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HOME > Publications > Professional Articles > What are the Highlights of RCEP Cumulative Rules of Origin

What are the Highlights of RCEP Cumulative Rules of Origin

Author: Sean Jia & Jing Ning 2021-01-081429

The signing of Regional Comprehensive Economic Partnership Agreement (hereinafter referred to as “RCEP”) is indeed inspiring and significant under the current political and economic situation. But if we discuss the rules of origin in RCEP from the legal point of view, the cumulative rules of origin are just an optimization and improvement under the original framework of the internationally accepted rules of origin. Through studying the cumulative rules, we can see the highlights of RCEP cumulative rules of origin may be that they can generate more economic and strategic benefits. The difference between RCEP and other free trade agreements signed by China before is not the subversion of the system, but the individual difference between different free trade agreements. This paper will introduce the current general cumulative rules of origin in China (Article 6 of Administrative Provisions of the Customs of the People’s Republic of China on Preferential Origin of Imports and Exports), and elaborate the meaning, highlights and impact of cumulative rules in RCEP. What are the general cumulative rules of origin? What are the RCEP cumulative rules? What are the highlights of RCEP cumulative rules and the impact on our foreign trade enterprises? All of these questions will be answered in the following text.


For better understanding and writing, this paper will refer to the general cumulative rules of origin in China as “general cumulative rules” to distinguish them from “RCEP cumulative rules”.


I. What are the general cumulative rules?


According to the Article 6 of Administrative Provisions of the Customs of the People’s Republic of China on Preferential Origin of Imports and Exports, where goods or materials originated from a member country or region under a preferential trade agreement are used for manufacturing of another type of goods in another member country or region under the same preferential trade agreement and become an integral part of the other type of goods, the goods or materials shall be deemed as originated from the other member country or region.


Lawyers views


1. Introduction of General Cumulative Rules in China


According to the current international trade and customs laws and regulations, the origin of goods is an important basis for whether the goods can enjoy the tax preferences in bilateral or multilateral free trade agreements, and whether it needs to undertake some trade sanctions. At present, China's rules of origin can be divided into rules of preferential origin and rules of non-preferential origin. Rules of preferential origin are formulated for the implementation of national preferential policies, and the specific standards need to be determined according to the corresponding free trade agreements. The rules of origin in RCEP, which has been a hot topic recently, belong to rules of preferential origin.


Whether they are rules of preferential or non preferential origin, the main international standards for determining the origin of goods are standards of entirely obtained and not entirely obtained. In addition, there are some supplementary rules for determining the origin of goods, such as cumulative rules. The emergence of cumulative rules provides criteria for determining which raw materials or processing can be included in the value components of goods in the countries where goods are produced or processed when the production or processing of goods involves multiple countries. The application of cumulative rules undoubtedly has an important impact on the determination of the origin of goods.


2. Meaning of the Cumulative Rules


Generally speaking, the cumulative rules are that when the production process of goods involves different member countries or regions under the same preferential trade agreement. When determining the origin of the goods, several countries (regions) under the same preferential trade agreement can be treated as an economic region, and the value components generated during the production and processing of goods in the economic region can be regarded as the domestic value components. That is to say, when determining whether the goods are substantially changed, the cumulative rules can be used to judge whether the originating materials of other members in the region can be included in the original materials of goods in the country where the final production is located. Once it can be included, when the regional value components accumulate to the proportion specified in the relevant FTA, the country where the goods are finally produced or processed will obtain the origin qualification of the goods.


For example:


Country A, B and C are members under the same preferential trade agreement. Country B imports XI originating from Country A, processes and produces the goods to be as X2 in Country B, and then exports them to Country C. According to the cumulative rules of origin, the origin of the raw material XI can be regarded as Country B, and be accumulated into the value of raw material of X2.


3. Enterprises can use cumulative rules to transform productivity


When an enterprise is under the cumulative rules of a specific preferential trade agreement, it can actively apply the rules to transform them into productivity. For example, making full use of the resources of the same economic region for production makes it easier for the goods to obtain the origin qualification of the contracting countries, and finally enjoy more preferential tax rates and trade treatment.


II. What are the RCEP cumulative rules of origin?


RCEP Article 3.4: Cumulation


1. Unless otherwise provided in this Agreement, goods and materials which comply with the origin requirements provided in Article 3.2 (Originating Goods), and which are used in another Party as materials in the production of another good or material, shall be considered as originating in the Party where working or processing of the finished good or material has taken place.


2. The Parties shall commence a review of this Article on the date of entry into force of this Agreement for all signatory States. This review will consider the extension of the application of cumulation in paragraph 1 to all production undertaken and value added to a good within the Parties. The Parties shall conclude the review within five years of the date of its commencement, unless the Parties agree otherwise.


(The above-mentioned articles are extracted from Article 3.4: Cumulation, CHAPTER 3 RULES OF ORIGIN, RCEP)


It can be seen from the above-mentioned cumulative rules in RCEP:


1. The Article 3.4.1 of RCEP is essentially the general cumulative rules.


It seems that there is a big gap between the two versions in terms of expression and style. We can find that the general cumulative rules and RCEP cumulative rules are actually the same from the example as follows.


For example:


Goods and materials [XI] which comply with the origin requirements [Country A] provided in Article 3.2 (Originating Goods), and which are used in another Party [Country B] as materials in the production of another good or material [X2], shall be considered as originating in the Party [Country B] where working or processing of the finished good or material [X2] has taken place.


We can also adjust the above expression without affecting the expression of meaning as follows:


Material X1 originating Country A which complies with the RCEP origin requirements is used in another Party Country B as materials in the production of another good or material X2. In this case, material X1 shall be considered as originating in the Party Country B where working or processing of the finished good or material X2 has taken place.


The statement can also be converted into the following:


Country B imports XI originating from Country A, processes and produces the goods to be as X2 in Country B, so material X1 shall be considered as originating in the Party Country B where working or processing of the finished good or material X2 has taken place.

In this way, by comparing the examples of general cumulative rules in the first part, we can see that the two kinds of cumulative rules are the same thing.


2. The Article 3.4.2 of RCEP is the supplement to the general cumulative rule.


Although both of the rules are cumulative rules, the RCEP cumulative rules have their own differences from the general cumulative rules, which is mainly reflected in the “Article 3.4.2 of RCEP” -- “extension of the application of cumulative to all production undertaken and value added to a good within the Parties”. In view of the “large size” of the 15 member states, compared with the general cumulative rules, in the economic regions and uniform cumulative rules of origin formed by the 15 member states, there is mainly the cumulation between “one member country or region” and “the other member country or region” under the same preferential trade agreement. RCEP “14+1” cumulative rules, its economic and strategic benefits are quite different. We will elaborate it in the third part of this paper.


III. What are the highlights of RCEP cumulative rules and the impact on our foreign trade enterprises?


Through studying the general and RCEP cumulative rules, we can see the highlights of RCEP cumulative rules may be that they can generate more economic and strategic benefits. The difference between RCEP and other free trade agreements signed by China before is not the subversion of the system, but the individual difference between different free trade agreements. So, what are the highlights of RCEP cumulative rules and the impact on our foreign trade enterprises?


1. RCEP “14+1” cumulative rules will make the enterprises acquire more economic benefits


When the origin of goods is determined according to the RCEP rules , the 15 member states under RCEP are treated as one economic region. As long as the RCEP member state processes materials or goods originating from other member states, the materials can be regarded as originating in the processing country. In this way, if the production of goods involves several member states, the final production or processing member state can accumulate the previous materials value of other member states when calculating the raw material value of the goods. That is to say, the raw materials value components from any RCEP member state will be considered to be accumulated in the raw materials value of the final production or processing member states, which will significantly improve the utilization rate of the preferential tariff rate.


For example:


If Country L, M and N are members of RCEP, and Country L processes the material Y1 originating from Country M into semi-finished product Y2, and then Y2 is used as raw material to produce finished goods Y3 by Country N. According to RCEP cumulative rules of origin, Y1 and Y2 can be accumulated into the value of raw materials for producing Y3, and all of them are regarded as originating from Country N.


In fact, rules of origin will affect trade costs. The more unified rules of origin in RCEP will promote the free flow of goods in the region. Goods that would not have been regarded as originating goods previously are more easily to be deemed as originating goods after the RCEP coming into force, so that they can enjoy the benefits of tariff concessions.


2. RCEP cumulative rules make enterprises enjoy more strategic benefits


Before the signing of RCEP, the rules of origin in trade agreements signed by relevant countries in the region are not unified. RCEP cumulative rules system will help to improve the regional economic integration in East Asia and promote the integration of regional industrial chain, supply chain and value chain, as well as help countries in the region to learn each other’ s industrial advantages, further optimize the industrial chain and division system, and to carry out the industrial layout more flexibly.


China is the largest economy in East Asia. The cumulative rules of origin can facilitate the trade flow of semi-finished parts in the production network of the whole region. It also means that China's raw materials and semi-finished products can be better used, from which many major industries in China will benefit, especially textile and garment industry, light industry, electronic equipment, agricultural products industries, etc. For China's foreign trade enterprises, on the one hand, it helps to export more products and better enjoy preferential tariff measures; on the other hand, it also helps to avoid some trade barriers.