ANALYSIS OF
THE FREE TRADE AGREEMENT BETWEEN CANADA AND THE
STATES OF THE EUROPEAN FREE TRADE ASSOCIATION (ICELAND,
LIECHTENSTEIN, NORWAY AND SWITZERLAND)
BY
JÓN RAGNAR JOHNSON
HONORARY CONSUL GENERAL OF ICELAND
TORONTO, CANADA
INDEX
EXECUTIVE SUMMARY ...1
OVERVIEW...2
ESTABLISHMENT OF BILATERAL RELATIONSHIP ...3
TRADE IN GOODS...4
A. ESTABLISHMENT OF A FREE TRADE AREA...4
B. HARMONIZED COMMODITY DESCRIPTION AND CODING SYSTEM...5
C. ELIMINATION OF CUSTOMS DUTIES ON PRODUCTS WITHIN CHAPTERS 25 THROUGH 97 OF THE HARMONIZED SYSTEM ...6
D. ELIMINATION OF CUSTOMS DUTIES ON PRODUCTS WITHIN CHAPTERS 1 THROUGH 24 OF THE HARMONIZED SYSTEM ...7
1. International Trade and Agricultural Products ... 7
2. Tariff Elimination on Primary and Processed Food Products (Except Marine Products) ... 8
(a) Processed Agricultural Products under CEFTA Annex G... 8
(i) Products Imported By EFTA States From Canada... 8
(ii) Products Imported by Canada from EFTA States ... 9
(iii) Export Subsidies... 9
(b) Agreement on Agriculture between Canada and the Republic of Iceland... 9
(i) Products Imported Into Iceland From Canada ... 10
(ii) Products Imported Into Canada From Iceland ... 10
(iii) Export Subsidies... 10
(iv) Other Provisions ... 10
3. Elimination of Customs Duties on Fish and Other Marine Products... 10
E. RULES OF ORIGIN AND ADMINISTRATIVE CO-OPERATION ...11
1. Approaches to Determining Origin... 12
2. Approaches to Establishing Preferential Rules of Origin ... 12
3. Rules of Origin Terminology... 13
4. CEFTA Rules of Origin and Administrative Co-Operation ... 13
5. Establishing That a Good is Originating under the CEFTA Rules... 13
6. Wholly Obtained Products... 14
7. Sufficient Production ... 14
(a) Product Specific Rules in Appendix I... 14
(i) Change in Tariff Classification... 15
(ii) Packaging and packing materials and containers... 15
(iii) Accessories, spare parts and tools... 15
(iv) Value Content Requirement ... 16
(v) Process Requirements... 20
(vi) Tolerance ... 20
(c) Non-Originating Materials that do not have to be taken into account ... 23
(i) Non-Originating Materials Incorporated into Originating Products (the “Roll-up” Rule) ... 23
(ii) Neutral Elements... 24
(d) Insufficient Production... 24
8. Other Provisions... 24
(a) Accounting Segregation of Fungible Materials ... 24
(b) Sets 24 (c) Transport through a Non-Party ... 25
(d) Exhibitions 25 9. Administration ... 25
(a) Origin Declarations... 26
(b) Importation Requirements ... 26
(c) Preservation of Records ... 26
(d) Administrative Co-operation and Origin Verifications ... 27
(e) Other Provisions... 27
(i) Approved Exporter Program ... 27
(ii) Importation by Instalment... 27
(iii) Confidentiality... 27
(iv) Penalties... 27
10. Sub-Committee on Rules of Origin and Trade in Goods... 28
11. Observations on the CEFTA Rules of Origin ... 28
F. NATIONAL TREATMENT AND IMPORT AND EXPORT RESTRICTIONS ...30
(i) Controls on Log Exports... 30
(ii) Controls on the Export of Unprocessed Fish... 30
(iii) Importation of Goods under certain Canadian Tariff Items... 30
(iv) Prohibition on the use of foreign or non-duty paid ships ... 31
(v) Measures concerning the internal sale and distribution of wine and distilled spirits... 31
G. HOW ICELANDIC GOODS CAN BENEFIT FROM IMPROVED ACCESS TO THE CANADIAN MARKET ...32
1. Top 25 Products by HS Subheading Codes Imported from Iceland into Canada – 2007 ... 33
2. Five Case Studies... 36
(a) Lambmeat (Classified under HS Heading 02.04) ... 37
(b) Skyr (Classified Under HS Subheading0406.10) ... 37
(c) Bottled Water (Classified Under HS Subheading 2201.90) ... 37
(d) Vodka (Classified under HS Subheading 2208.60) ... 38
(e) Outerwear (Classified Under HS Heading 62.01) ... 38
H. SANITARY AND PHYTOSANITARY MEASURES AND TECHNICAL REGULATIONS39 1. CEFTA and the WTO TBT Agreement... 40
2. CEFTA and the WTO Agreement on the Application of Sanitary and Phytosanitary Measures ... 41
3. Observations ... 41 (ii)
J. TRADE FACILITATION ...43
K. EXCEPTIONS AND SAFEGUARDS ...43
1. Article XX of GATT 1994... 43
2. Cultural Exemption... 44
3. National Security Exception ... 45
4. Emergency Action ... 45
SERVICES AND INVESTMENT ...46
TEMPORARY ENTRY ...46
COMPETITION LAW AND POLICY ...47
STATE TRADING ENTERPRISES AND PUBLIC PROCUREMENT ...47
INSTITUTIONAL PROVISIONS ...47
DISPUTE RESOLUTION ...48
A. WTO OR CEFTA PROCEDURES ...48
B. NON-APPLICATION OF CEFTA DISPUTE RESOLUTION PROCEDURES ...49
C. CONSULTATIONS ...50
D. ARBITRATION ...50
E. IMPLEMENTATION OF THE AWARD...51
F. OBSERVATIONS ...51
OTHER PROVISIONS ...51
A. ENTRY INTO FORCE...51
B. AMENDMENTS ...52
C. ADDITIONAL PARTIES ...52
D. COMPLIANCE BY SUB-NATIONAL ENTITIES...52
E. WITHDRAWAL AND TERMINATION ...52
CONCLUDING REMARKS ...53
ANALYSIS OF
THE FREE TRADE AGREEMENT BETWEEN CANADA AND THE
STATES OF THE EUROPEAN FREE TRADE ASSOCIATION (ICELAND,
LIECHTENSTEIN, NORWAY AND SWITZERLAND)
BY
JÓN RAGNAR JOHNSON
HONORARY CONSUL GENERAL OF ICELAND
TORONTO, CANADA
EXECUTIVE SUMMARY
The Free Trade Agreement Between Canada and the States of the European Free Trade Association (Iceland, Liechtenstein, Norway and Switzerland) (“CEFTA”) creates significant opportunities for the Icelandic Government and for Icelandic businesses not only to expand trade with Canada but also to inform the Canadian business community as to the opportunities that Icelandic business has to offer. Iceland will now have a special business relationship with Canada that did not previously exist.
CEFTA is first and foremost an agreement respecting trade in goods. Canadian tariffs will be eliminated on virtually all industrial goods and on most primary goods which Iceland produces. Tariff elimination opens up opportunities for Icelandic producers and exporters. The current penetration by Icelandic products of the huge Canadian import market is very low and there is significant room for improvement.
Opportunities differ from product to product and Icelandic producers and exporters will have to do their homework to determine whether their products can benefit from CEFTA. CEFTA will have no effect on products that already enter Canada duty free. However, Canada maintains significant tariffs on many products. The elimination of tariffs will create advantages for Icelandic products over exporters from countries whose products are subject to the tariffs and will place Icelandic products in the same competitive position as products from countries that enjoy duty free access to the Canadian market under free trade agreements and other preferential arrangements.
Tariff elimination will only apply to qualifying goods. CEFTA sets out rules of origin for determining whether goods are qualifying. The CEFTA Rules of Origin are complex when viewed in their entirety but Icelandic exporters must not lose sight of the forest for the trees because the only rule of origin with which an exporter must be concerned is the specific rule that applies to its product. That rule is frequently very simple and easy to comply with.
CEFTA does not eliminate any of the import restrictions that Canada maintains on certain products. However, the restrictions such as Canada’s supply management regime for dairy products have minimal effect on products in which Iceland has a strong export interest.
The other CEFTA trade-in-goods provisions are mainly a re-affirmation of the mutual obligations that Canada and Iceland have under the WTO. However, their inclusion in CEFTA creates an opportunity for the Icelandic Government to raise concerns and negotiate the elimination of irritants informally through the CEFTA Joint Committee rather than having to rely solely on WTO procedures.
CEFTA sets out emergency action procedures that permit the temporary reinstatement of duties if imports from a CEFTA Party are causing or threatening serious injury. Canada has never resorted to the use of emergency action procedures in any of the free trade agreements to which Canada is a party.
Like all free trade agreements, CEFTA contains exceptions. Some are standard such as an exception for national security. Others are unique such as the exception for cultural industries that is a peculiar Canadian concern dating from Canada’s original free trade negotiations with the United States. As between Canada and Iceland, the CEFTA cultural exception should have minimal impact.
CEFTA contains useful provisions respecting temporary entry and co-operation in competition matters. There are tentative provisions respecting services, investment and government procurement.
The CEFTA institutional structure is minimal but this is usual in free trade agreements. The CEFTA Joint Committee will provide a very useful means for Icelandic businesses, through the Icelandic Government, to raise concerns about trade irritants with the Canadian Government. Depending on how it is used, the Joint Committee should provide a useful vehicle for the informal resolution of disputes and the elimination or reduction of irritants. CEFTA also makes provision for an effective and binding dispute settlement procedure should a dispute not be capable of being resolved through negotiation. While this dispute settlement procedure will likely be used very seldom, if at all, its inclusion adds creditability to the agreement.
CEFTA will become effective when Canada and at least two other EFTA States have ratified it. The Canadian Government introduced its implementing legislation on May 5, 2008 and, barring an election being called, the Canadian legislation should be passed in the latter part of 2008. CEFTA should come into effect early in 2009.
OVERVIEW
The Free Trade Agreement Between Canada and the States of the European Free Trade Association (Iceland, Liechtenstein, Norway and Switzerland) (“CEFTA”)1 is a significant step forward for Canada in its trading relationships and should provide benefits to each of its four EFTA trading partners.
1
The CEFTA text can be accessed on the website for International Trade Canada website at: http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/efta-agr-acc.aspx?lang=en. The CEFTA provisions and the CEFTA Annexes referred to in this Analysis, as well as the Agreement on Agriculture between Canada and the Republic of Iceland, can all be accessed through this website.
CEFTA is the first free trade agreement that Canada has entered into with European countries. This by itself is significant. However, Iceland, Liechtenstein, Norway and Switzerland are among the most advanced countries in Europe under any number of measurements. The per capita GDP of each of these countries is among the highest in the world and each of these countries is a leader in a number of fields. Norway and Switzerland both have diversified and highly successful economies. Iceland, with a population of just over 300,000 may be a small country but its economy, its business community and its expertise in a number of fields are much more significant than its small population would suggest. By entering into CEFTA, Canada has entered into an enhanced trading relationship with four of the most successful countries in Europe.
Free trade agreements create opportunities for exportation and importation through the elimination of tariffs and the reduction of other trade barriers. A free trade agreement also opens up an opportunity for each member country to educate the governments and business communities of the other member countries as to their capabilities, areas of specialized knowledge and degree of business sophistication. The Icelandic Government and business community should use CEFTA not only to exploit business opportunities specifically arising from the elimination of tariffs but also to inform Canadian governments and the Canadian business community of the full range of opportunities Iceland presents. It is unlikely that many Canadian government or business leaders are aware of how far Icelandic economic interests extend beyond the fishery into banking, metal production, sophisticated technology and significant overseas investment in a number of countries including Canada.
CEFTA is a major breakthrough in Canadian trade negotiations. Canada achieved a single major success twenty years ago with the signing of the Canada-United States Free Trade Agreement (“CUFTA”). The North American Free Trade Agreement (“NAFTA”) began as a U.S./Mexican initiative that Canada joined for defensive reasons. Canada entered into the Canada-Israel Free Trade Agreement more for political reasons than economic reasons. The only other free trade agreements that Canada has successfully negotiated have been with developing countries, namely Chile, Costa Rica and Peru. Canada has been engaged in protracted free trade negotiations with South Korea but so far no agreement has materialized.2 The successful conclusion of CEFTA should be viewed as a major achievement by Canada’s Minister of International Trade.
ESTABLISHMENT OF BILATERAL RELATIONSHIP
CEFTA establishes a bilateral trading relationship between Canada and each of the four EFTA countries (“EFTA States”). Trading relations among the EFTA States will not be affected by CEFTA3 but will continue to be governed by the Convention Establishing the European Free Trade Association (now known as the “Vaduz Convention”) and, in the case of Iceland, Norway and Liechtenstein, the European Economic Area.
2
Canada’s NAFTA trading partners, the United States and Mexico, have been much more successful than Canada in negotiating free trade agreements with other countries. This is particularly the case with Mexico, whose free trade agreements include agreements with the EFTA countries, the European Union, and a number of other countries.
3
Canada and each EFTA State are members of the World Trade Organization (“WTO”) and are bound by the Agreement Establishing the World Trade Organization (“WTO Agreement”) and the agreements set out in its annexes.
TRADE IN GOODS
A. ESTABLISHMENT OF A FREE TRADE AREA
CEFTA is first and foremost an agreement respecting trade in goods. CEFTA creates a new free trade area comprised of Canada and the four EFTA States. The coverage of goods is virtually complete for all goods except for primary products classified under Chapters 1 through 24 of the Harmonized System set out in the Appendix to this Analysis. Goods classified under Chapters 1 through 24 of the Harmonized System are covered in part by specific CEFTA provisions and in part by individual bilateral agreements between Canada and each of Iceland, Norway and Switzerland.
The free trade area is the most basic preferential trading arrangement that is sanctioned under WTO rules.4 The more comprehensive preferential arrangement is the customs union. Members of free trade areas must eliminate tariffs and other restrictions of commerce on substantially all of the trade among them. However, each member country remains free to maintain its individual trade policies in respect of non-member countries. In addition to eliminating tariffs and restrictions of commerce on trade among themselves, members of customs unions must also harmonize their trade policies respecting non-member countries.
Free trade areas are much more flexible arrangements than customs unions. The EFTA countries are free to maintain their arrangements with the European Union to which Canada is not a party. Similarly, Canada has its own trading arrangements with the United States and Mexico under NAFTA. The EFTA countries have their free trade agreement with Mexico but do not have any special trading arrangement with the United States. Individual member countries of a customs union such as the European Union do not have this flexibility.
The disadvantage of the free trade area trading arrangement is the necessity of establishing rules of origin for the purpose of determining eligibility for preferential tariff treatment. This is because the members of a free trade area do not harmonize their border policies. Canada allows preferential tariff treatment to U.S. goods under NAFTA but the EFTA States do not have any basis for allowing preferential tariff treatment for U.S. goods. Just as an EFTA State would not grant preferential treatment to a U.S.-produced good imported directly from the United States, there is no reason for the EFTA State to allow preferential treatment to that good just because it has been transhipped through Canada. The U.S. good must be transformed into a different good or have value added to it in Canada in order for it to be eligible for preferential treatment when
4
See Article XXIV of the General Agreement on Tariffs and Trade 1994 (“GATT 1994”) set out in Annex IA of the WTO Agreement. Without the cover provided by Article XXIV, the establishment of a preferential trading arrangement such as a free trade area or a customs union would be inconsistent with the most-favoured-nation (“MFN”) provision in Article I of GATT 1994, which requires that an advantage granted to the goods of any country be immediately and unconditionally granted to goods of all WTO members.
exported from Canada to an EFTA State. The extent of the transformation or the value added that is required is determined by rules of origin.
The requirement that goods satisfy rules of origin in order to receive preferential treatment adds a level of complication to border procedures and an additional cost to producers. The cost of compliance can range from being minimal to substantial, depending on the complexity of the rule.
While the free trade area trading arrangement is criticized for not encouraging deeper economic integration among the member countries, the harmonization of trade and other policies regarding third countries is a difficult process among sovereign countries and entails a surrender of degrees of sovereignty that many countries find unacceptable.5
B. HARMONIZED COMMODITY DESCRIPTION AND CODING SYSTEM
The Harmonized Commodity Description and Coding System (“Harmonized System” or “HS”) has been adopted by all WTO countries, including Canada and each of the EFTA States, as the basis for the classification of goods for tariff and statistical purposes. The Harmonized System is a numerical classification system that classifies goods under 97 chapters grouped under Sections I through XXI. The 97 chapter titles are set out in the Appendix to this Analysis. Each chapter is broken down into headings and each heading is further broken down into subheadings. The numerical code for a product is broken down as follows:
First two digits - chapter number. First four digits – heading number First six digits – subheading number.
The first six digits of the numerical code for any product will be identical in the tariff schedules of all countries that have adopted the Harmonized System. Each country develops its own tariff code for individual products by adding two or more digits to subheading number. These additional digits will vary from country to country.
Example:
Chapter 3 of the Harmonized System is Fish and crustaceans, molluscs and other aquatic invertebrates. The first two digits of the tariff code of any product classified under Chapter 3 are “03”.
Heading 03.05 of the Harmonized System is Fish, dried, salted or in brine; smoked fish; whether or not cooked during the smoking process; flours, meals and pellets of
5
Proponents of deeper integration between Canada and the United States propose that NAFTA become a customs union. While this would doubtless confer economic benefits, the harmonization of trade policies among the three NAFTA countries would be very difficult. For example, the highly restrictive U.S. policies regarding Cuba are very different from those of Canada and Mexico, both of whom treat Cuba as just another developing country.
fish, fit for human consumption. The first four digits of the tariff code of any product classified under this heading are “0305.”
Subheading 0305.20 of the Harmonized System is Livers and roes, dried, smoked, salted or in brine. The first six digits of the tariff code of any product classified under this heading are “0305.20.”
Livers and roes, dried, smoked, salted or in brine are classified under subheading 0305.20 in the tariff schedules of Canada, Iceland, each other EFTA State and every member of the WTO. The Harmonized System provides a common language for the description of products.
Each country applying the Harmonized System establishes its tariff items for specific goods by adding two or more digits to the HS subheading numbers. For example, the tariff items under Subheading 0305.20 in the Canadian Customs tariff are:
Tariff item 0305.20.10 – livers Tariff item 0305.20.20 - roes
The tariff items under Subheading 0305.20 in the Customs Tariff of Iceland6 are: Tariff item 0305.20.01 – Lumpfish roes, salted
Tariff item 0305.20.02 – Cod roes, salted
Tariff item 0305.20.03 – Other roes, sugar salted Tariff item 0305.20.04 – Cod roes, roughly salted Tariff item 0305.20.05 – Capelin roes, roughly salted Tariff item 0305.20.06 – Other roes, roughly salted Tariff item 0305.20.09 - Other
Correct tariff classification is critical to working with CEFTA, both for determining tariff treatment and for the correct application of the rules of origin. The Harmonized System is accompanied by General Rules of Interpretation, as well as Section Notes and Chapter Notes. The Harmonized System Explanatory Notes published by the World Customs Organization provides authoritative guidance to the application of the Harmonized System.
C. ELIMINATION OF CUSTOMS DUTIES ON PRODUCTS WITHIN CHAPTERS
25 THROUGH 97 OF THE HARMONIZED SYSTEM
Chapters 25 through 97 of the Harmonized System include cover all products except primary products (i.e. Chapters 1 through 24). Chapters 25 through 97 are listed in the Appendix to this Analysis. With very few exceptions, customs duties will be completely eliminated on all products classified within Chapters 25 through 97 of the Harmonized System traded between Canada and Iceland.7 With the exception of certain boats and ships imported into Canada,
6
I have used the Customs Tariff of Iceland 2006 published in The International Customs Journal, Journal No 111 (10th Edition) September 2006.
7
CEFTA Annex F lists a few products to which the elimination of duties will not apply. In the case of Canada – Iceland trade, Canadian duties will not be eliminated on certain albumins classified under HS heading 35.02,
CEFTA Article 10 provides the elimination of duties shall take place immediately upon CEFTA coming into effect.
Canadian duties on cruise and excursion ships under a certain size, tankers and vessels for transporting goods (except refrigerated vessels), fishing vessels and factory ships, dredgers, floating or submersible drilling or production platforms, warships under a certain size and open boats such as lifeboats will be phased out in eight or thirteen equal annual reductions with complete elimination in ten or fifteen years, depending on the classification.8 The CEFTA arrangement respecting boats and ships reflects the desire on the part of the Canadian Government to continue to protect the small and relatively insignificant Canadian shipbuilding industry.
Duty elimination only applies to qualifying products. A product must satisfy the Rules of Origin described below in order to be a qualifying product.
D. ELIMINATION OF CUSTOMS DUTIES ON PRODUCTS WITHIN CHAPTERS
1 THROUGH 24 OF THE HARMONIZED SYSTEM
The products covered by Chapters 1 through 24 of the Harmonized System are set out in the Appendix to this Analysis. The products covered by these chapters include many primary food products as well as a number of processed food products.
1. International Trade and Agricultural Products
Trade rules respecting agricultural products are more restrictive than rules respecting other sectors for a variety of reasons. Food production, at least historically, is seen to be essential and deserving of special protection. Farm lobby groups frequently have political influence that far outweighs their numbers. Many countries wish to preserve rural traditions at the expense of trade liberalization.
The Canadian position respecting agricultural products is highly ambivalent. Canada is a free trader with respect to products such as wheat, oats and barley9 but highly protective with respect to dairy and poultry products. The Canadian Government and the provincial governments jointly administer supply management programs covering diary and poultry products that provide price support to farmers by limiting supply through a combination of domestic production quotas and import restrictions. The import restrictions originally took the form of import quotas. With the peptones and their derivatives classified under HS heading 35.04 and dextrins and other modified starches under HS subheading 3505.10.
8
See CEFTA Annex E for details.
9
While Canada is an efficient producer of grains and has a strong interest in opening markets and reducing subsidy programs maintained by other countries, Canada still maintains the Canadian Wheat Board (“CWB”) as the exclusive marketing agency for wheat, oats and barley grown in western Canada. The practices of the CWB have been a source of constant friction between Canada and the United States, with the United States complaining about unfair marketing practices. The current Canadian Government would like to dismantle the CWB but cannot do so with its current minority position in the House of Commons.
entry into force of the WTO Agreement on Agriculture, Canada converted its import quotas on dairy and poultry products into tariff quotas. The effect of the tariff quotas is the same as the quotas because the over-access tariff rates are vary high. For example, milk classified under HS subheading 0401.20 (Of a fat content, by weight, exceeding 1% but not exceeding 6%), Canada’s within access MFN tariff rate is 7.5%; the over-access tariff rate is 241% but not less than CDN$34.50/hl.
2. Tariff Elimination on Primary and Processed Food Products (Except Marine Products)
Tariff elimination as between Iceland and Canada for products covered by Chapters 1 through 24 of the Harmonized System is provided for in part by CEFTA Annex G, which lists certain processed agricultural products, and in part by the bilateral Agreement on Agriculture between Canada and the Republic of Iceland, which applies only as between Canada and Iceland. There are separate bilateral agreements on agriculture between Canada and each of Norway and Switzerland.10
(a) Processed Agricultural Products under CEFTA Annex G
CEFTA Annex G applies among all the CEFTA Parties.
(i) Products Imported By EFTA States From Canada
Table 1 to Annex G lists specific products, by reference to Harmonized System headings, in respect of which the EFTA countries have granted tariff concessions. The treatment accorded by each EFTA country respecting imports from Canada is listed in that countries column in the table. The designation “FREE” indicates that no customs duty will be levied. The majority of products listed are subject to such designation. The designation with an asterisk * indicates that the product will be treated in accordance with Article 1(1) of Annex G.
Article 1 of Annex G permits each EFTA country to levy a duty to take into account the difference between the domestic price and the world price of raw materials. Each EFTA State, including Iceland, is required to notify Canada of such duties before CEFTA becomes effective.
Article 2(1) of Annex G requires that the treatment accorded to Canada for the listed products be no less favourable that the treatment accorded to corresponding products of the European Union. This provision is relevant only for products which are not designated FREE. The provision is not free from ambiguity but appears to mean that
10
The NAFTA agricultural provisions set out in Section A of NAFTA Chapter 7 comprise, in fact, three separate bilateral agreements on agriculture. The Canada-U.S. bilateral agreement simply carried over the provisions of the Canada-U.S. Free Trade Agreement which, while eliminating tariffs, left Canada’s supply management system with its quotas intact. The Canada-Mexico bilateral agreement also left quota regimes intact. However, the U.S.-Mexico regime provided for the conversion of all quotas to tariff quotas and, unlike the WTO Agreement on Agriculture, provided for the tariff quotas to be phased out over ten or fifteen years, depending on the product. The phase-out period for these tariff quotas is now complete or almost complete.
duty levied on a particular product under Article 1 to account for cost differences in raw materials cannot exceed the duty, if any, which is levied on that product when imported into Iceland from the European Union.
(ii) Products Imported by Canada from EFTA States
Table 2 to Annex G lists specific products, by reference to Harmonized System headings, in respect of which Canada has granted tariff concessions when such products are imported from EFTA countries. With a few exceptions, Canada’s offered rate of duty is FREE. With a few products, duty will still apply but at a reduced rate. For example, the Canadian rate of duty on chewing gum, whether or not sugar-coated classified under HS subheading 1704.10.00 will be reduced from the MFN Applied Rate of 9.5% to 4.5%. As mentioned above, diary and poultry products are subject to Canadian supply management programs that limited imports through the imposition of tariff quotas. The only product listed on Table 2 that is subject to a tariff quota is yogurt classified under HS subheading 0403.10. Canada’s within access commitment rate is reduced from the MFN Applied Rate of 6.5% to FREE. However, Canada’s over access commitment rate for imports from EFTA countries remains at Canada’s MFN rate of 237.5% but not less than 46.6¢/kg.
(iii) Export Subsidies
While export subsidies are generally prohibited under WTO rules,11 export subsidies are permitted under the WTO Agreement on Agriculture, subject to reduction commitments.12 The WTO Agreement on Agriculture covers products classified under HS Chapters 1 to 24, fish and fish products,13 together with some additional products. Article 4 of Annex G prohibits export subsidies on products subject to tariff concessions in accordance with Annex G (i.e. the products listed in Tables 1 and 2.)
(b) Agreement on Agriculture between Canada and the Republic of Iceland
The Agreement on Agriculture between Canada and the Republic of Iceland (“Canada-Iceland Agriculture Agreement”) is a bilateral arrangement between Canada and Iceland that provides for tariff concessions to be made by each of Canada and Iceland on specifically identified products. The Canada-Iceland Agriculture Agreement will come into effect at the same time as CEFTA.
11
WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement), Article 3.
12
WTO Agreement on Agriculture Article 9.
13
See Annex I of the WTO Agreement on Agriculture. The exclusion of fish products from the WTO Agreement on Agriculture means that the prohibition of export subsidies in Article 3 of the SCM Agreement applies to these products.
(i) Products Imported Into Iceland From Canada
The products in respect of which Iceland has granted reductions of customs duties on products imported from Canada are listed in Annex 1 of Canada-Iceland Agriculture Agreement. In all cases, the duty for imports of these products from Canada will be FREE.
(ii) Products Imported Into Canada From Iceland
The products in respect of which Canada has granted reductions of customs duties on products imported from Iceland are listed in Annex 2 of Canada-Iceland Agriculture Agreement. For all products listed, the Canadian offered rate of duty is FREE.
The only product included on the list that is subject to Canadian supply management rules is fresh (unripened or uncured) cheese, including whey cheese, and curd classified under HS subheading 0406.10. Icelandic skyr falls within this tariff classification. The within access commitment MFN rate on the tariff item including skyr is reduced from 3.32 cents per kilogram to FREE. However, the over access commitment rate of duty remains at 245.5% but not less than CDN$4.52/kg. 14
(iii) Export Subsidies
Unlike Annex G, the Canada-Iceland Agriculture Agreement does not prohibit export subsidies on the listed products. Canada and Iceland confirm that the products listed do not benefit from export subsidies. If either Canada or Iceland reintroduces an export subsidy on a product subject to a tariff concession, the other of them can increase its duty on that product back up to the MFN rate.
(iv) Other Provisions
The Canada-Iceland Agriculture Agreement incorporates a number of provisions from CEFTA, most notably the procedures for dispute resolution.
3. Elimination of Customs Duties on Fish and Other Marine Products
CEFTA Annex H lists specific marine products that are covered by the tariff elimination provision of Canada EFTA Article 10. The list includes all products in HS Chapter 3 (Fish and
14
The Canadian Customs Tariff splits HS subheading 0406.10 into two 8-digit tariff items. The first tariff item is 0406.10.10, being the within access commitment that applies to products that are imported within the quota established under the tariff quota that applies to these products. Tariff item is further split into 0406.10.10.10, which is cream cheese (excluding whey and buttermilk cheese) and 0406.10.10.90, which is “Other”. Skyr would fall under 0406.10.10.90. The second 8-digit tariff item is 0406.10.20, being the over access commitment that applies to products that are imported outside the quota established under the tariff quota. This tariff item is not further broken down. Given the over access commitment rate of duty of 245.5%, it is unlikely that this tariff item is ever used.
crustaceans, molluscs and other aquatic invertebrates), whale meat,15 and various processed products derived from fish, crustaceans, molluscs and other marine animals.
It should be noted that Canadian MFN rates of duty on most tariff items in HS Chapter 3 are already FREE. The only exceptions are:
0302.70.00 -Livers and roes - 3%
0303.80.00 -Livers and roes (frozen) - 3%
0305.20.00 -Livers and roes of fish, dried, smoked, salted or in brine - 3% 0306.11.00 -Rock lobster and other sea crawfish (frozen) - 5%
0306.14.90 -Crabs – Other (than king or snow crabs for processing) (frozen) -5%
0306.19.00 -Other (crustaceans), including flours, meals and pellets of crustaceans, fit for human consumption (frozen) – 5%
0306.21.00 00 -Rock lobster and other sea crawfish (not frozen) – 5% 0306.24.00 00 -Crabs (not frozen) – 5%
0306.29.00 00 -Other, including flours, meals and pellets of crustaceans, fit for human consumption (not frozen) – 5%
0307.10.10 00 -Oysters in shell – 3%
0307.29.20 00 - Scallops dried, salted or in brine – 4%
Canadian duties on all the foregoing products will be eliminated upon CEFTA coming into effect. The elimination of these tariffs will benefit some Icelandic exports to Canada. In 2007, the value of products exported from Iceland to Canada under HS subheading 0303.80 (Livers and roes frozen) was CDN$2,757,219. The Canadian 3% duty on these products will be eliminated. In 2007, value of products exported from Iceland to Canada under HS subheading 0306.19 (frozen crustaceans) was CDN$2,278,290. The Canadian 5% duty on these products will be eliminated. However, the largest single export from Iceland to Canada in 2007 in terms of HS subheading classification was under HS subheading 0305.69 (Other fish, slated or in brine, not dried or smoked), with a value of CDN$5,460,507. The Canadian MFN duty on these products is FREE so CEFTA will not have an impact on these exports.16
E. RULES OF ORIGIN AND ADMINISTRATIVE CO-OPERATION
As mentioned above, the price that the members of a free trade area pay for the flexibility of being able to maintain independent trade policies with non-member countries is the necessity of having to establish rules of origin to establish the eligibility of imported products for preferential tariff treatment. The need to comply with rules of origin adds cost. One cost that is invariably incurred is the cost of bookkeeping and record keeping to ensure that the rules are complied with. Rules of origin can also add cost by requiring that materials be obtained from sources other than the most economic source, such as an apparel rule that requires that fabric be sourced within the preferential trading area rather than from another country where the fabric is cheaper.
15
Note 1 to Annex H notes the import ban for whale products applied by Canada, Liechtenstein and Switzerland based on the Convention on International Trade in Endangered Species of Wild Fauna and Flora.
16
See the tables below under G. HOW ICELANDIC GOODS CAN BENEFIT FROM IMPROVED ACCESS TO THE CANADIAN MARKET.
A company may also have to maintain different production runs for the same product destined for different export markets. If the cost of complying with rules of origin exceeds the benefit achieved through preferential duty treatment, businesses will forego the preferential treatment, which defeats the purpose of establishing the free trade area.
1. Approaches to Determining Origin
There are two broad categories of rules of origin. The first is preferential rules of origin and the second is non-preferential rules of origin. Preferential rules of origin are used to determine the eligibility of a product for preferential treatment, such as eligibility for preferential tariff treatment under a free trade agreement. Non-preferential rules of origin are used to establish a country of origin for a variety of purposes. Uses of non-preferential rules of origin include the administration of country of origin marking requirements and country-specific quotas, as well as the application of antidumping and countervailing duties.
It is not necessary with a preferential rule of origin to identify the country of origin of the product. A product either satisfies the requirement or it does not. Non-preferential rules are more complicated because their application must result in the identification of a specific country. The only rules of origin provided for in CEFTA are preferential rules of origin for the purpose of determining eligibility for preferential tariff treatment. Canada and each EFTA State will continue to apply its own non-preferential rules of origin, such as rules for the marking of goods, unaffected by CEFTA.
2. Approaches to Establishing Preferential Rules of Origin
Establishing a preferential rule of origin for goods such as crops grown and harvested, trees cut, animals raised, fish caught and so on is relatively straight forward. These goods are “wholly obtained” in the preferential trading area. For example, lumber cut from white pine grown in Canada or lamb meat from a lamb born and raised on a farm in Iceland is “wholly obtained”. The more difficult origin determination arises with the good containing inputs ("third country materials") from outside the preferential trading area. A rule of origin that treated all goods containing third country materials as non-originating would be far too restrictive and would defeat the purposes of creating a preferential trading area. On the other hand, to treat goods made entirely from third country materials and subject only to final assembly or finishing processes within the preferential trading area as eligible for preferential treatment would confer unintended benefits on producers in third countries. Rules of origin define the point at which third country materials have been sufficiently processed within the preferential trading area so that the good into which they are incorporated can be considered as "originating" and eligible for preferential tariff treatment.
This point can be defined in terms of "substantial transformation", which occurs when the third country materials have been transformed within the preferential trading area into a new and different good. This approach compares the imported materials with the finished good and ascertains whether the materials have been sufficiently changed within the preferential trading area so that the resulting good is something new and different. This point can also be defined in terms of value added within the preferential trading area. When the value of the third country
materials has been counterbalanced by sufficient value imparted to the good through processing within the preferential trading area, the good is considered to be "originating".
3. Rules of Origin Terminology
In rules of origin terminology, an "originating" good is one that satisfies the rules of origin and a "non-originating" good is one that does not. A "material" is any good used in the production of another good. A "material" that qualifies as an originating product under the rules of origin that apply to it is an "originating" material and a material that does not so qualify is a "non-originating" material. A material must be produced within the preferential trading area to be originating. In the case of CEFTA, the preferential trading area is the area comprised of the territories of Canada and each EFTA State. Any material imported from outside the preferential trading area is a non-originating material. A material produced within the preferential trading area can also be non-originating if it contains imported materials that have not been sufficiently processed to satisfy the rules of origin that apply to the material.
4. CEFTA Rules of Origin and Administrative Co-Operation
The CEFTA Rules of Origin are set out in CEFTA Annex C. Articles 1 through 15 of Annex C set out the rules of origin and Articles 16 through 29 set out rules respecting the application of the rules of origin. Appendix I of Annex C sets out the Product-Specific Rules of Origin that will be described below. Appendix II of Appendix C sets out a simple form of origin declaration that must be completed by an exporter for the importer to be able to claim CEFTA preferential treatment.
The CEFTA rules are only relevant for goods produced in an EFTA State and exported to Canada and for goods produced in Canada and exported to and EFTA State. Goods produced in Iceland and exported to another EFTA State will have to satisfy whatever rules of origin apply as between Iceland and that EFTA State in order to be eligible for preferential tariff treatment. A good produced in Iceland and exported to Mexico, a country with which the EFTA countries have a free trade agreement, will have to satisfy the rules of origin in the Mexico-EFTA Free Trade Agreement in order to be eligible for preferential duty treatment when entering Mexico. For the purposes of the CEFTA Rules of Origin, the Swiss Confederation and Liechtenstein are considered as a single Party by reason of a customs union between them.
5. Establishing That a Good is Originating under the CEFTA Rules
The CEFTA Rules of Origin provide that it can be established that a good is originating in one of the following ways.17
A. A product is originating if it is wholly obtained in the territories of the Parties as described below under “Wholly Obtained Products”
B. A product is originating if it is produced exclusively from originating materials.
17
C. A product is originating if it has undergone sufficient production according to the rules set out in Appendix I to Annex C or as otherwise provided in Article 4 of Annex C.
The conditions for acquiring originating status must be fulfilled without interruption in the territories of the Parties.18 This means that a product cannot undergo processing in one Party (e.g. Canada), further processing in a non-Party (e.g. the United States) and yet further processing in a Party (e.g. Canada) and still be considered as originating. The intervening step of processing in the United States in this example destroys the originating status of the product.
6. Wholly Obtained Products
Categories of wholly obtained products are set out in Article 3 of CEFTA Annex C. Most of the categories are straight-forward. For example, the categories include a mineral good extracted, a vegetable or other good harvested, a live animal born and raised and a good obtained from hunting, trapping or fishing.
Fish, shellfish and marine life taken from the sea, seabed or subsoil outside the territories of the Parties by a vessel registered, recorded or listed with a Party and flying its flag or by a vessel not exceeding 15 tons gross tonnage that is licensed by a Party will be considered as wholly obtained and, therefore, originating. Products produced from such products on a factory ship registered, licensed or recorded with a Party will also be considered as wholly obtained.
If, however, such a factory ship produces products using fish, shellfish or other marine life taken by a vessel of a non-Party, the resulting products will be originating only if the applicable rule in Appendix I to Annex C has been satisfied. The production on the factory ship can take place outside the territories of the Parties without impairing the originating status of the product.19
7. Sufficient Production
(a) Product Specific Rules in Appendix I
As provided in of Article 4(1) of CEFTA Annex C, a product shall be considered to have undergone when the conditions set out for that product in Appendix I to Annex C are fulfilled. Appendix I is entitled “Product Specific Rules” and sets out rules for groups of products organized in accordance with the Harmonized System. In order to determine which rule applies to a particular product, one must first know the correct tariff classification of the product and then one must look up the rule in Appendix I. The tariff classifications in the Product Specific Rules only go down to the subheading level so correct classification under the tariff schedule of any Party would yield the correct tariff classification for the purposes of applying these rules.
18
Paragraph 2 of Article 2 of Annex C. There is one exception to this respecting marine products processed in factory ships that is described below.
19
(i) Change in Tariff Classification
Most of the product-specific rules are based on a change in tariff classification. The change referred to is the change in tariff classification that occurs to each non-originating material incorporated into the end product that occurs in the production process.20 In order to apply a change in tariff classification rule, it is necessary to know not only the correct tariff classification of the end product but also the correct tariff classification of each non-originating material incorporated into the end product. The tariff classification of the end product is then compared to the tariff classification of each non-originating material. If the change in tariff classification stipulated by the rule is satisfied by each non-originating product, the product is originating. If the change in tariff classification stipulated by the rule is not satisfied by one or more non-originating materials, the product is not originating unless the tolerance rule described below under Tolerance
applies. A change in tariff classification rule is sometimes referred to in English as a “tariff shift” rule.
For example, the product specific rule for products classified under HS subheading 0306.19 (Crustaceans other than lobsters or shrimps and prawns or crabs, including flours, meals and pellets of crustaceans, fit for human consumption– Frozen)21 is:
A change from any other subheading, except from HS subheading 0306.29.
HS subheading 0306.29 is “crustaceans other than lobsters or shrimps and prawns or crabs, including flours, meals and pellets of crustaceans, fit for human consumption, unfrozen”. What the rule says in effect that if material classified under HS subheading 0306.29 used to produce the end product is non-originating (which would be the case if it were imported from a non-Party), the mere process of freezing is not sufficient processing to confer originating status.
(ii) Packaging and packing materials and containers
Packaging and packing materials and containers are disregarded in applying a change in tariff classification requirement but, as noted below, are taken into account in applying a value content requirement if they are non-originating.22
(iii) Accessories, spare parts and tools
Accessories, spare parts and tools are considered as originating if the product is considered originating and are disregarded in applying a change in tariff classification
20
For detailed rules on how to apply the “change” rules, see paragraphs 1(d) through (f) of the General Interpreateive Notes set out at the beginning of Appendix I to Annex C.
21
As noted in the table set out below under G. HOW ICELANDIC GOODS CAN BENEFIT FROM
IMPROVED ACCESS TO THE CANADIAN MARKET, products imported during 2007 into Canada from
Iceland under HS subheading 0306.19 ranked #4 in terms of value, subject to Canadian duty of 5%.
22
requirement provided that they are not invoiced separately and are in quantities and values customary for the product. However, such items that are non-originating are taken into account in applying a value content requirement.23
(iv) Value Content Requirement
Some of the Product Specific Rules include a value content requirement. In a few cases, the value content requirement is in addition to a change in tariff classification requirement.24 The much more common structure provides for a choice between a more stringent change in tariff classification rule (such as a rule that does not permit the use of non-originating parts) and a less stringent change in tariff classification (such as a rule that does permit the use of non-originating parts) coupled with a value content requirement. In some product-specific rules, such as those that apply to automobiles, the rule consists solely of a value content requirement.
The value content requirement is expressed in each Product Specific Rule where it appears as follows:
provided that the value of the non-originating materials of [specified subheading or subheadings] does not exceed [specified percentage] of the transaction value or ex-works price of the product.
This can be expressed as a formula as follows: value of non-originating
materials under specified HS subheadings
_________________________ must not exceed X%. transaction value or
ex-works price of the product
Note that this rule is negatively rather than positively expressed. This means the higher the percentage, the easier the rule is to satisfy and the lower the percentage, the harder the rule is to satisfy.
The application of this formula depends on three definitions set out in Article 1 of Annex C.
23
Article 10 of Annex C
24
See for example, the Product Specific Rules that apply to all the products classified under HS Chapter 39 – Plastics and articles thereof. All of these rules require a change in tariff classification from any other heading and a value content requirement.
The first definition is of “customs value”, which reads as follows:
“customs value” means the value as determined in accordance with the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994 (WTO Agreement on Customs Valuation)
The Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994 (“WTO Agreement on Customs Valuation”) establishes rules for establishing the customs value of a product. The idea of using the principles of the WTO Agreement on Customs Valuation as a basis for valuation when applying value content requirements first appeared in the rules of origin under the CUFTA and was carried forward into NAFTA.25 The rationale was that the WTO Agreement on Customs Valuation is a code for disciplining inter-company pricing common to the Parties to these agreements.26 The basis for customs value in the WTO Agreement on Customs Valuation is “price paid or payable” unless unacceptable for reasons such as the buyer and seller being related and the relationship affecting the price. The WTO Agreement on Customs Valuation sets out various alternative methods for calculating customs value if “price paid or payable” is unacceptable
The second definition is “transaction value”, which reads as follows: “transaction value” means the price actually paid or payable for a product or material with respect to a transaction of the producer of the product, adjusted in accordance with the principles of paragraphs 1, 3 and 4 of Article 8 of the WTO Agreement on Customs Valuation to include, inter alia, such costs as commissions, production assists, royalties or license fees
Note that this definition only incorporates certain specified provisions of the WTO Agreement on Customs Valuation. Paragraph 1 of Article 8 of requires the addition to price paid or payable of commissions and brokerage and the cost of containers and the cost of packing (if not included in price paid or payable), the value of assists (i.e., materials or tools and dies or engineering work etc provided to the supplier by the purchaser), royalties and licence fees, etc. Unlike the definition of “customs value”, the definition of “transaction value” does not incorporate the alternative methods of determining a value if “price paid or payable” is unacceptable as described above. It is not clear what the drafters intended by these different definitions or exactly how they are supposed to fit together.
25
CUFTA and NAFTA both referred to the Tokyo Round predecessor of the WTO Agreement on Customs Valuation.
26
Income tax codes also set out rules for addressing inter-company pricing situations but these rules differ from country to country.
The third and fourth definitions described below incorporate the definitions of both “customs value” and “transaction value” just described.
The third definition is “value of non-originating materials”. This definition comprises the numerator of the calculation and reads as follows:
“value of non-originating materials” includes for purposes of this definition non-originating packaging materials and containers referred to in Article 8, non-originating accessories, spare parts and tools referred to in Article 10, non-originating component products referred to in Article 1127 and in Appendix I, and non-originating hulls referred to in Appendix I28, and means:
(i) the transaction value or the customs value of the materials at the time of their importation into a Party, adjusted, if necessary, to include freight, insurance, packing and all other costs incurred in transporting the materials to the place of importation; or
(ii) in the case of domestic transactions, the value of the materials determined in accordance with the principles of the WTO Agreement on Customs Valuation in the same manner as international transactions, with such modifications as may be required by the circumstances.
As noted above, materials can be non-originating because they have been imported from a non-Party or because they have been produced in the territory of a Party but have not qualified as originating under the rule of origin applicable to the material in question. If the producer has imported the material, the value is the customs value subject to adjustments referred to in clause (i) of the definition. If the producer has purchased the non-originating material in a domestic transaction, clause (ii) requires that the value of the materials determined in accordance with the principles of the WTO Agreement on Customs Valuation modified to account for the fact that the transaction is domestic. The conceptual difficulty in clause (ii) of this definition is that the WTO Agreement on Customs Valuation, dealing as it does with importation of products, is not designed for the purpose of evaluating purely domestic transactions. The customs authorities of the Parties will have to develop methodology for dealing with this.29
27
Article 11 of Annex C sets out rules relating to sets.
28
See the Product-Specific Rule for HS Heading 89.03, which is Yachts and other vessels for pleasure or sports; rowing boats and canoes.
29
The NAFTA negotiators went far beyond establishing rules of origin in NAFTA and actually harmonized the regulations in Uniform Regulations in each of the three NAFTA countries that are applied by customs authorities in making origin determinations. The reason that the NAFTA negotiators established Uniform Regulations was to avoid the host of interpretation problems that had arisen between Canada and the United States under the CUFTA in applying the CUFTA rules. The Uniform Regulations rewrote the relevant provisions of the WTO Agreement on Customs Valuation so as to be applicable to domestic as well as international transactions. See Schedule VIII Value
The fourth definition is “transaction value or ex-works price of the product”. This definition comprises the denominator of the calculation and reads as follows:
“transaction value or ex-works price of the product” includes for purposes of this definition sets of Article 11 and of Appendix I, and means:
(i) the transaction value of a product when sold by the producer at the place of production; or
(ii) the customs value of that product; adjusted, if necessary, to exclude any costs incurred subsequent to the product leaving the place of production such as freight and insurance
The value in clause (i) would apply if the producer sold the product at its place of production to someone who subsequently exported it. The denominator would be equal to the price paid or payable as provided in the definition of “transaction value”, subject to the adjustments in that definition. Otherwise the denominator would be equal to the “customs value” subject the adjustments in clause (ii).30
Consider the product specific rule of origin for HS Heading 84.38, Machinery for the Industrial Preparation of Food or drink, other than machinery for the extraction or preparation of animal or fixed vegetable fats or oils and HS Subheading 8438.90 is Parts for such machinery.31 The product specific rule of origin for products classified under HS Subheading 8438.90 as follows:
“A change from any other heading; or
A change from within that subheading, whether or not there is also a change from any other heading, provided that the value of the non-originating materials of that subheading does not exceed 50 % of the transaction value or ex-works price of the product.”
of Materials in the NAFTA Rules of Origin Regulations which can be found in Canadian Customs Memorandum D11-5-1, which can be found on the website for the Canada Border Services Agency. There is no provision in CEFTA for the establishment of Uniform Regulations.
30
Note that if clause (i) applies, the relevant definition is “transaction value”, which does not cover the circumstance where the producer and the buyer are related parties and the relationship has affected the price. If clause (ii) applies, the circumstance where the producer and the buyer are related parties and the relationship has affected the price because the WTO Agreement on Customs Valuation applies in its entirety. This seems a definitional mismatch and it is not clear what the drafters intended.
31
As noted in the table set out below under G. HOW ICELANDIC GOODS CAN BENEFIT FROM
IMPROVED ACCESS TO THE CANADIAN MARKET, products classified under HS 8438.90 ranked #6 in
This product specific rule of origin offers a choice to the producer between a change in tariff classification requirement without a value content requirement and a change in tariff classification requirement coupled with a value content requirement. In order to qualify under the change in tariff classification requirement without a value content requirement, the producer cannot use any material classified under HS heading 84.38, such as a part, that is not originating. Any other material can be used in the production of the end product and the change in tariff classification requirement will be satisfied, regardless of its origin. If the producer uses originating parts imported from a non-CEFTA country, the producer must satisfy the value content requirement. In this particular case, the value of non-originating parts (classified under subheading 8438.90) cannot exceed 50% of the transaction value or ex-works price of the product.
(v) Process Requirements
Some of the product specific rules specify certain processing requirements. For example, the specific rule of origin for products classified under HS Subheading 0305.10 – 0305.59, which includes HS subheading 0305.2032 (Livers and roes dried, smoked, salted or in brine), reads as follows:
“A change from any other subheading, provided that products of subheading 0305.20 through 0305.30 which have undergone only salting have a minimum salt content of 18 %.”
In addition to satisfying the change in tariff classification requirement, these products must also satisfy the minimum salt content requirement in order to be originating.
(vi) Tolerance
Article 5 of Annex C sets out a tolerance rule designed to eliminate the possibility of a product being considered non-originating under a product-specific rule because a small amount of non-originating material fails to satisfy a change in tariff classification requirement or some other requirement in the product specific rule. The rule provides that a product will be originating if the value of all non-originating materials failing to satisfy the requirement does not exceed 10% of the transaction value or ex-works price of the product. This rule also appears in the NAFTA text as the de minimis rule, with a 7% rather than a 10% threshold.
As with the NAFTA de minimis rule, the CEFTA tolerance rule does not apply to products falling classified under HS Chapters 50 through 63 (various textile products including fibre, yarn and fabric of various compositions, carpets and other textile floor coverings, apparel items and textile made-up articles, worn clothing and worn textile
32
As noted in the table set out below under G. HOW ICELANDIC GOODS CAN BENEFIT FROM
IMPROVED ACCESS TO THE CANADIAN MARKET, products classified under HS 0305.20 ranked #15 in
articles.)33 The rules of origin for some of these products prohibit tariff classification changes from HS headings describing yarn or fabric.
For example, the specific product rule of origin for products classified under H.S. 56.07 Twine, cordage, ropes and cables, whether or not plaited or braided and whether or not impregnated, coated, covered or sheathed with rubber or plastics is
A change from any other heading except from yarn of heading 52.04 through 52.07, 54.01 through 54.06 or 55.08 through 55.11.
Headings 52.04 through 52.07 describe various types of cotton thread and yarn. Headings 54.01 through 54.06 describe various threads and yarns of man-made filaments. Headings 55.08 through 55.11 describe various threads and yarns of various man-made staple fibres. If this product produced in a CEFTA country contains yarns of any of these H.S. headings that is non-originating (e.g. because it was imported from a non-CEFTA country) the product is non-originating, regardless of the value of the non-originating material.34 However, for products of Chapters 50 through 60 and for certain products under H.S. Chapter 63, there is a special tolerance rule that provides that the product will be originating if the weight of the non-originating yarn or fabric does not exceed 10%.35
(b) Where No Change in Tariff Classification
Paragraph 2 of Article 4 of CEFTA Annex C provides that except for products under H.S. Chapter 39 and for products classified under Chapters 50 through 63 (various textile products including fibre, yarn and fabric of various compositions, carpets and other textile floor coverings, apparel items and textile made-up articles, worn clothing and worn textile articles), where a product and non-originating materials from which it is produced are classified under the same HS heading or subheading so that a requirement set out in Appendix I cannot be applied, the product will be originating if the value of non-originating materials classified as or with the product does not exceed 40% of the transaction value or ex-works price of the product.
A similar rule is set out in the NAFTA Rules of Origin36 and the reason given was that the Harmonized System does not always create separate headings for parts of products. For
33
See Appendix I to this Analysis
34
This rule is not typical of the CEFTA product-specific rules of origin respecting textile and apparel products in prohibiting the use of non-originating yarn. The CEFTA product-specific rules of origin are much more lenient than their NAFTA counterparts, most of which are fabric-forward (fabric must be originating), yarn forward (yarn and fabric must be originating) or, in some instances, fibre-forward (fibre, yarn and fabric must all be originating.) The NAFTA textile and apparel product-specific rules were drafted for the benefit of the U.S. textile industry. For a discussion generally of rules of origin as applied to textile and apparel goods see Jon R. Johnson, Rules of Origin in Canadian and U.S. Preferential Trade Arrangements at page 43 Rules of Origin: Textiles and Clothing Sector edited by Dr. Roman Grynberg, Cameron May, London, 2005.
35
Paragraph 2 of Article 5 of CEFTA Annex C.
36
NAFTA Article 401(d). The value content rule is the NAFTA regional content rule which is somewhat different. NAFTA Article 401(d) also covers the situation where no change in tariff classification takes place because the product was imported in unassembled of dissembled form (such as a completely knocked-down kit) and is classified
example, H.S. subheading 8715.00 is Baby carriages and parts thereof. The NAFTA product specific rule is:
A change to heading 87.15 from any other heading.
Under the NAFTA rule, a change in tariff classification could not occur if the producer of the baby carriage used imported baby carriage parts and if the NAFTA de minimis rule did not apply, the producer could establish that its product was originating through applying the NAFTA regional content requirement.
Interestingly, the CEFTA product specific rule of origin for baby carriages sets out the same change in tariff classification as the NAFTA rule but then adds the following alternative rule:
“A change from within that heading [i.e. 87.15], whether or not there is also a change from any other heading, provided that the value of the non-originating materials of heading 87.15 does not exceed 50% of the transaction value or ex-works price of the product.”
The CEFTA product specific rule for baby carriages expressly contemplates that a change in tariff classification cannot occur, just as does paragraph 2 of Article 4 of CEFTA Annex C described above. However, the threshold set out in the product specific rule is 50% rather than the more restrictive 40% threshold provided in the rule in paragraph 2 of Article 4 of CEFTA Annex C.
This is a common pattern in the CEFTA product specific rules of origin, as there are many HS headings and subheadings that include the parts for a product or materials of which a product is made. In some instances the alternative product specific rule sets out a process requirement rather than a value content requirement. For example, HS subheading 7108.12 describes “non-monetary gold in unwrought forms other than powder.” There is a specific alternative specific rule of origin for this HS subheading as follows:
“A change to subheading 7108.12 from within that subheading, whether or not there is also a change from another subheading, provided that the non-originating materials undergo electrolytic, thermal or chemical separation or alloying.”
If a producer’s product contains any non-originating materials, the starting point in applying the CEFTA rules of origin is to look up the product-specific rule. If the product-specific rule expressly addresses the circumstance of there being no change in tariff classification, the
together with the finished good under H.S. General Rule of Interpretation 2(a). The CEFTA rule does not cover this situation.
