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
