12, or 15.14; or (e) non-originating peaches, pears or apricots of Chapter or 20 of the Harmonized System, used in the production of a good of heading 20.08 For greater certainty, milk powder of subheading 0402.10 through 0402.29, and processed cheese of subheading 0406.30, that is originating as a result of the application of the 10% de minimis allowance in Article 3.11 (De Minimis), shall be an originating material when used in the production of any good of heading 0401 through 0406 as referred to in subparagraph (a) or the goods listed in subparagraph (b) Paragraph No of the De Minimis rules contains yet further “exceptions” that are of great significance for the textile and garment industry These are quite complex and involve use of a De Minimis allowance by weight instead of value and, further exceptions involving © CTRMS Vietnam 10 limitations, i.e no De Minimis allowances for elastomeric fabrics and sewing threads Because of the complexity of ROO involving textiles and garment goods, a more detailed review of these will be provided with our next newsletter in this continuing series A special alert for our readers: a first look at the EU – Vietnam Free Trade Agreement indicates significant differences in rules concerning “Accumulation” and “De Minimis” that will be analyzed and reported on more extensively with future newsletters Conclusion We hope the continuation of our basic introduction to the Rules of Origin of TPP has succeeded in alerting the reader to the need to begin a diligent and detailed analysis of their situation and strategic planning for TPP and other applicable free trade agreements at this time It will indeed take time, effort, specialist expertise and dedicated resources for companies and traders to successfully implement the benefits of TPP with respect to their goods As reported with our November, 2015 newsletter, producers or exporters will have to accurately specify the Rule of Origin under which they certify that their goods are eligible for TPP treatment The certifier will also have to sign and date the following statement with the certification of origin: “I certify that the goods described in this document qualify as originating and the information contained in this document is true and accurate I assume responsibility for proving such representations and agree to maintain and present upon request or to make available during a verification visit, documentation necessary to support this certification.” © CTRMS Vietnam 11 Disclaimer All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future No one should act upon such information without appropriate professional advice after a thorough examination of the facts of their particular situation Liability claims regarding damage caused by the use or disuse of any information provided, including any kind of information which is incomplete or incorrect, will therefore be rejected, if not generated deliberately or grossly negligent To receive future issues of our newsletter, please click on the link below to add your e-mail address to our mailing list: Subscribe Newsletter For assistance, please contact Nestor Scherbey at: CTRMS Vietnam Floor, Viconship Building 6-8 Doan Van Bo Street, District Ho Chi Minh City, Vietnam Tel: +84 6261 8231 Fax: +84 6261 8218 Mob: +84 7772 2979 Email: info@ctrms.com rd © CTRMS Vietnam 12 CUSTOMS, TRADE & RISK MANAGEMENT SERVICES (VIETNAM) CO., LTD Free Trade Complexities in Vietnam: TPP and EU-VN FTA - Part IV Strategic planning for TPP is now joined with planning for the EUVietnam Free Trade Agreement: Can one “tariff engineer” and satisfy origin eligibility requirements for both? March, 2016 Summary In our series on the Trans-Pacific Partnership Agreement (“TPP”), we continued to focus in our February, 2016 newsletter (TPP Trade in Goods Chapters - Part III) upon the complex Rules of Origin of this Agreement This is because accurate application of these rules to goods produced and traded internationally by companies and traders will determine whether they will be successful, or not, in taking advantage of the benefits of tariff elimination under the Agreement The tariff elimination benefits will be immediate for a wide range of goods when the Agreement enters into force For other goods, tariff benefits will be “staged,” with reductions to zero rates occurring over specified periods of years, depending on the product or good involved However, the TPP is not the only trade agreement that global companies and traders operating in Vietnam will have to deal with The agreed text of the EU – Vietnam Free Trade Agreement (“EU-VN FTA”) was published on the website of the European Commission on February 1, 2016 It is available for review online here © CTRMS Vietnam As we reported in last month’s newsletter, an initial quick survey indicated that many provisions appeared to be remarkably similar to TPP However, many definitions, concepts, procedures and approaches to Rules of Origin and Certification of Origin, while similar to TPP, differed significantly We cautioned that product or commodity eligibility under TPP rules will not automatically mean eligibility under the EU – Vietnam Free Trade Agreement and, vice versa The challenge for global companies and traders sourcing or operating in Vietnam with exports of products or commodities to TPP countries and to the EU, will be to try to “tariff engineer” their products to be both “TPP Ready” and “EU-VN FTA Ready,” if possible This month, we focus upon the EU-VN FTA’s rules and procedures to identify similarities and differences with respect to TPP, to alert readers to key topics for strategic planning to achieve maximum benefits under both free trade agreements Rules of Origin of TPP and EU-VN FTA Similarities and Differences In our August, 2015 newsletter (New Generation FTA Requirements) we warned that free trade is not really “free,” because new-generation agreements require much higher standards of compliance with (i) accurate HS tariff classifications, (ii) calculation of specific value contents and, (iii) certifications of the origins of all materials and components used to produce final products exported to FTA markets This caution is equally applicable to both the EU-VN FTA and to TPP In the case of the TPP, the qualifications of a good for eligibility must be documented and, the appropriate supporting records to prove eligibility must be maintained for five years from the date of certification of eligibility of goods, to pass international customs verification audits that may occur with © CTRMS Vietnam initial exports or, retroactively In the case of the EU-VN FTA, copies of an origin declaration or, application for the issuance of a certificate of origin and, analogous supporting records must be maintained for “…at least three years from the date of the origin declaration or of the certificate of origin ” As a result, global producers and exporters to TPP countries and the EU (or to Vietnam) should be prepared to maintain appropriate records for a period of at least five years from the certification of origin for trade preference eligibility, to satisfy both TPP and EU-VN FTA verification requirements Rules of Origin – General Rules v Product – Specific Rules General Rules of Origin Our November, 2015 newsletter (TPP Trade in Goods Chapters - Part I) explained that only goods that can be certified to “originate” in TPP countries will qualify for the preferential treatment of TPP, when imported into TPP countries from other TPP countries In TPP, what practitioners call “general rules of origin” (in contrast to “product-specific rules of origin”) involve goods that are “wholly obtained” in the territory of one or more TPP countries These involve only goods that are either the agricultural, animal, sea products and mineral commodities, as well as, scrap, that are listed in Article 3.3 of Chapter of TPP or, to goods produced entirely in the territory of one or more TPP countries exclusively from originating materials from TPP countries In the EU-VN FTA, the analogous “general rules of origin” are contained in Article of Chapter (Protocol Concerning The Definition Of The Concept Of “Originating Products” And Methods Of Administrative Cooperation) In the case of “wholly obtained” goods, the listing of goods that shall be considered to be eligible as “wholly obtained” in the EU-VN FTA © CTRMS Vietnam virtually duplicates the listing found in TPP’s Article 3.3 and, as a result, producers and exporters of the listed commodities should not experience undue difficulties with satisfying the requirements of both trade agreements for eligibility certification of such commodities and goods However, the majority of manufactured goods in global trade involve intermediate goods or finished goods The number of such goods or products that are produced with no non-originating materials or components is quite limited In the TPP, the majority of traded goods will instead either qualify for eligibility under the Product-Specific Rules of Origin contained in Annex 3-D of Chapter of the TPP or, in the case of automotive goods, the additional rules contained in Appendix to this Annex In the case of textile and apparel goods, the requirements of Chapter of TPP and the Product-Specific Rules of Origin contained in Annex 4-A of Chapter 4, as well as, the Appendix to the Annex that provides for certain exceptions to these for non-originating materials in a “Short Supply List of Products” involving such goods will apply Product-Specific Rules of Origin In TPP, the technical complexities of the Product-Specific Rules of Origin require the application of professional expertise and experience with the rules of the Harmonized System of customs tariff classification to both finished goods and to all non-originating materials used to produce these In addition, application of WTO Customs Valuation rules for determination of Regional Value Content percentages under one of several specified formula methods of calculation (which include specific definitions of the values to be used for such calculations), is necessary for goods whose specific rules involve regional value content requirements © CTRMS Vietnam In the EU-VN FTA, application of professional expertise and experience with the rules of the Harmonized System of customs tariff classification, as well as, with WTO Customs Valuation is equally required, as with TPP However, the implementation of Product-Specific Rules of Origin significantly differs from that of TPP Article of Chapter of the EUVN FTA introduces the concept of “Sufficiently Worked or Processed Products,” while Article of Chapter lists “Insufficient Working or Processing” activities or operations concerning goods that will not confer the status of originating products, regardless of whether or not requirements of Article are otherwise fulfilled Insufficient Working or Processing The EU-VN FTA lists the following in Article of Chapter 4: “…Insufficient working or processing The following operations shall be considered as insufficient working or processing to confer the status of originating products, whether or not the requirements of Article are satisfied: (a) preserving operations to ensure that the products remain in good condition during transport and storage; (b) breaking-up and assembly of packages; (c) washing, cleaning; removal of dust, oxide, oil, paint or other coverings; (d) ironing or pressing of textiles and textile articles; (e) simple painting and polishing operations; (f) © husking and partial or total milling of rice; polishing and glazing of cereals and rice; CTRMS Vietnam (g) operations to colour or flavour sugar or form sugar lumps; partial or total milling of crystal sugar; (h) peeling, stoning and shelling, of fruits, nuts and vegetables; (i) sharpening, simple grinding or simple cutting; (j) sifting, screening, sorting, classifying, grading, matching (including the making-up of sets of articles); (k) simple placing in bottles, cans, flasks, bags, cases, boxes, fixing on cards or boards and all other simple packaging operations; (l) affixing or printing marks, labels, logos and other like distinguishing signs on products or their packaging; (m) simple mixing of products, whether or not of different kinds; mixing of sugar with any material; (n) simple addition of water or dilution or dehydration or denaturation of products; (o) simple assembly of parts of articles to constitute a complete article or disassembly of products into parts; (p) a combination of two or more of the operations specified in points (a) to (o); (q) slaughter of animals For the purpose of paragraph 1, operations shall be considered simple when neither special skills nor machines, apparatus or tools especially produced or installed for those operations are required for their performance All operations carried out either in the Union or in Vietnam on a given product shall be considered together when determining whether the working or processing undergone by that product is to be regarded as insufficient within the meaning of paragraph 1…” © CTRMS Vietnam Producers and exporters in Vietnam will have to pay special attention to operations listed in Paragraph no 1, especially items (o) and (p) A significant number of companies in Vietnam engage in “Temporary Imports for Processing for Export” that involve assembly and packaging operations with the use of imported parts, components or materials that may be of nonEU or non-Vietnamese origin If the assembly and packaging operations not require the use of special skills or machines and tools as stated in Paragraph of Article 6, the resulting goods may fail to be eligible for the EU-VN FTA’s tariff benefits The difference in approaches to product-specific rules of origin in the EU-VN FTA and in TPP is best illustrated with actual examples In the example below, the first product-specific rule (Ex Chapter 62) is for textile wearing apparel classified in Harmonized System Chapter 62, including, women’s, girl’s and baby clothes and accessories The EU-VN FTA rule very specifically lists the types of processing and manufacturing operations that will be held to transform such products, when made from non-originating materials, into products that will qualify for preferential tariff treatment under the agreement Ex Chapter Articles of apparel and clothing Weaving accompanied by 62 accessories, not knitted crocheted; except for: or making-up (including cutting) or Making-up preceded by printing accompanied by at least two preparatory or finishing operations (such as scouring, bleaching, setting, mercerizing, raising, heat calendaring, shrink resistance processing, permanent finishing, decatising, © CTRMS Vietnam impregnating, mending and burling), provided that the value of the unprinted fabric used does not exceed 47,5 % of the ex-works price of the product ex 6202, ex Women's, girls' and babies' Weaving 6204, ex clothing 6206, ex accessories 6209 and embroidered and for accompanied by clothing making-up (including cutting) babies, or Manufacture ex 6211 from unembroidered fabric, provided that the value unembroidered of fabric the used does not exceed 40 % of the exworks price of the product In contrast, below is the analogous product-specific rule of origin for such goods in TPP: 62.01 - 62.08 A change to a good of heading 62.01 through 62.08 from any other chapter, except from heading 51.06 through 51.13, 52.04 through 52.12, or 54.01 through 54.02, subheading 5403.33 through 5403.39 or 5403.42 through 5407.94, or heading 54.08, 55.08 through 55.16, 58.01 through 58.02, or 60.01 through 60.06, provided the good is cut or knit to shape, or both, and sewn or otherwise assembled in the territory of one or more of the Parties Readers are cautioned not to rely upon the simplified versions of these example rules as important footnotes and other conditions have been omitted for purposes of illustration © CTRMS Vietnam Please note that the EU-VN FTA rule specifies the processing operations that are to be considered for “sufficient working” of nonoriginating materials and, it also specifies value limits for certain materials in relation to the ex-works prices of the goods The TPP rule by contrast, has no references to specific working or processing operations and, no references to materials or regional value contents In TPP, there are no regional value content or other value conditions in product-specific rules of origin for textile and garment goods classified in Chapters 50 - 63 of the Harmonized System Once a customs specialist with expertise in the Harmonized System of tariff classification appropriately “decodes” the TPP rule, it will be understood as calling for “tariff shifts” or, changes in HS codes of non-originating materials in the free trade territory that can only occur through substantial working or processing operations As a result, the intention of these approaches to rules of origin with respect to non-originating materials is generally the same - to ensure that sufficient processing occurs so as to render final products eligible for free trade treatment However, the details of how this is accomplished are different in the rules in each agreement and, these details matter It is quite possible for a good to qualify under one rule and, not the other It is also possible for the same good to qualify under both In addition, there are significant differences in tolerances for minimal non-originating content in goods in both agreements called “De Minimis” and, in rules involving “Accumulation.” The latter involves allowances for adding “originating” materials or components from countries specified in the free trade agreement, in order for the final product or good to qualify The EU-VN FTA contains in Article of Chapter special provisions for certain goods involving materials originating in an ASEAN country that applies a preferential trade agreement with the EU, as well as, for fabrics originating in the Republic of Korea The latter will be treated as “originating in Vietnam” © CTRMS Vietnam if they are further processed or incorporated into goods listed in an Annex to the EU-VN FTA, providing the processing goes beyond the simple “insufficient working or processing” operations listed in Article of Chapter In general, the TPP does not contain analogous provisions and applies product-specific rules of origin to all “non-originating” (non-TPP) goods or materials uniformly Conclusion We hope the continuation of our very basic introduction to the Rules of Origin of TPP and the EU-VN FTA has succeeded in alerting the reader to the need to begin a diligent and detailed analysis of their situation and, to develop strategic planning for eligibility of products and goods for free trade agreements at this time It will take time, effort, specialist expertise and dedicated resources for companies and traders to successfully implement the benefits of the TPP, the EU-VN FTA and other free trade agreements with respect to their goods “Tariff engineering” of goods for preferential tariff eligibility under these trade agreements will require detailed product-byproduct, processing and materials analysis to determine their status under each agreement’s specific rules Global companies and traders will have to assess the impacts of these agreements on their global supply chains, step up their visibility into multiple tiers of suppliers who, through lack of management and oversight of supplier relationships, might cause future failures with certifications of origin eligibility of final products, or of related record-keeping compliance, when the final products are imported into free trade area countries Our advice: don’t wait in making the necessary efforts to cope with the complexities of these new free trade agreements © CTRMS Vietnam 10 In addition to the similarities and differences highlighted in this newsletter concerning these free trade agreements, there are important topics relating to Origin Certification procedures and other compliance requirements of these agreements that will be further explained with future newsletters in our series Disclaimer All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future No one should act upon such information without appropriate professional advice after a thorough examination of the facts of their particular situation Liability claims regarding damage caused by the use or disuse of any information provided, including any kind of information which is incomplete or incorrect, will therefore be rejected, if not generated deliberately or grossly negligent To receive future issues of our newsletter, please click on the link below to add your e-mail address to our mailing list: Subscribe Newsletter For assistance, please contact Nestor Scherbey at: CTRMS Vietnam 3rd Floor, Viconship Building 6-8 Doan Van Bo Street, District Ho Chi Minh City, Vietnam Tel: +84 6261 8231 Fax: +84 6261 8218 Mob: +84 7772 2979 Email: info@ctrms.com © CTRMS Vietnam 11