China Implements WTO Commitments on Rules of Origin

Administration of the New Regulations

Several agencies play different roles in the administration of China's import and export system. Three agencies, the General Administration of Customs (Customs), the Ministry of Commerce (MOFCOM) and the State Administration of Quality Inspection and Quarantine (AQSIQ), are primarily responsible for formulating the criteria for determining the origins of imports and exports and for implementing the rules of origin. Customs is responsible for issuing preliminary decisions concerning the origins of imports and verifying the origins of imports. AQSIQ is primarily responsible for administering exports and is responsible for issuing certificates of origins for exporters.³ The New Regulations do not specifically state which agency will be responsible for the interpretation of the New Regulations, but presumably MOFCOM will be responsible given its broad mandate with respect to trade matters.

Wholly Obtained Goods

The New Regulations set forth the criteria for determining the origins of all goods imported to or exported from China. Under regulations that were superseded by the New Regulations (collectively, the Old Regulations), rules of origin were based on where a good was produced (sheng chan) or manufactured (zhi zao).⁴ The New Regulations bring the basic terminology used in China up to the standards used in the WTO. Now, goods are said to be "wholly obtained" within a country if they are captured, caught, collected, harvested, mined, processed or produced within a certain country or region.⁵

In substance, however, there is little distinction between the Old Regulations and the New Regulations with regard to the actual types of goods that originate completely within a single jurisdiction. Plants or plant products, and wild and domesticated animals raised within a certain country; scrap materials generated from a production process within a certain country; and marine products and products derived from the processing of items that are obtained by vessels flying the flag of a particular country outside of its own territorial waters are types of goods that were included in the Old Regulations. There are some areas in the New Regulations that may increase the number of products that originate from a particular region. All natural items other than live animals, plants and minerals that are obtained in a certain country shall be considered wholly obtained in that country. Items such as antiques and other artefacts that cannot be restored or repaired will also be deemed to originate in a certain country.

One area that is significantly clarified by the New Regulations is the case of goods originating in the offshore waters of a country. Under the Old Regulations, minerals extracted from the "continental shelf" were considered to originate in China, but the Old Regulations did not specify exactly what constituted the continental shelf. The New Regulations appear to adopt the definition of continental shelf formulated in the1982 United Nations Convention on the Law of the Sea.⁶ Article 4(11) of the New Regulations provides that articles obtained from the seabed or seabed bottom soil outside such country's territorial waters and to which such country enjoys the exclusive exploitation rights are goods that are wholly obtained within such country. This new language should significantly reduce the amount of interpretation to which products obtained in the offshore waters of a particular country may be subject.

Substantial Transformation

Under the WTO's Agreement on the Rules of Origin, if a good is not wholly obtained within a particular country its origin may be determined in accordance with the rules governing substantial transformation. The Old Regulations did not use the term "substantial transformation". Under the Old Regulations that dealt with import of goods, a good that was processed or manufactured in several countries was considered substantially processed (shizhixing jiagong) in a country if after such processing, such product's four-digit tariff code changed or the ratio of the value-added portion of the good to the total value of the good exceeded 30%.⁷ The Old Regulations that deal with the export of goods provided that the good would be considered as originating in China if China was the last location of a substantial change (shizhixing gaibian) to a good's nature, appearance or state.⁸

Article 6 of the New Regulations attempts to unify the guidelines set forth in the Old Regulations with respect to imported and exported goods. Article 6 provides that a substantial transformation occurs if, following manufacturing or processing, a change in tariff classification occurs but does not establish a specific ratio between value added in a given country to the total value of the good. In the Report of the Working Party on the Accession of China, China's representative stated the value-added threshold was set at 30%, but Article 6 leaves the exact determination to Customs, MOFCOM and AQSIQ.

The last supplementary criterion for determining the origin of goods is the location of the main manufacturing or processing operations that give rise to the features of the goods. If the primary manufacturing or processing that give rise to a good's basic features occur within a certain country then that will be the origin of such goods.

Factors not Affecting the Origins of Goods

Certain factors will not alter the origins of a particular good. Under the Old Regulations, spare parts, fittings, parts and tools that were attached to machines, instruments, vehicles or other equipment were deemed to originate in the country of the principal good. The New Regulations expand the scope of factors that do not affect the origins of goods to include packaging, accessories and explanatory documents such as user manuals. Similarly the energy used to produce goods, the physical buildings, equipment, machinery and tools used to produce a product will not influence the origins of a good.

Certificates of Origin

Consignors must also apply for a certificate of origin for their products prior to exporting them abroad. Exporters can apply for a certificate of origin either from AQSIQ or the China Council for the Promotion and International Trade (CCPIT). The specific procedures for registering with the AQSIQ and CCPIT are not included in the New Regulations.

Consignees, or their representatives, are permitted to apply for preliminary determinations on the origins of imports. Once an application is received, Customs has 150 days to make a determination. Goods that are consistent with the preliminary determination do not need to be examined again. Customs will, however, re-evaluate the classification of any goods that are inconsistent with the preliminary determination.

Fraudulent Activities

The New Regulations attempt to discourage fraudulent acts by importers and exporters but provide very limited penalties for such acts. Article 11 requires importers to truthfully report the origins of their imports in accordance with the New Regulations. Should Customs determine that the origins of a particular product are determined to differ from that which is marked on the goods, Customs may order the importer to remedy the classification.

Attempts to falsify certificates of origin or the supporting documents necessary to obtain a certificate of origin are subject to fines of between Rmb5,000 to Rmb100,000. If an importer or exporter receives illegal income from falsified documents, Customs may confiscate such income. Significant violations may result in criminal penalties.

Application of the New Regulations

Though the New Regulations set forth clear standards for determining the origins of imports, certain ambiguities remain. One such ambiguity arises from the implementation of China's commitment to liberalize its trading regime. Under the old rules, trading rights were limited to designated trading companies and manufacturing companies. As a result, the Old Regulations only permit companies with the right to conduct foreign trade, trade processing companies and foreign-invested enterprises to apply for certificates of origin.

The PRC Foreign Trade Law (中华人民共和国对外贸易法)provides that any foreign trade operator (wai mao jingying zhe) may apply for trading rights.⁹ The New Regulations, however, do not consistently use the term foreign trade operator in setting forth the obligations of importers and exporters. As discussed above, Article 12 of the New Regulations provides that in the case of imports a consignee (shou huo ren) or other party directly connected to the imported goods is permitted to apply for a preliminary decision on the origin of goods. Article 15 of the New Regulations, however, provides that Customs may render a preliminary determination based on an application submitted by a foreign trade operator. Thus it is unclear if a party that is directly related to an imported good, for example a retailer, can apply for a preliminary decision on the origin of goods it would like to sell. In the case of exporters, the New Regulations provide that a consignor (fa huo ren) can apply for a certificate of origin but there is nothing in the New Regulations that suggests what entity qualifies as a consignor. It is unclear why the drafters of the New Regulations did not also standardize the terminology used in these regulations with the Foreign Trade Law, but presumably the relevant trade authorities will interpret these terms broadly to include all companies with trading rights.

The New Regulations should improve the certainty of how goods entering and exiting China are classified and simplify the process for making determinations concerning rules of origin. However, the New Regulations could have been drafted more clearly to provide for consistency with China's internal laws as well as the WTO Agreement. Much of their practical impact will not be known until China issues the specific criteria for determining substantial transformation. For now, however, the New Regulations bring China one step closer to fulfilling its WTO commitments.

Endnotes

1 As reported in the China Daily on January 1 2004.

2 Adopted by the State Council on August 18 2004 and promulgated on September 3 2004.

3 The China Council for the Promotion of International Trade is also authorized to issue certificates of origin.

4 The Regulations repeal the PRC Place of Origin of Exports Regulations, which were promulgated by the State Council on March 8 1992 (the Export Regulations) and the General Administration of Customs, Place of Origin of Imports Tentative Procedures, promulgated on December 6 1986 (the Import Regulations).

5 Reflecting the political reality of China's "one country, two systems" approach to the Special Administrative Regions of Hong Kong and Macao, references to "country" are followed immediately by references to "region". For purposes of simplicity, this article will refer to country only.

6 On June 7 1996, China acceded to the 1982 United Nations Convention on the Law of the Seas, which provides: "The continental shelf of a coastal State comprises the seabed and subsoil of the submarine areas that extend beyond its territorial sea throughout the natural prolongation of its land territory to the outer edge of the continental margin, or to a distance of 200 nautical miles from the baselines from which the breadth of the territorial sea is measured where the outer edge of the continental margin does not extend up to that distance."

7 See Article 3 of the Import Regulations.

8 See Article 6(2) of the Export Regulations.

9 Promulgated April 6 2004, the Foreign Trade Law became effective on July 1 2004. Article 8 of the Foreign Trade Law defines foreign trade operator as any legal person, other organization or individual that engages in foreign trade business in accordance with the Foreign Trade Law.