By: John Michael Pierobon
Tariffs are relative low compared to decades past, and yet exporters get excited when they read that their country has entered into a free trade agreement with another country, that to them, represents a new and very large market. The elimination of an import duty of just 5% can mean winning a big contract and opening a new market.
Exporters believe that a free trade agreement will eliminate tariffs and they will be able to compete on a level field. This is not always the case. Although the word "free" is in "free trade agreement", nothing in life is free. A free trade agreement might reduce or eliminate tariffs and import quotas, but import rules still exist.
Is a gadget really "Made in America" if all of its components are imported from Vietnam? Rules of origin is a requirement of a minimum of local material inputs and local transformations adding value to goods. Only goods that meet these minimum requirements are entitled to the special treatment envisioned by free trade agreements.
Rules of origin are used as instruments of commercial policy. They exist to impose anti-dumping duties, provide safeguard measures, and to prevent tariff evasion through re-exportation countries.
There is a Rules of Origin Agreement which requires World Trade Organization members to ensure their rules of origin are transparent; that they do not have restricting, distorting or disruptive effects on international trade; that they are administered in a consistent, uniform, impartial and reasonable manner; and that they are based on a positive standard. Their rules of origin should clearly state what does confer origin.
The exact rules vary from country to country and from agreement to agreement. Generally, if a product has been produced in more than one country the product shall be determined to have its country of origin to be where the last substantial transformation took place. It is the country into which a product is being imported into that determines the rules of origin.
To determine eligibility for a free trade agreement, importers must obtain product information from all suppliers. A manufacturer should have an automated procedure in place to obtain country of origin information from all suppliers. Once supplier documentation is received the importer must determine the eligibility of the product based on the many rules of origin surrounding the type of product.
In addition to improving quality, being ISO 9001 certified makes it easy to comply with rules of origin, and thus easier to export and qualify for lower tariffs.