By
Reid Whitten on November 12, 2015
Posted
in Free Trade Agreements (FTA)
The
Open Road: Approaching the TAPPan
Summarizing
the behemoth 12-nation TPP agreement in a few-hundred word blog is a task
beyond the reach of a practicing attorney. . . assuming he wants to continue
practicing. In this article we will examine automobiles, an area of
particular interest to two big economies in the TPP, the United States and
Japan.
The
Washington Post provides this nice overview to get you up to speed, and
numerous news outlets are publishing summaries outlining the terms of the deal.
The problem with summaries is that they tend to act as superhighways, speeding
you to your destination, but rolling right past the exits where minor
attractions, the trade-agreement equivalent of the world's largest ball of
yarn, might catch your interest.
For
that reason, and to fully run down this extended road trip metaphor, we will
take you along a few of the narrow winding TPP lanes, pausing for a gander at
the chapter on originating materials, stopping for souvenirs at a few of the
annexes and even the appendices to annexes, where you just might find a little
nugget of information that, to you and your business, could be a treasure.
Get
Out the Map, Plan Your Route
Now
recall that this journey is hypothetical - yes, because we're making up the
question we are going to answer for illustration purposes - but also because
the individual TPP member countries still have yet to ratify the agreement.
Until that time, all statements about TPP in action is simply conjecture.
Nevertheless, in order to be ready when the trip begins, we boldly make our plans
and hope that the conditions hold.
The
Rules of Origin in TPP Chapter 3 are a good place for us to begin our journey.
To trace a path through how the TPP will apply to the country of origin
calculations of certain goods, we will take a hypothetical but realistic set of
facts, as follows:
You
are a manufacturer producing passenger vehicles in the United States, using
certain non-US materials sourced from countries outside the TPP agreement.
You
source steel from China and, at your US facility, you bend, form, cut, and
stamp the steel into a passenger vehicle auto body.
So
just how are we going to calculate the origin of your vehicle and the materials
therein?
Hop
in and buckle up, let's start this ride.
Oh
Look Honey, an Originating Good!
Article
3.2 of the TPP states that an originating good is one entirely obtained or
grown in a TPP country or produced in the territory of one or more TPP parties
exclusively from originating materials. In addition, an originating good can be
a good produced entirely in the territory of one or more TPP countries using
non-originating materials, provided the good satisfies the applicable
requirements of Annex 3-D (Product-Specific Rules of Origin).
That's
it! We're off to Annex 3-D to find out whether our US-made passenger vehicle
using some non-originating materials will be considered an originating good.
Hit the gas!
Annex
3-D lists specific HTS Codes and the applicable rules determining their origin.
The following note in Annex 3-D addresses how a passenger vehicle, classified
under HTSUS8703, made from non-originating parts, may qualify as originating:
No
change in tariff classification required for a good of heading 87.02 through
87.05, provided there is a regional value content of not less than:
(a)
45 per cent under the net cost method; or
(b)
55 per cent under the build-down method.
With
respect to which method we would use for the RVC calculation, Article 3.9 Net
Cost, states the following requirement:
If
Annex 3-D (Product-Specific Rules of Origin) specifies a regional value content
requirement to determine whether an automotive good of subheading 8407.31
through 8407.34, 8408.20, heading 84.09, heading 87.01 through 87.08 or heading
87.11 is originating, each Party shall provide that the requirement to
determine origin of that good based on the Net Cost Method is calculated as set
out under Article 3.5 (Regional Value Content). [emphasis added]
Pause.
Let's breathe a moment.
Ok,
so in order to qualify as originating, we need 45% originating material under
the net cost method and, according to Article 3.9, we will use the net cost
method because our passenger vehicle is categorized under HTSUS heading 8703,
which is between 8701 and 8708. Do not you roll your eyes, kids, or I will turn
this car around!
Where
were we? Right, the net cost method of regional value content calculation.
Article 3.5 tells us that for "automotive goods only," we calculate
the RVC as follows:
RVC
= NC - VNM x 100
NC
RVC
is the regional value content of a good, expressed as a percentage;
VNM
is the value of non-originating materials, including materials of undetermined
origin, used in the production of the good;
NC
is the net cost of the good determined in accordance with Article 3.9 (Net
Cost);
See,
not so bad? Pretty interesting, in fact. It says right here in our guidebook
that if the RVC of the US-made passenger vehicle is 45% or greater, as
calculated above, the automobile will be considered an originating good.
Are
we there yet: Originating materials
In
order to determine whether a vehicle auto body made in the United States from
steel sourced from China may be counted as originating material in calculating
the Regional Value Content of the automobile made with that body, we begin with
Article 3.6 of the TPP, Materials Used in Production. Article 3.6 states the
following:
Each
Party shall provide that if a non-originating material undergoes further
production such that it satisfies the requirements of this Chapter, the
material is treated as originating when determining the originating status of
the subsequently produced good, regardless of whether that material was
produced by the producer of the good.
The
description above still leaves us to determine whether the steel undergoes
"further production such that it satisfies the requirements" of
Chapter 3. For that information, we make a slight u-turn to revisit those
"Product-Specific Rules of Origin" contained in Annex 3-D. Then we
pass onto the dirt roads of the further specific rules for automobiles and
parts are contained in Appendix 1 to Annex 3-D. . . no, no I do NOT think we
are lost and I will NOT ask for directions. . .
Right:
Appendix 1 to Annex 3-D specifically addresses the qualification as originating
materials used for a body for an 8703 vehicle.
For
the purpose of satisfying the regional value content requirement of the
product-specific rule of origin applicable to a good of subheading 8701.10
through 8701.30 or heading 87.02 through 87.05, a material listed in Table A
used in the production of that good is originating if :
the
production undertaken on that material in the territory of one or more of the
Parties involves one or more of the operations listed in Table B
Here we see the material for
auto body, 8707.10, for our passenger vehicle is listed in Table A. Therefore,
according to the Appendix section quoted above, material for the production of
the auto body will be considered originating if, under sub-paragraph b above,
the production process used on the material involves one or more operations in
Table B.
How clear is that ?! The TPP
spells out the exact activities that will cause a non-originating material to
be considered originating through a manufacturing process. Table B appears as
follows:
Table
B Note 1: "Complex" means an operation that requires specialized
skills and the use of machines, apparatus or tools that are especially produced
or installed to carry out that operation, regardless of whether such machines,
apparatus or tools were produced with the intention of carrying out that
operation on a specific good.
Table
B Note 2: The operations referred to in Table B do not include the mere
assembly of non-originating components classified as a good in accordance with
Rule 2 (a) of the General Rules for the Interpretation of the Harmonized
System.
Because
the steel sourced in China will undergo forming, stamping, and machining in the
United States as part of the auto body manufacturing process, the US-made
vehicle auto body should count as originating material in the RVC calculation
of the automobile under TPP, even though the material to make the auto body is
sourced from a non-TPP country.
Another
bend in the road
The
exhausting travelogue above illustrates the principles of the rules of origin,
but may not get us to our final destination. Included among the voluminous TPP
agreement material are letters between countries, side agreements, and other
bilateral activity that must be examined closely before a final determination
of TPP's application can be made. Before embarking on your own freewheeling TPP
journey, we recommend you check with your own compliance counsel to be certain
you're clear on the directions.
Happy
motoring!
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