Rule of origin in international trade

TABLE OF CONTENTS INTRODUCTION LITERATURE REVIEW INTRODUCTION TO RULES OF ORIGIN Definition and classification Roles of Rules of Origin in international trade .7 Origin criteria a Wholly obtained criterion b Substantial transformation criterion Origin certification and verification 10 a Certification: 10 b Verification: 11 THE SIGNIFICANCE OF RULES OF ORIGIN IN INTERNATIONAL TRADE 12 Introduction 12 The significance of Rules of Origin .12 a ROO reduce costs of doing business in international trade 12 b Rule of Origin as trade policy instrument 13 c ROO expand foreign direct investments (FDI) and export processing zones (EPZs) 13 d ROO circumvent trade remedy measures 13 e Minor rule amendment requires a big operation change 14 Conclusion 14 THE HINDRANCE OF RULES OF ORIGIN IN INTERNATIONAL TRADE 15 Introduction 15 ROO as International Trade Hindrances 15 a ROO as protectionist apparatuses .15 b ROO rules of origin triggers trade diversion 16 c Trade – diverting ROO lead to a loss in welfare .17 d The harmonization of non-preferential and preferential ROO 17 THE RULES OF ORIGIN IN ASEAN FREE TRADE AGREEMENTS .19 Reforms in ASEAN FTA Rules of Origin: 19 Comparison of ROOs in ASEAN and ASEAN + FTAs 21 CONCLUSION 23 REFERENCES 25 INTRODUCTION In the modern world, countries all over the world are becoming more and more interdependent With the establishments of many trade unions and associations, countries can now benefit from the trade agreements they participate in However, each country has a different level of advantages and duties As the origin of goods plays an important role in determining this level, specific rules have been set to remedy the problems regarding the good’s origin These rules are called “Rules of Origin” Since its approval, Rules of Origin have been widely implemented in many agreements and now are becoming topical than ever Understanding the importance of Rules of Origin, in this study, we want to focus on providing knowledge about these rules: what it is, how it is classified and how to determine the origin of a product Moreover, like any kind of provision, Rules of Origin still has merits and demerits In this study, we can have a thorough look at these rules and then come up with a better solution for any problems Also, this study will mention the implementation of Rules of Origin in ASEAN so that we can obtain a deeper insight into the provision and its real situation Hopefully, our study can enrich your economic knowledge and provoke your interest in international trade and policy Thanks for your time and we would appreciate it if you could leave any comments or ideas LITERATURE REVIEW Studies on Rules of Origin have been undertaken by not only researchers with political background but also economists, most of these concerned with measuring impacts of Rules of Origin on trade flows Others have noticed that approaches to trade facilitation studies can be used to address certain administrative issues of ROO (Harris & Staples, 2009; Izam, 2003; James, 2006; Messerlin & Zarrouk, 2000) Estevadeordal et al (2007) summarise two key aspects of the ROO that were the subject of their research: restrictiveness and divergence While ‘restrictiveness’ refers to the aspect of ROO that restrict trade under FTAs, ‘divergence’ denotes the divergent ROO that differ across FTAs and products within an FTA.Though few studies embrace other issues concerning ROO, most studies have been devoted to assessing these two aspects The complexity that results from the diversity of ROO has been examined frequently based on the estimated cost of complying with such rules (Anson et al., 2003; Anson et al, 2005; Carrère & De Melo, 2004; Estevadeordal et al., 2007) Anson et al (2003,) suggest that the compliance costs of ROO largely negate preferential access under FTAs, and that the compliance costs of ROO amount to 6% of a product’s export value, which is higher than the average preferential margin of 4% Carrère and De Melo (2004) argue that, to compensate for the production and compliance costs caused by the restrictiveness of ROO, about 10% of the preference margin would be needed for NAFTA Cadot, Carrère, De Melo and Portugal-Pérez (2005) estimate that the border price of Mexican apparel product has risen 12% to compensate for the cost of complying with NAFTA’s ROO Cadot, Carrère, De Melo and Tumurchudur (2006) estimate the trade-weighted compliance costs at approximately 8.0% for the PanEuropean Union (PANEURO) and 6.8% for NAFTA The fundamental objective of ROO is often identified as the checking of freeriders who ‘seek to enjoy the benefits of the FTA without paying the costs associated with FTA membership’ (Boadu & Wise, 1991) For this reason, researchers often suggest that the origin certification and verification procedures under the ROO be made integral to the administration of ROO Izam (2003), Brenton and Imagawa (2005) and Estevadeordal et al (2007) conclude that the procedures for exporters or producers to obtain the certificate often require expensive accounting and inventory systems The administrative burden in this procedure, they warn, may result in inadequate administrative cooperation, faults, and fraud in the certification of origin process Manchin and Pelkmans-Balaoing (2007b, p 14) indicate that the costs and delays in obtaining certification and in proving conformity with their origin requirements depend largely on the stringency of the verification procedures Harris and Staples (2009, p 7) suggest that the primary dilemma in this regard is ‘balancing the rights and obligations of the producer and the importer’ While the producer has sufficient knowledge of the origin of their product, the importer is responsible for the payment of tariffs Therefore, if the producer, either by fraud or by negligence, provides faulty origin details about their product, the importer is liable for non-paid tariffs and penalties Boadu and Wise (1991), Cantin and Lowenfeld (1993) and Harris and Staples (2009) emphasise the fact that the administration of ROO often results in considerable uncertainty for companies, and this can occur under circumstances in which ‘procedures are unclear, customs officials lack capacity, or legal provisions are incomplete’ (Harris & Staples, 2009) In summary, studies have found the restrictiveness, complexity (or divergence), compliance costs, and uncertainty arising from the administration of ROO to be factors that influence the full use of FTAs However, in this report, we are going to have a brief look over the landscape of Rules of Origin and specific case of ASEAN is given at the end of the report Abbreviation: ROO: Rule of origin WTO: World Trade Organization RTA: Regional Trade Agreement MFN: Most Favoured Nation FTA: Free Trade Agreement PsROO: Product-specific Rules of Origin CU: customer union GSP: Generalized System of Preferences AD: Anti-dumping CTC: Change in Tariff Classification CV: Countervailing VC: Value Content ICC: International Chamber of Commerce INTRODUCTION TO RULES OF ORIGIN Definition and classification Rules of Origin (ROOs) are specific provisions that are established in the agreement to determine the origin of goods (Medalla, Balboa, 2009, p.2) Rules of Origin are usually used in cross - border trade, especially free trade agreements (FTA) There are two types of Rules of Origin: preferential rules of origin and non-preferential rules of origin - Preferential rules of origin are used to determine whether the good qualifies for the preferential tariff offered under the agreement They are a set of criteria that the good needs to comply with in order to be considered originating in the territory of the trade agreement The goods are checked against these criteria to establish whether they can be considered originating in a country when exported to an FTA partner - Non-preferential rules of origin apply to goods traded between countries not linked by any preferential trade agreement (in the absence of any preferential agreement or when the goods are not covered by an existing FTA) It does not lead to a reduction in tariffs but is used for a number of other purposes such as quotas, anti-dumping and countervailing duties It is also used for trade statistics and for the purpose of labelling Roles of Rules of Origin in international trade - Rules of Origin allow the application of trade measures to the right subject-matters For example, when country A wants to impose an import tariff for apples from country B There may be cases: (1) The apples are from country B, which means country A can apply the measure properly; (2) The apples are from country C and just transit through country B, which means country A cannot impose the tariff on these apples; (3) The apples are from country B but transit through country C, which means country A should impose the tariff To differentiate between these cases, Rules of Origin are inevitable in order to assure the right implementation - Rules of origin are also used in trade statistics which is very important for countries to keep track of their trade balance - In FTAs, Rules of Origin are used to differentiate between goods originating in contracting parties and those originating in third countries Such differentiation serves two purposes: (1) it allows the importing party to determine whether a product is eligible for preferential treatment under the FTA at hand; (2) it avoids the scenario where exports from third countries enter the FTA via the member with the lowest external tariff (i.e., trade deflection) Origin criteria As Rules of Origin plays an important role in determining the accuracy of trade policies, it focuses on the criteria that differentiates between products from different countries There are approaches to determine the country origin of goods: wholly obtained (or produced) criterion and substantial transformation criterion a Wholly obtained criterion Wholly obtained or produced goods are defined as natural products in a country or products made from entirely domestic inputs in a country They are minerals extracted from the soil, animals born and raised in the country and their products, plants harvested in a single country These goods are more easily identified and have clear HS nomenclature and coding b Substantial transformation criterion For non - wholly obtained goods, there are common ways to determine the country origin of goods: the value-added measure (VA), the tariff heading criterion (CTH), and the specified processes (SP) test These methods can be used singly or in combination based on specific cases Rules Content Merits Demerits Value - added A good is considered - Simple and precise - Costly and measure (VA) substantially transformed when - Suitable for sophisticated due to the value added of a good addressing certain differences in increases up to a specified level goods which have calculation methods, expressed by ad valorem been further refined fluctuation in percentage The value added or value-added values… criterion can be expressed in - Having implicit two ways, namely a maximum bias against low- allowance for non-originating wage, capital-scarce materials or a minimum countries requirement of domestic content Tariff A good is considered - Simple and - HS is not always heading substantially transformed when predictable suitable for origin criterion the good is classified in a determination (CTH) heading or subheading purposes (depending on the exact rule) - Documentary different from all non-originating requirements are materials used difficult to comply with Specified A good is considered processes (SP) substantially transformed when test - Technical and - Modifications objective needed to keep up the good has undergone specified with technological manufacturing or processing changes and new operations products There are other tests used for different products Some FTAs use the so-called “hybrid tests” One type of this test requires a combination of two (or more) criteria; the other type provides a choice among two (or more) criteria There is no standards and countries can choose the appropriate approach based on different partners Apart from the core origin criteria, there are also general rules to determine the economic nationality of products Examples of these are De Minimis and cumulation principle De Minimis principle is a provision that allows a small amount of nonoriginating materials to be used in the production of the good without affecting its originating status The provision acts as the relaxation of the rules of origin The other principle - cumulation is a provision which allows to consider goods obtained in as well as processing taking place in one FTA member country as originating in another Origin certification and verification Certification and verification are also important when applying rules of origin Although a product can fulfill all the criteria, they may not be entitled to preferences unless they comply with procedural requirements These requirements can differ between trade agreements but are clearly declared, so participating countries must follow in order to gain the benefits Certificate of origin is one of the most important requirements for a consignment Many agreements provide a value threshold under which the country origin of the goods cannot be certified a Certification: - This is usually the responsibilities of exporters but sometimes the producers or importers - Firstly, the trader should classify the product under appropriate HS code in order to look up the rules of origin applicable for this product Then, it is necessary to verify if the products meet the rules of origin - Another important step is to obtain the suppliers’ declarations as a pROOf - Once the exporter has verified that the good meets the relevant rule of origin, a certificate of origin needs to be provided If self - certification is permitted, the trader only needs to fill out the information relating to the consignment on a prescribed form (if any), and declare that the goods listed therein fulfill origin criteria and other requirements 10 - However, if self-certification is not allowed, a trader must apply for a pROOf of origin issued by a certifying authority, which is normally the chamber of commerce or an agency of the ministry of trade or commerce To obtain such document, the exporter or the producer will submit various documents relating to the production or manufacturing of the goods The competent authority will examine the documents, and pay visits to an applicant's premise to verify if necessary, and certify if the goods are compliant with the origin criteria set out in the trade agreement at hand b Verification: - When the consignment arrives at the port of entry in the importing country, the pROOf of origin will be submitted to the customs authority To facilitate trade, sometimes a physical submission is not required - the importer or its representative may simply submit the document number and/or an electronic copy thereof The customs' acceptance of the pROOf of origin will decide whether or not the consignment is entitled to preferential treatment - In case there arise some doubts, the customs authority may resort to several measures, e.g examining the original pROOf or origin or verifying the information on the document and the goods actually imported The customs may require the trader to provide more information, or even contact the issuing authority in the exporting country for further clarification 11 THE SIGNIFICANCE OF RULES OF ORIGIN IN INTERNATIONAL TRADE Introduction The basic role of Rules of Origin is the determination of the economic nationality as opposed to the geographical nationality of a given good There are several mandatory legal or administrative requirements to observe when goods are traded on the international market This is necessary for the implementation of various trade policy instruments such as imposing import duties, allocating quotas or for the collection of trade statistics The determination of the country of origin is the last step in the customs clearance procedures, the first steps being the classification of the goods and the determination of the value of the goods The classification and valuation are important per se for the customs clearance, but these are also the basic tools for the determination of the country of origin of goods in the sense that the rules of origin are product specific rules linked to specific HS codes, and that in order to assess if value added rules are fulfilled, the composition of the customs value is needed The significance of Rules of Origin Rules of Origin have become one of the major trade issues among trading nations and trading communities worldwide While reasons for this could be closely linked to each other, the following factors are pointed out a ROO reduce costs of doing business in international trade Thanks to the series of General Agreement on Tariffs and Trade (GATT) multilateral trade negotiations, “trade liberalization” measures (i.e., reduction or elimination of customs duties) have been implemented, and according to WTO, the average tariff rate is 4% Generally speaking, tariffs are not regarded as major barriers to trade although high-tariff items and tariff escalation still exist for certain sensitive products Instead, business and trading communities—in particular, small and medium enterprises (SMEs) - pay greater attention to “trade facilitation” measures, such as establishment or harmonization of customs procedures In fact, an Asia Pacific Economic Cooperation (APEC) study shows that trade facilitation efforts will produce more fruits than trade liberalization Customs procedures cover not only export/import clearance procedures, but also certification of Rules of Origin requirements Excessive 12 and burdensome government documentation requirements would undermine the benefits from trade liberalization measures b Rule of Origin as trade policy instrument Rules of Origin are supposed to be technical and neutral rules to determine the country of origin of goods However, Rules of Origin are frequently used as a trade policy instrument in some importing countries in the form of preferential trade agreements and arrangements, such as GSP and FTAs.4 In order to protect national interest, Rules of Origin tend to differ from one FTA to another, reflecting different trade patterns and structures on a bilateral basis Thus, for example, jurisdictions such as the United States and the European Communities have used Rules of Origin as the legal justification for imposing antidumping duties on third country exports (sometimes retroactively) following findings that merchandise produced in such third countries had not acquired third country origin but continued to have the origin of the country with respect to which antidumping duties were imposed As such conclusions were drawn without any investigation whether third country exports were dumped and thereby caused injury, the use of Rules of Origin was effectively extrapolated to construct an independent shortcut for imposing antidumping duties on exports from a third country, although the international legal basis for doing so is ambiguous, to say the least c ROO expand foreign direct investments (FDI) and export processing zones (EPZs) Exports are regarded as an engine for economic growth Many developing countries offer tax incentives to EPZs to attract FDI Rapid growth of FDI in developing countries creates a production base for exports to enjoy preferential tariff treatment under GSP and FTAs In order to benefit from such treatment, goods produced at EPZs must meet the requirements for Rules of Origin d ROO circumvent trade remedy measures Some companies tend to circumvent trade remedy measures (e.g., anti-dumping and countervailing duties) by simply transferring their factories to third countries that are not subject to these trade remedy measures, or to the importing country that has imposed such measures and is supplying essential parts and components Since trade 13 remedy measures are taken against specific exporting countries, Rules of Origin play a key role in determining the country of origin of the goods in question Determination by the importing authorities is vital for such companies to waive payment of additional customs duties Measure-imposing countries may wish to create special origin rules to avoid such circumvention practices, which could lead to another trade policy instrument (Darlan Marti, n.d.) e Minor rule amendment requires a big operation change Authorities often issue technical amendments of Rules of Origin Even if such amendments are minor, it could require considerable modification of present production operations There are instances where the combination of use of domestic and imported materials should be changed to meet the new origin rules Conclusion Rules of origin are the criteria used to determine where a product originates from, in other words where the product was made Rules of origin are an important part of international trade rules, both at the WTO level as well as within free trade arrangements These rules determine what import duty shall be paid, whether anti-dumping duties, countervailing measures or safeguard measures are applicable to product as well as determining which country may add to the label indicating where it was made The rules therefore will allow you to either import the product at a cost or prevent you from importing and selling it The rules of origin have become increasingly more important given the global value chains where materials and labour from different countries are used in the production or manufacture of an end product This becomes even more evident when trying to navigate the free trade arrangements that your product may benefit from as each of the free trade arrangements have different rules of origin and the rules of origin are not the same for all products The rules of origin could for example require that you are only allowed to use a certain percentage of materials that not originate from the country where you may want the product to originate from The rules could also specify the type of processing that needs to be applied to non-originating materials in order that an end product may be deemed to originate from the country where you would like the product to come from Such processing could require that the material you use must be classified under a different tariff heading than the tariff heading of the end product or prohibit the use of materials from certain tariff headings Failure to adhere hereto could result in unforeseen costs in the forms of duties, storage cost, re-shipment cost and penalties (Rian Geldenhuys, 2019) 14 THE HINDRANCE OF RULES OF ORIGIN IN INTERNATIONAL TRADE Introduction Like a widespread epidemic that brings fear and disturbs life on earth, stringent ROO along with their complexity and worldwide diversity brings fear to traders, disturb them and hinder international trade The role of ROO is increasing day by day and its importance to international trade is undeniable, however, ROO are considered to be obstacles to international trade when they are used as protectionist apparatuses and when their stringency leads to trade diversion Therefore, harmonizing and simplifying non-preferential and preferential ROO (to be transparent, unbiased, predictable and objective) is the best solution to overcome problems related to international trade among both domestic and multi - national firms, in order to facilitate international trade and achieve an efficient globalization ROO as International Trade Hindrances a ROO as protectionist apparatuses Trade barriers have been reduced or eliminated by establishing various preferential contractual and/or autonomous trade regimes and lowering MFN tariffs in general Consequently, countries started to use ROO as alternative barriers to trade so as to protect their own national interests and susceptible goods (Moshe Hirsch, 2008) Both preferential and non preferential goods can be used as protectionist apparatuses so long as they are not harmonized Using non-preferential ROO as a protectionist tool is one of reasons that motivated the WTO to initiate the HWP; the aim was to establish a joint set of non-preferential ROO to be applied by all WTO member states worldwide (K.N Harilal & P.L Beena, 2003) Imposing stringent ROO in any RTA could lead to excessive demanding of regional finished goods producers to regional intermediate goods As a result, regional intermediate goods prices would increase and regional intermediate goods producers would be disguisedly protected Although stringent ROO imposed in an RTA may prevent foreign emulators from competing with regional producers, in some other cases, such rules may instead/simultaneously hinder the intra-regional trade 15 b ROO rules of origin triggers trade diversion Trade diversion occurs when a regional importer diverts its importation of goods from an efficient outsider source of supply to an inefficient internal one Trade diversion does not only happen because of the imposition of stringent RTA ROO; it also takes place as a result of the imposition of trade barriers, such as a country's "external tariffs” => Consequence: Trade diversion negatively affects "global efficiency" because it widens the "production" of inefficient regional trade area "producers" and makes the production of efficient third countries producers smaller and less effective The rule of trade diversion is: "The higher the threshold established in the Rule of Origin, the greater the chance that trade diversion will take place." (Anne Krueger, 2008) 16 c Trade – diverting ROO lead to a loss in welfare Trade creation boosts welfare regionally and leads to the formation of an RTA Therefore, trade creation is opposite to trade diversion In fact, the imposition of tradediverting Rule of Origin in a RTA negatively affects the economic welfare of third countries and does not facilitate their trade with the regional trade area Applying the trade diverting Rule of Origin in a RTA does not facilitate intraregional trade, and further lessens the economic welfare of the RTA contracting parties The imposition of stringent ROO in a RTA could lead to investment diversion when it induces an outsider-finished goods producer to establish input producing facilities in a contracting party to the RTA in order to comply with the rules, even though the party is not, economically, the optimum spot d The harmonization of non-preferential and preferential ROO ROO vary from country to country and from one RTA to another Their variation along with their complexity is considered to be a nightmare for producers and traders all over the world Therefore, efforts to harmonize ROO were made in 195 by the ICC - The Harmonization of Non-preferential ROO: The Agreement strives to harmonize non-preferential ROO in a way that can prevent such rules from becoming obstacles to trade It was formed in order for the WTO member states to comply with a regular pack of harmonized rules when specifying the origin of a product on MFN grounds The harmonization of non-preferential ROO is needed to be completed soon in order to cease the occurrence of any dispute that could be aroused during the transition period The process was supposed to be completed in 1998, however, it has not been completed yet due to the existence of a number of outstanding issues, which are based upon PSROO There are many outstanding issues obstructing the completion of the harmonization process of Non-preferential ROO The General Council decided to concentrate on twelve of the ninety four issues - Harmonizing Preferential ROO: 17 The harmonization of preferential ROO was proposed during the Uruguay Round Harmonizing the preferential ROO of the GSP makes it easier for developing countries to take advantage of the GSP accorded preferences, that is why many have supported the harmonization of preferential ROO and many see that it is of crucial importance In preferential trade systems, ROO play a considerable role in avoiding trade deflection (transshipment of goods) Preferential ROO are divided with great elaboration in RTAs The application of preferential ROO differs from an agreement to another, making things complicated for a trader when it appears to be a member in a variety of agreements that impose different ROO Enterprises face difficulties when complying with a diversity of costs provoked by different agreements that lead to what is called the "Spaghetti Bowl" phenomenon Harmonizing preferential ROO should be based on the substantial transformation norm in which undergoing the minimum CTC, if not supplemented by the VC and/or the specific manufacturing operation tests, should grant origin for the non-wholly obtained good 18 THE RULES OF ORIGIN IN ASEAN FREE TRADE AGREEMENTS ASEAN, the Association of Southeast Asia Nations is a regional intergovernmental organization comprising ten countries in Southeast Asia, which formed its core role in initiating free trade agreements (FTAs) It has extended its framework by adding up plus-one agreements: ASEAN – China agreements (ACFTA, effect in 2004), ASEAN – South Korea agreements (AKFTA, effect in 2007), ASEAN – Japan agreements (AJFTA, effect in 2008), ASEAN – Australia – New Zealand agreements (AANZFTA, effect in 2010) and ASEAN – India agreements (AIFTA, effect in 2010) There are also mechanisms that explore larger groups such as “ASEAN plus three” (APT) with the East-Asia-wide initiative (EAFTA) and the Comprehensive Economic Partnership for East Asia under the context of the East Asia Summit This section will give a closer look into Rules of Origin in concluded ASEAN’s agreements The Rules of Origin for the ASEAN Free Trade Area (AFTA) uses the valueadded criteria applications to determine origin Origin status is conferred under either one of two conditions: products wholly produced or obtained in the exporting Member States including agricultural products, animals and animal products, and mineral and mineral products and waste and scraps from production; or non-wholly produced or obtained products, a product is deemed to be originating from ASEAN Member States, if at least 40 percent of its content originates from any Member States Reforms in ASEAN FTA Rules of Origin: The original ROO has revealed several shortcomings, which led to low FTA utilization rate of AFTA Even though the AFTA ROO is prominent for its generality in application, utilizing the single method of value-added criteria, there are two main problems needed to be taken into consideration First, heavy reliance on electronics and textile and garments for exports among ASEAN Member States, which contain value-added/local content often much lower than 40 percent Another major setback is the complex accounting system required, poses difficulties toward exporters, especially for SMEs with full measurement, disclosure and certification of input costs 19 As stated in “ASEAN Economic Community Blueprint”, a simple and liberal ROO regime for FTAs plays a consequential role in transforming ASEAN into a single market and production base, a highly competitive economic region, a region of equitable economic development, and a region fully integrated into the global economy “Putting in place ROO which are responsive to the dynamic changes in global production processes so as to: facilitate trade and investment among ASEAN Member Countries; promote a regional production network; encourage development of SMEs and the narrowing of development gaps; and promote the increased usage of the AFTA CEPT Scheme Actions: - Continuously reform and enhance the CEPT ROO to respond to changes in regional production processes, including making necessary adjustments such as the introduction of advance rulings and improvements to the ROO; - Simplify the Operational Certification Procedures for the CEPT ROO and ensure its continuous enhancement, including the introduction of facilitative processes such as the electronic processing of certificates of origin, and harmonization or alignment of national procedures to the extent possible; - Review all the ROO implemented by ASEAN Member Countries, individually and collectively, and explore possible cumulation mechanisms, where possible.” With a view to encouraging deep integration among ASEAN members, newlyadopted changes aimed at simplifying procedures for ROOs A major reform is the replacement of the original regional value content rules with co-equal rules such as change in tariff classification or textile rule In general, until 2007, alternate rules have become applicable to more than 4400 tariff lines (out of 5224 PSR lines) ASEAN’s cumulation rule is further refined and an easing thus expansion of ROO through the new concept of “partial cumulation” is developed Components counted as part of ASEAN content have conventionally been required to have ASEAN 20 content of 40 percent or more This requirement was eased at the September 2004 AFTA Council Meeting, which also authorized the inclusion of the actual value of components with more than 20 percent of ASEAN content into the calculation of ASEAN content as partial cumulation The policy of certification is adopted through designated government agency, further actions to liberalize and simplify the screening and procedural aspects of acquiring certificates of rules of origin, which follows by revision below: - Standardizing the method of calculating local/ASEAN content, - Adding a set of principles for calculating cost of ASEAN origin and guidelines for costing methodologies, - Treatment of locally-procured materials, and improved verification process including on-site verification (ASEAN Annual Report, 2003-2004) In addition, AFTA imports are subject to random post-audit checks Policy reforms are being done to create “green lanes” to speed up the ROO administration Nonetheless, many firms would still prefer to go through the “red” lane to avoid possible harassment that could arise from the “random” post-audit checks (Manchin and Pelkmans-Balaoing, 2007) Comparison of ROOs in ASEAN and ASEAN + FTAs In addition to the ASEAN Free Trade Area, ASEAN as a whole is also engaged with various Dialogue Partners to implement or discuss free trade areas under the “ASEAN plus” framework Agreements have been signed with China (ACFTA), Korea (AKFTA) and Japan (AJCEP) All the three ASEAN plus FTAs (ACFTA, AKFTA and AJCEP) adopt the general 40 percent local/regional value added (RVA) rule, with full cumulation The alternative rule using CTC is also applied to certain products During the early stage of ACFTA, it is more similar to AFTA, using mostly the single RVC rule, with some exceptions AKFTA is the most liberal with regard to the number of lines with 21 alternative rules For the AJCEP, the general rule is CTC, with the more frequent adoption of RVA as an optional rule This reflects the trend towards more liberal ROO regime for Japan, whose ROOs in earlier FTAs (JSEPA, for example) tended to be relatively more restrictive The progression for AFTA and ASEAN plus one has been about higher flexibility, meaning lower restrictiveness Reforms in the AFTA ROO introduced more flexibility, covering a larger number of products with alternative CTC rule (Medalla & B, 2009) The following are some key observations: - The AFTA has a relatively simple and liberal ROO provision of AFTA, characterized by generality in application In addition, reforms paved the way towards more liberal rules by “expanding/easing standards.” - The existing FTAs in East Asia (limited to those which involve only the 13 East Asian countries) are more or less consistent with AFTA ROO, with the use of 40 percent RVA AKFTA appears to be the least restrictive - Automotive, textile and garments sectors m are the most sensitive sectors for most countries In addition, various rules are applied across countries and across specific commodity classifications - The use of CTC as an alternative rule has been increasing sharply, being defined for specific products - Even Japan, whose ROO was very restrictive, have become more liberal, using alternate rules for majority of cases in the recent AJCEP - ACFTA, on the other hand can be considered simpler, using only RVC (40) in the majority of cases However, the lack of alternative rule could be constraining Reforms are being made to accommodate greater flexibility with more alternate rules being developed - However, in general, there is a trend towards progressively more liberal ROO regime in East Asia 22 CONCLUSION From all of the information that are provided previously, it is certain that Rules of Origin play an important role in international trade all over the world Whether it is a product qualifies or receive preferential tariff treatment, they are largely influenced by Rules of Origin In many cases, ROO is easy to understand and countries can easily deal with ROO if a product is produced and assembled in one single country However, the cases will become difficult or even unsolvable if the finished product includes components that originate from more than one country, posing a problem of determining the actual origin of the product As can be easily seen, we have two kinds of ROO to be understood and dealt with, non-preferential and preferential ROO, respectively So what these Rules of Origin actually and how can they affect international trade? First of all, Rule of Origin apply trade measures to the right subject-matters They will also be used in trade statistics and are used to differentiate between goods originating in contracting parties and those originating in third countries Rules of Origin have a significant impact on international trade and they bring many unexpected benefits for trade around the world The first advantage of ROO is that they reduce the costs of doing business while trading and they act as trade policy instrument Moreover, ROO help to expand foreign direct investments (FDI) and export processing zones (EPZs) They also break trade remedy measures and prevent factories from transferring to the third party We must admit that without Rule of Origins, WTO, FTAs and local government may have to suffer from various problems of business products On the other hand, because of their complexity, Rules of Origin not always bring benefits, they come with other concerning drawbacks They act as protectionist apparatuses and create trade barriers for countries In addition, Rules of Origin trigger trade diversion, which negatively affect global efficiency and lead to losses in welfare 23 In this assignment, we apply Rules of Origin to a specific case which open up ASEAN’s Rules of Origin applications, in order to understand better and more clearly about their effect on international trade and ways to deal with their hindrances The Rules of Origin for the ASEAN Free Trade Area (AFTA) uses the value-added criteria applications to determine origin The original ROO of ASEAN has shown some drawbacks, which led to low FTA utilization rate of AFTA Therefore, ASEAN has made some improvements in the Rules of Origin, such as reforming and enhancing the CEPT ROO, simplifying the Operational Certification Procedures for the CEPT ROO, and other changes in ASEAN - plus one agreement To summarize, Rules of Origin are of great importance when it comes to international trade, they could act as international trade support, however, they could also become its hindrances Understanding both of their sides, ASEAN has learnt to apply ROO in an effective and flexible way, leading to a transparent, unbiased and proportional application of preferential ROO in preferential trade regimes, prevent using them as protectionist, trade-diverting, allow for a globalized system of production As a part of ASEAN, Vietnam knew that Rules of Origin need to be taken into consideration and has also learnt to make progress in using them, trying to keep these rules as a tool to boost the economic climate 24 REFERENCES Medalla, E M and Balboa, J (2009) ASEAN Rules of Origin: Lessons and Recommendations for Best Practice [online] Available at: http://www.eria.org/ERIADP-2009-17.pdf?fbclid=IwAR1mM0xlUHYVH0WQqRHQEpXlKfALuoeLEogv8Rvaeji0xN2ElbG7odlVr4 (Accessed: 16 November 2019) ‘Introduction to Rules of Origin’, Rules of Origin Facilitator [online] Available at: https://findrulesoforigin.org/Glossary/Glossary_ROO 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[online] Available at: https://medium.com/@edwardwong_61578/whatare-the-wto-rules-of-origin-in-ftas-and-why-do-they-matter-for-asean-281016e674e9 (Accessed at 16 November 2019) 23 Cadot, O and Ing, L (2016), How Restrictive Are ASEAN’s Rules of Origin?, Asian Economic Papers [online] Available at: http://www.eria.org/ERIA-PB-20174 pdf (Accessed at 16 November 2019) 24 Findlay, C and Urata, S (2010) Free trade agreements in the Asia Pacific [online] Available at: http://qnitrade.gov.vn/uploads/news/2012_12/free-tradeagreements-in-the-asia-pacific.pdf (Accessed at 16 November 2019) 27 ... ‘Importance of Rules of Origin? ?? Trade issues [online] Available at: https://tradeissues.wordpress.com/rules -of- origin/ importance -of- rules -of- origin/ (Accessed at 16 November 2019) ‘Rules of Origin? ?? Encyclopedia... 2019) ‘Introduction to Rules of Origin? ??, Rules of Origin Facilitator [online] Available at: https://findrulesoforigin.org/Glossary/Glossary_ROO (Accessed: 16 November 2019) ‘Rules of Origin? ??, Wikipedia... issuing authority in the exporting country for further clarification 11 THE SIGNIFICANCE OF RULES OF ORIGIN IN INTERNATIONAL TRADE Introduction The basic role of Rules of Origin is the determination