Legal aspects of application of rules of origin of goods in regional comprehensive economic partnership

This article aims to provide the distinguished reader with the results of the research of the rules of origin of goods under the RCEP agreement and their practical application on the examples of the author. Based on the existing legal regulations, the author makes assumptions about the impact of the RCEP agreement on its parties and Ukraine in a very narrow scope - obtaining preferential tariffs. No research has been conducted on this topic either by Ukrainian or European experts, which makes this article up-to-date and increases the demand for such information which has not yet been disclosed by specialists in international law.

Main body

RCEP members agreed to apply product-specific rules for every tariff-line. There is no General Rule under RCEP. All 5,205 products (at 6 digit level of HS) have their own Products-Specific Rules (PSR). PSRs will reflect the real production process of each product. ASEAN and most ASEAN+1 FTAs apply General Rules for a majority of products, and PSRs for a limited number of products. Worth highlighting that for ASEAN-India FTA, a General rule (Regional Value Content 35% + Change in Tariff Sub-Heading) is applied to all products.

Pending your question about the calculation of Regional Value Content [6, p. 4-10, 61] under the RCEP Agreement, the author immediately clarifies this rule hereunder. Article 3.5 of the RCEP Agreement provides the following formula for calculating the RVC.

RVC = (FOB -VNM)/ FOB х 100

Let's suppose Thailand has a finished product - turbine for marine propulsion (HS 8406.10) that costs USD 40,000 (FOB). China provided a company based in Thailand with components worth USD 15,000 (VNM). According to Annex 3A of the RCEP Agreement, the Product-specific rule of HS 8406.10 is CTSH or RVC40. This means that the turbine for marine propulsion should either be constructed from non-originating materials that had changed their tariff classification at 6-digit HS in the process of creating the product OR the commodity should have at least 40 percent of regional value content. In the present case, the CTSH option may not be successfully applied as «Wire» from China used as a part has HS code 8102.96. Thus, there was no change in tariff classification at the 6-digit HS level. But what if we try the RVC40 rule?

RVC in turbine for marine propulsion = (40,000 -15,000)/ 40,000 х 100

RVC in turbine for marine propulsion = 62,5%

62,5% > 40,00%

As you have seen, the condition for obtaining preferential treatment is met under the RVC40 rule. If regional value content was 35%, the product would not qualify both under RVC40 and CTSH.

After a thorough analysis of Annex 3A, the author concluded that the most common option is the use of the Change of Tariff Heading rule. CTH was used as a product-specific rule for 988 goods, less popular was CTSH used with 615 products. CC (transformation at 2-digit level) rule is used with almost 500 goods, mostly in Chapters 2-24 and Chapters 56-63. Practically, transformation at CC from raw material to a finished product is as follows: coconut is a raw material (HS 0801.11), the finished product is coconut crude oil (HS 1513.11). Since there is a change in the tariff chapter, the product may qualify as originating good of a member state of RCEP.

RCEP integrates Rule of Origin of ASEAN Trade in Goods Agreement (ATIGA) and ASEAN+1 to help 15 MS to use a single set of rules of origin. RCEP's product-specific rules use single rules and co-equal rules which make PSRs under RCEP less restrictive than other ASEAN+1 FTAs. This could increase the utilization rate of the RCEP agreement. Combination rules are deemed to be unnecessary and too difficult for businesses to follow. The author finds that RCEP PSRs are more consistent with the production process of each product. Under the existing legal framework, ASEAN and ASEAN+1 FTAs use different rules to determine the origin of the same product. For example, in 6 FTAs 4 different origin rules are used in respect of canned tuna (HS1604.14). ATIGA, AANZFTA and ACFTA use RVC40 or CC rule. In AJCEP there is a requirement to the change chapter rule, except for chapter 3. In AIFTA parties agreed to use RVC45+CTSH, but for RCEP we have simple CC. In respect of sugar (HS1701.99) it is even more complicated. Six FTAs use 5 different rules. Since the RCEP agreement came into force all 15 MS have the right to use unified rule - RVC40 or CC [7].

The author kindly draws your attention that RCEP members are free to choose the forum in the determination of rules of origin, A member state may check the commitments under ATIGA or e.g. ACFTA, and see what fits the exporter the most and under which FTA it should trade goods.

RCEP allows «originating material» to be cumulated among 15 Member States. Hence, the scope of cumulation will be broader than in ATIGA and ASEAN+1 FTAs (which have 10-12 Members). Cumulation rules are not an innovation; they have been tested in the ASEAN and ASEAN+1 FTAs. At the same time, the previous agreements have never involved 15 countries, including powerful economies like China and Japan. Hence, businesses have a greater chance to meet origin criteria and utilize tariff preferences under RCEP. It also helps to promote the regional supply chain within RCEP Members.

Section B of Chapter 3 RCEP Agreement covers operational certification procedures. In conformity with Article 3.16 RCEP members are to consider proof of origin either of the following:

1. Certificate of Origin;

2. Self-Certification by Approved Exporters;

3. Self-Declaration by any Exporter.

Therefore, RCEP is an upgrade from ASEAN+1 FTAs, where only Certificate of Origin can be used. The Rule of Origin which unites 15 countries is a complementary advantage for RCEP to unify the region's production chain. Investors in RCEP member countries can import high-value inputs from technology-developing member countries more conveniently than under ASEAN+1 FTAs.

RCEP is a fully integrated manufacturing FTA that combines upstream, midstream, and downstream production countries. Conditions laid down in RCEP for the first time were persuasive enough for Asian manufacturing technology owners from China, Japan, and Korea to support the same FTA, thus making it ready for production in Asia.

According to the various free trade agreements of «ASEAN+1», there are at least 22 rules of origin, and the level of complexity has caused great concern for traders and competent authorities in various countries. This is the so-called Spaghetti bowl phenomenon, which increases operating costs.

RCEP has introduced new rules of origin, and member countries will only need a certificate of origin to transport products to each other, without having to worry about specific origin standards in particular countries or each manufacturing step. This move will drastically reduce costs for transnational corporations and could encourage small and medium-sized enterprises to try to expand within the region, allowing more competitive players to profit more.

Through the RCEP commitments, some countries that weren't engaged in FTAs have increased the possibility of expanding there trade exchanges. Based on the subjective opinion of the author, the agreement gave Japan the greatest advantage, as it is equivalent to reaching an agreement with three trading partners, namely China, South Korea, and ASEAN at one time, which is extremely helpful to the post-pandemic economy.

On the other hand, there is a room for a reasonable concern for ASEAN MS whose main export lines were aimed at ASEAN market, because, before the establishment of RCEP, only ASEAN members could preferentially access the markets of South Korea, Japan, and China under the existing ASEAN+1 FTAs and consequently enjoy the three countries' trade benefits [8]. South Korea, Japan, and China could enjoy advantages of the WTO MFN treatment, but the MFNs are as a rule higher than tariffs under preferential trade agreements, inter alia ASEAN. When all these countries join RCEP, the treaty will proximately reduce tariffs. This fact will undoubtedly increase the value of export/import among them, and simultaneously create challenges to Thailand, Malaysia, Singapore, and other countries. The author believes that ASEAN exporters and manufacturers should cooperate with China, Japan, and South Korea to maintain their market share.

Presumably, the countries that can get immediate benefits from RCEP, apart from Japan and South Korea should belong to the developing countries of ASEAN. According to estimates, by 2030, China will receive $100 billion in revenue, followed by Japan with $46 billion, South Korea with $23 billion, and Southeast Asian countries with $19 billion [9]. In the case of the Philippines, RCEP will open up the market for 92% of the country's products, including the most important service sector - offshoring. However, legal aspect of trade in services will be covered by the author in a separate research-based article.

In lieu to Comprehensive and Progressive Agreement for Trans-Pacific Partnership, RCEP does not have special chapters regulating state-owned enterprises. Separate arrangements have been made for the special cases of China, Vietnam, Cambodia, and other countries. These countries all have powerful state-owned enterprises. Some chapters of RCEP do not fully address future controversies, such as dispute settlement. Additionally, RCEP does not prohibit data localization or avoid blocking cross-border data flows, to prevent certain states from restricting the flow of information. Small economies require data localization laws, which may create obstacles for RCEP members to expand cross-border e-commerce in the future.

Special attention of the author was drawn to the study of the impact of the RCEP agreement on trade between Ukraine and RCEP member states. In conformity with Article 17.2 of the RCEP agreement, there is no direct effect or certain obligations imposed on non-members of the treaty. Ukrainian businesses and suppliers incorporated in RCEP MS may benefit from improved supply chains, but at the same time, it may affect their competitiveness. RCEP MS have foreseen the possible threats and developed both competition law enforcement mechanism (Article 13.4 RCEP) and measures to prevent unfair competition (Article 13.3 RCEP). Although RCEP is an economic partnership that has a narrower application compared to e.g. TFEU or NAFTA, Ukraine should cooperate with RCEP MS in both economic and political initiatives. The author supports the establishment of the ASEAN Center at the Institute of International Relations KNU in Ukraine in 2021 and encourages research on the indirect impact of bilateral and multilateral agreements concluded among Asian countries and Ukraine.

Ukrainian entrepreneurs and exporters with whom the researcher maintains contacts for scientific purposes said that in addition to tariff restrictions, a common problem is the lack of clear information and instructions on the import of products, obtaining licenses, and customs clearance. To address the problem of insufficient information, the members of the RCEP undertook under Article 17.4 RCEP to promptly provide guidelines, laws, and comments on the application of regulations on trade in goods in their respective countries. Ukrainian businesses will benefit from this undertaking as well. Additionally, the general development of E-Commerce and customs clearance in the small economies of RCEP will benefit the potential export of Ukrainian goods to these states in terms of upgraded procedures. Since the Regional Comprehensive Economic Partnership came into force recently the primary tasks of Ukrainian exporters in short-term perspective are as follows: 1) study the market as well as beneficial supply chains; 2) explore potential investors and partners, and 3) verify credibility level of foreign partners through diplomatic missions of Ukraine.

To assess the effect of RCEP agreement on the export of agricultural goods from Ukraine to Asian states, the author compared tariffs and schedules of commitments under WTO framework and RCEP. The author found that the Kingdom of Thailand established the final bound AVG duty under the WTO rules for HS10 Cereals - 33%, due to the Schedule of commitments of Thailand under RCEP the import duty is 27%. Surprisingly, you will not find a universal Schedule of commitments under RCEP of some MS, including China. In case of China there are 5 different schedules of commitments for use of ASEAN and non-ASEAN RCEP MS. Nevertheless, the average MFN import tariff under the WTO rules for HS10 Cereals is 19,5%. Due to the China-ASEAN commitments under RCEP, the tariffs for agricultural products vary from 2% for Buckwheat (HS 1008.10.00) to 65% for groats of wheat (HS1103.11.00) [10]. The situations in the case of oilseeds, fats & oils is pretty similar, the MFN duty is 10,9%, the RCEP commitments vary from 9% to 30%. Indonesia, where, in 2019, Ukrainian wheat surpassed foreign countries in terms of imports and amounted to 603 million US dollars, remains in demand. The government of Indonesia established a 4,4% import tariff on most HS15 lines. Therefore, there are no prerequisites for a sharp decline of demand on Ukrainian wheat (HS10), oil (HS15), ores, slag, and ash (HS26), etc. Despite the objective to liberalize trade among RCEP, parties in a lawful way protect their domestic markets from foreign effects and possible dumping.

The author highlights that trade liberalization entails considerable reforms, beyond simply removing tariffs and non-tariff barriers. RCEP MS entered a perspective project that has to address in the upcoming future environmental protection, labor rights, financial services, and other technical aspects of collaboration.