To make use of the EVFTA tariff reductions goods must be “originating” from within either the European Union (EU) or Vietnam. While this will probably not pose a challenge for vertically integrated European industries, the story for Vietnam is quite different. This emerging country produces a relatively low added value. Its industry is focusing on assembling materials sourced abroad. These assembly jobs often do not contribute much to the value of a finished product. Thus, many goods produced here may not be considered “originating in Vietnam” in the context of the EVFTA. This challenge is widely known in Vietnam with the discussion focusing on its sprawling garment sector. In today’s blog entry we will give you a guide on how to find out if your products originate in Vietnam. In the second part of this article we will then discuss if regulations could indeed be a challenge for local suppliers.
PART I – HOW TO FIND RULES OF ORIGIN (ROO)
THE BASICS – FIND OUT YOUR “HS CODE”
You will need the HS codes of your products for the following explanations. If you do not know these we explained how to research HS codes in our blog entry on tariff elimination, which you may find here: https://www.deinternationalvietnam.com/post/when-will-my-tariffs-be-eliminated-guide-to-tariff-reductions-within-the-evfta
BEFORE YOU START…
All the information laid out beneath can be sourced in detail from the EVFTA text. In the following explanations we will refer repeatedly to this document. You can download the relevant protocol here: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:L:2020:186:FULL&from=EN#page=1321
Again, the preferential tariff rates coming with the EVFTA may only be used if a product is “originating in Vietnam”. There are basically two different ways to achieve this assessment:
The products are “wholly obtained” in Vietnam
The products are “incorporating materials which have not been wholly obtained there, provided that such materials have undergone sufficient (…) processing”
STEP 1 – FIND OUT IF YOUR PRODUCT IS “WHOLLY OBTAINED IN VIETNAM”
“Wholly obtained” refers mostly to goods from mining, agriculture, fishing as well as waste resulting from manufacturing processes within Vietnam. Therefore, if you are planning on trading products such as phosphorus from the northern Vietnamese mountains, rice and pangasius from the Mekong Delta or industrial scraps: You’re lucky because these items will be considered “wholly obtained in Vietnam” sparing you any further research.
Here are some more details on “wholly obtained” product groups referring to HS nomenclature (see above-mentioned blog entry for further info):
Section I – Live Animals; Animal Products: Largely wholly obtained
Section II – Vegetable Products: Largely wholly obtained
Section III – Animal or Vegetable Fats and Oils…: Largely wholly obtained
Section IV – Prepared Foodstuffs: Only chapter 16 (preparations of meat, of fish…) is largely wholly obtained. Because these are more complex products and tariff lines, the rest of this chapter includes many conditions regarding “sufficiently worked”.
Section XV – Base metals and articles of base metal: The raw materials should be considered wholly obtained if mined in Vietnam. However, processed metals include conditions.
Scrap items are mostly indicated as “manufacture from materials of any heading”, meaning that their input materials may be non-originating (meaning: imported)
Please note that some processed foods and beverages are also considered “wholly obtained” under certain circumstances.
If Step 1 does not apply:
STEP 2 – FIND OUT IF YOUR PRODUCT IS “SUFFICIENTLY WORKED”
Most tariff lines will not be considered as “wholly obtained” because they incorporate materials that have originated in other countries or have parts that have been imported from abroad. Just imagine a machine with hundreds of parts: In a globalized world some input materials or even the respective components of those input materials will have been traded over some border.
For these goods to be assessed as “originating in Vietnam” they have to be “sufficiently worked or processed”.
Within EVFTA protocol 1, Section A, Article 6 there are some processes that are never considered sufficiently worked or processed. These include but are not limited to:
Simple painting and polishing operations
Peeling, stoning and shelling of fruits, nuts and vegetables
Sifting, screening, sorting, classifying, grading, or matching
Affixing or printing marks, labels, logos and other like distinguishing signs on products or their packaging
Simple assembly of parts of articles to constitute a complete article or disassembly of products into parts
Generally, “simple operations” considered as insufficiently worked or processed shall include those requiring “neither special skills (…) nor machines, apparatus or tools especially (…) installed for those operations”. Therefore, basic final assembly processes will not benefit from the EVFTA.
For items to be considered sufficiently worked and processed an elaborate set of rules has been laid out based on HS nomenclature chapters (first two digits) and headers (first four digits) covering over 70 pages in the above-mentioned EVFTA protocol.
Often, these rules will require a certain degree of “originating materials” to be incorporated to use the EVFTA tariff reductions. These materials can of course simply originate in Vietnam. However, there is an additional rule called “cumulation” which allows materials from other countries to be considered as originating, too. This means the materials under the cumulation principle will be considered as “originating in Vietnam” for the purpose of the EVFTA. Following countries are part of the EVFTA cumulation principle:
European Union: All materials are considered “originating” from Vietnam’s FTA counterpart
Republic of Korea: Vietnamese businesses may import Korean textile fabrics to process their “originating” garments. Please note that all other materials from the RoK are currently considered non-originating
ASEAN: For some reason cuttlefish (HS 160554) and octopus (HS 160555) from south-east Asian nations may be cumulated but nothing else
Granted, cumulation apart from the EU is currently a rather limited affair. However, there seems to be an expectation that cumulation will be extended in the future with more countries engaging in FTAs with the EU and Vietnam.
Following, you will see a few examples for rules on originating products (please note tariff nomenclatures GSP = Generalized System of Preferences / MFN = Most Favored Nations):
Jams of tropical fruits
HS code: 2007 10 91 00
Current tariff rate: 5.2% GSP, 15.0% MFN
EVFTA tariff reduction category: A
Required working or processing: Manufacture from materials of any heading, except that of the product, in which the weight of sugar used does not exceed 20 % of the weight of the final product. This means that “all non-originating materials (…) may be used” if the sugar content is less than 20%. If it is higher, a certain portion of sugar should be originating in Vietnam (or EU) until the above-mentioned rule is met. (See explanations on pages 49 and 52)
Knitted cotton men’s polo shirts (e.g. pique fabrics)
HS code: 6105 10 00 00
Current tariff rate: 9.6% GSP, 12.0% MFN
EVFTA tariff reduction category: B5 (becoming tariff-free six years after the EVFTA comes into effect)
Required working or processing: Knitting and making-up (including cutting). This means that that this pre-process has to be done in Vietnam OR fabrics have to be imported from EU/RoK. These conditions will be a challenge for Vietnamese manufacturers as most fabrics are currently imported from China.
Sports shoes
HS code: 6402 19 00 00
Current tariff rate: 11.9% GSP, 16.9% MFN
EVFTA tariff reduction category: A (becoming tariff-free right after the EVFTA comes into effect)
Required working or processing: Manufacture from materials of any heading, except from assemblies of uppers affixed to inner soles or to other sole components of heading 6406. This means that “all non-originating materials (…) may be used” (See explanations on page 49) except for other sole components which must originate in Vietnam.
Threaded iron coach screws
HS code: 7318 11 00 00
Current tariff rate: 0.0% GSP, 3.7% MFN
EVFTA tariff reduction category: A
Required working or processing: Manufacture from materials of any heading, except that of the product. This means that “all non-originating materials (…) may be used”. (See explanations on page 49)
Electrical motors
HS code: 8501 20 00 90
Current tariff rate: 0.0% GSP, 2.7% MFN
EVFTA tariff reduction category: A (becoming tariff-free right after the EVFTA comes into effect)
Required working or processing: Manufacture from materials of any heading, except that of the product and of heading 8503; or manufacture in which the value of all the materials used does not exceed 50 % of the ex-works price of the product. This means that “all non-originating materials (…) may be used”. (See explanations on page 49) except for certain parts for electronic motors as displayed in heading 8503 or with “originating materials” exceeding 50% of the product price. (See explanations page 50)
The above-mentioned EVFTA document actually does a great job explaining the ROOs. Even I as a “tariff noob” have the feeling that I understand them. However, when sourcing from Vietnam you should clarify the originating status of your products with your supplier. She knows where her input materials originate from and should have contacts to relevant authorities to get a definitive reply if her products receive an originating status.
In the second part of this blog entry we will elaborate more on the chances of Vietnamese suppliers fulfilling the ROOs of the EVFTA.