CME Powerpoint Web Version Oct 2015
- 1. Rules of Origin in Canada’s New Trade Agreements Presentation to the Canadian Manufacturers and Exporters Association Mark N. Sills Brian Staples October 21, 2015
- 2. • What are rules of origin (“ROO’s”)? • Rules of origin are those rules used to determine the country of origin of a product for purposes of international trade • Our focus today will be on preferential rules of origin PART I: DEFINITION OF ROO
- 3. • Even in the area of non-preferential trade, rules of origin are often controversial • Used in the fields of antidumping and countervailing duties, marking and labelling requirements for foreign products and in export controls WHERE ELSE ARE ROO’S USED?
- 4. • The NAFTA introduced a full-fledged tariff shift-based regime for determining origin of goods and their consequent eligibility for NAFTA tariff preferences • These rules sometimes contained supplementary rules to the tariff shift rules with regional value content (“RVC”) requirements IMPORTANCE OF ROO’S IS RELATIVELY RECENT: NAFTA
- 5. • A tariff shift-based regime is on its face more precise and administratively • But there are limitations and the HS itself is the product of intergovernmental government negotiations involving special interests ADVANTAGES AND DISADVANTAGES
- 6. • The rules of origin in all of the above agreements reflect a series of compromises by the countries to the negotiation • Rules of origin permit countries to adjust levels of access for certain sensitive sectors in their domestic economies and are preferable to product exclusions NAFTA, FTA’S, CETA AND TPP
- 7. 1. Goods wholly obtained or produced in the NAFTA region 2. Goods produced in the NAFTA region wholly from originating materials 3. Goods meeting the Annex 401 origin rule (product- specific rules which are mostly “tariff shift”) 4. Unassembled goods and goods classified with their parts which do not meet the Annex 401 rule of origin but contain 60% regional value content using the transaction method (50% using the net cost method) PART II: NAFTA CHAPTER 4 DEFINES “ORIGINATING GOODS” IN 4 WAYS
- 8. • Certain of Annex 401’s rules of origin contain minimum regional value content requirements in addition to tariff shifts • Article 402 gives two formulas for calculating the regional value content: the transaction value method, or the net cost method. MINIMUM RVC REQUIREMENTS
- 9. • The formula for calculating the regional value content using the transaction value method is: RVC = TV - VNM x 100 • TV where • RVC is the regional value content, expressed as a percentage; • TV is the transaction value of the good adjusted to a free-on-board (F.O.B.) basis; and • VNM is the value of non-originating materials used by the producer in the production of the good. TRANSACTION VALUE CALCULATION
- 10. • The formula for calculating the regional value content using the net cost method is: • RVC = NC - VNM x 100 NC where • RVC is the regional value content, expressed as a percentage; • NC is the net cost of the good; and • VNM is the value of non-originating materials used by the producer in the production of the good. NET COST CALCULATIONS
- 11. • The net cost method calculates the regional value content as a percentage of the net cost to produce the good • The percentage content required for the net cost method (50%) is lower than the percentage content required for the transaction value method (60%) NET COST VS. TRANSACTION VALUE
- 12. • The absorption or roll-up principle is a general regime-wide rule which allows the use of the entire originating status of an intermediate product when used for subsequent manufacturing operations of originating goods • Intermediate materials of this nature can either be purchased from arms-length suppliers or self-produced ABSORPTION OR “ROLL-UP”
- 13. • For the purpose of calculating the regional value content of final goods (using either the transaction value method or the net cost method), NAFTA Article 402(10) allows a producer to designate as an intermediate material any self-produced, originating material used in the production of the final goods. This provision covers all goods and materials except: – automotive goods defined in article 403(1) and described in Annex 403.1; and – components described in Annex 403.2, specifically engines and gearboxes INTERMEDIATE MATERIALS/SELF- PRODUCED GOODS
- 14. • Tracing tracks the value of major automotive components and subassemblies imported into the NAFTA region. • This significantly limits the phenomenon known as roll-up and roll-down • See Annexes 403.1 and 403.2 TRACING
- 15. • Producers of automotive goods in the US, Canada or Mexico also may elect to “average” their costs when calculating the regional value content requirement AVERAGING
- 16. • To qualify for preferential treatment, textile and apparel goods must normally pass a “yarn forward” or triple transformation test • This rule is significantly stricter than the US- Canada FTA rule which calls for a double transformation • TPL's are available in specified cases and there are limited “short supply” provisions TEXTILES AND APPAREL
- 17. • Post-NAFTA FTA agreements concluded by the US with various Latin American countries introduce new ways to calculate the value content for rules of origin • Two major changes have been introduced: 1-the net cost method is now focussed largely on the automotive industry; 2- the Build up Method has been introduced. • The NAFTA “transaction value” methodology has been renamed the “Build-down” Method. PART III: DEVELOPMENTS IN ROO’S SINCE NAFTA: “BUILD-UP” AND “BUILD DOWN”
- 18. • RVC = ((VOM/AV) x 100) where • RVC is the regional value content expressed as a percentage of the adjusted value of the good • AV is the adjusted value of the good • VOM is the value of originating materials acquired or self produced and used by the producer in the production of the good “BUILD-UP”
- 19. • This method introduces into the formula the concept of value of originating materials separately; this means that the value content is calculated exclusively on the basis of the originating inputs BUILD-UP (CONT’D)
- 20. • Similar in many respects to the “build-up” approach favoured by the US • Focussed value method will benefit Canadian producers by minimizing the number of non-originating materials that must be tracked for origin purposes thereby reducing administrative burdens • See example on following page “FOCUSSED VALUE” TEST APPLIED BY CANADA
- 21. • 8415.10 - A change from any other heading; or • A change from subheading 8415.90, whether or not there is also a change from any other heading, provided that the value of non-originating materials of subheading 8415.90 does not exceed 65 per cent of the transaction value of the good. (Canada – Colombia FTA) FOCUSSED VALUE EXAMPLE
- 22. • Standardized value tests for kits when tariff shift is impossible (i.e. unassembled bikes) • Remanufacturing: recognizing this emerging trend by recognizing “dis-assembly” as production • Increased use of tariff rate quotas (TRQs) and “short- supply” mechanisms (implementation pending!!) NEW DEVELOPMENTS IN ROO’S IN CANADIAN FTA’S SINCE NAFTA
- 23. • A big issue is the interface between free trade agreements that have been concluded between each of the parties and a third country or economic grouping • Article 304 provides for cross cumulation. However this article requires a further administrative agreement CROSS CUMULATION
- 24. • The Comprehensive Economic and Trade Agreement between Canada and the European Union (“CETA”)was signed in 2013 • The text was finalized in October 2014. It is awaiting ratification by all of the EU’s 27 Member States PART IV: CETA
- 25. • Canadian exporters would have had difficulties meeting stringent European rules on origin for cars, textiles, fish and certain agricultural/processed agricultural products • A compromise in the form of rules of origin derogations for a limited quantity of exports (exceptions for which a more relaxed rule applies) was reached with the EU • Derogations (origin quotas) for products with a higher proportion of imported inputs◦ 1. automobiles 2. ◦fish/seafood 3. ◦textiles and apparel 4. ◦high-sugar-containing products 5. ◦chocolate and confectionery 6. ◦processed foods CETA PROVISIONS ON ROO’S
- 26. • The CETA allows for ROO cumulation in some specific product sectors such as autos • However cumulation is only granted on a product-by- product and chapter/heading/subheading) basis; and within the CETA only CETA CUMULATION
- 27. • As an example: Tariff heading 87.03 (Motor vehicles) • Main rule: originating goods must account for at least 50% of the ex- works or transaction value of the product • Derogation however is granted for100,000 units, provided non- originating materials do not exceed 70% of the ex-works or the transaction value of the goods or 80% of the net cost • Rule 1 to be modified in 7 years: non-originating materials do not exceed 45 % of the ex-works or transaction value of the product • If TTIP takes place with cross-cumulation, the auto TRQ is phased out and the rule changes too so that the maximum foreign content is 40% (Mexico is not included!) CETA (CONT’D)
- 28. • The Trans-Pacific Partnership (“TPP”) was signed on October 5, 2015 • The TPP will include Australia, Brunei, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States, and Vietnam PART V: TPP
- 29. • Uniform set of rules of origin that define whether a particular good is “originating” • Product-specific rules of origin are attached to the text of the Agreement. Qualifying content: either a “build-down” method consistent with current Canadian free-trade agreements or “build up”/”focussed value” method • The TPP provides for “accumulation” • Common TPP-wide systems of certification and verification TPP PROVISIONS ON ROO’S
- 30. • Auto sector ROO’s require 45 percent regional value content for finished vehicles along with a regional value content threshold between 35 and 45 percent for auto parts calculated under a net cost approach • 45 percent content requirement in respect of “key Canadian- produced vehicle parts” (including engines and transmissions) and 40 percent for “other key Canadian produced vehicle auto parts.” • small share of parts will only require a lower regional content of 35 percent to qualify for tariff benefits • Also a “flexibility mechanism” • Reportedly, “tracing” of parts will not be required under the TPP AUTOS
- 31. • Not just the rules but rules administration • NAFTA model – US has moved to importer certification (easier to litigate – harder for everyone else) • Enforcement trends: US enhanced enforcement for textiles and apparel ( Korea, Panama, TPP…) • Letting country of export undertake the risks – with consequences CERTIFICATION AND VERIFICATION
- 32. • ROO’s have assumed greater importance in recent years and are no longer limited to customs compliance issues • ROO’s raise important compliance issues • As well, corporate strategy departments will be increasingly required to work with sourcing and compliance units • Sourcing of specific components may no longer be solely a matter of technical fit and price PART VI: TRENDS FOR THE FUTURE FOR ROO’S
- 33. • Since the NAFTA, the trend in ROO’s in preferential trade agreements has been to simplify • NAFTA represented the high-water mark of special- interest-driven accommodation in ROO’s • CETA considerably less complicated in ROO area and more flexible in terms of its quotas • Remains to be seen what the TPP will bring TRENDS: CETA VS. TPP
- 34. • The CETA represents a deal that is agreed and simply awaits ratification by EU member States • TPP on the other hand has many more hurdles to face, including ratification by the US and Japan which is by no means certain TRENDS