Sunday, June 1, 2014

Cleaning Up ASEAN FTA Certificate of Origin Redundancies

ASEAN and Japan announced that they had revised the certificate of origin form used for trading goods under the ASEAN-Japan Comprehensive Economic Partnership (AJCEP), the free trade agreement (FTA) between ASEAN and Japan. Although this sounds like a minor technical correction, in reality it marks a major change in how the ASEAN FTAs work, hopefully one that will carry through to other ASEAN FTAs and the ASEAN Trade in Goods Agreement (ATIGA) itself.

Currently, all goods traded in the ASEAN FTAs must be accompanied by a form (“Form D” in the case of ATIGA) to confirm that the goods qualify for FTA treatment.  This is done by establishing that they meet one of the rules of origin, in most cases either (1) the goods have sufficient regional value content  (RVC) (usually a minimum value of 35%) or (2) the goods have undergone sufficient physical processing to change their tariff classification (CTC). 

As I discussed in an earlier post, ASEAN had originally based its rules of origin almost entirely on the RVC approach in its first FTAs.  This contributed to the underutilization of FTAs, as small and medium sized ASEAN companies had difficulties with the accounting and recordkeeping requirements necessary to demonstrate that the RVC percentage had been met.  Hence ASEAN added the alternative CTC approach, which does not require such information but focuses more on the change of the physical nature of the product.

The problem was that although ASEAN had added this alternative approach, the ASEAN customs authorities continued to request accounting and other value-based information on RVC, such as the FOB value of the goods.  If the customs form did not contain the FOB value, ASEAN customs authorities would deny FTA treatment for the goods. This happened, despite the fact that if the CTC approach is being invoked, the FOB value of goods is completely irrelevant.  

The AJCEP parties’ decision is thus a good development, as it recognizes that value information is not needed in the form when the CTC approach has been invoked.  Now the question is whether the other ASEAN+1 FTAs with Australia-New Zealand, China, India and Korea will follow suit, and indeed whether the ATIGA itself will do so as well.

Most important is the question of why such forms are necessary in the first place.  If ASEAN and its trading partners move to self-certification by exporters and a post-entry audit system, as is practiced in the developed world, then minor documentary defects acting as a block to FTA qualification will become a thing of the past.