U.S.-Australia Free Trade Agreement
Using the Rules of Origin to Qualify Your Product
The U.S.-Australia Free Trade Agreement (FTA) was largely modeled upon the North American Free Trade Agreement (NAFTA) between the United States, Canada, and Mexico. Thus, those familiar with NAFTA will recognize some aspects of the Rules of Origin section of the U.S.-Australia FTA. There are, however, some important differences, which require the close attention of the U.S. exporter. If you are new to this process, you may wish to read or print out for later reading the section below on How to Read the Rules of Origin, prior to reviewing the U.S.-Australia FTA Rules of Origin or for the revisions to the rules of origin (Schedule 1 in Australia's regulations) based on the 2007 revisions to the Hamonized System).
How To Read the Rules of Origin
Rules of origin are written in terms of the Harmonized System (HS) of Tariff Classification. The HS classification system uses six to ten digit codes to identify goods. The first six digits of an HS number are harmonized among the majority of the world's countries. The last four digits are unique to each country. The vast majority of the product-specific rules of origin under the U.S.-Australia FTA use an HS classification number. The United States uses Schedule B Numbers to classify exported products from the United States and these numbers are based on the international HS system. Therefore, the first step in interpreting the "rules" is to obtain the appropriate code for the good in question. Note: the first two digits of an HS number are referred to as a "chapter," the first four digits are called a "heading" (e.g., 1905), and the first six digits are called a "subheading" (e.g., 1905.90).
A rule of origin may consist of:
1) A change in tariff classification;
2) A regional value-content requirement;
3) Both a change in tariff classification and a regional value content requirement.
Note: It is necessary to refer to the rule associated with the product being exported. Regional value content can only be applied when it is allowed under a product-specific rule, and only a minority of product-specific rules of origin allow for regional value content calculations.
Some Examples
1) An example of a rule that employs a simple tariff shift is:
Rule of Origin: "A change to heading 1902 through 1905 from any other chapter."
Products: Breads, pastries, cakes, biscuits (HS 1905.90)
Non-U.S. or Australian input: Flour (classified in HS chapter 11), imported from Europe.
Explanation: For all products classified in HS headings 1902 through 1905, all non-U.S. or Australian inputs must be classified in an HS chapter other than HS chapter 19 in order for the product to obtain preferential duty treatment. These baked goods would qualify for tariff preference because the non-originating goods are classified outside of HS chapter 19. (The flour is in chapter 11). However, if these products were produced with non-originating mixes, then these products would not qualify because mixes are classified in HS chapter 19, the same chapter as baked goods.
2) An example of a rule that employs both the "tariff shift" and "regional value content" is:
Rule of Origin: "A change to subheading 9403.10 through 9403.80 from any other heading; or
A change to subheading 9403.10 through 9403.80 from any other subheading, provided there is a regional value content of not less than
(a) 35 percent based on the build-up method, or
(b) 45 percent based on the build-down method."
Product: Wooden Furniture (HS # 9403.50)
Non U.S. or Australian input: Parts of furniture (classified in 9403.90), imported from Asia.
Explanation: Wooden furniture can qualify for preferential tariff treatment in two different ways - through a tariff shift, or a combination of a tariff shift and regional value content requirement.
Because the non-U.S. or Australian input is classified in the same heading (9403) as the final product in this case, the good does not meet the simple "tariff shift" in the first rule. Moving down to the second rule though, the good can meet the tariff shift because the non-originating component is from a different subheading than the final product. For the good to qualify as originating, however, it must also pass the regional value content test.
Regional Value Content
The Regional Value Content test allows the good to qualify using either one of two methods. These are the build-down and build-up methods.
Build-down method:
Regional Value Content (RVC) = (( Adjusted Value - Value of Non-Originating Materials)/Adjusted Value)X 100
Build-up method:
Regional Value Content (RVC) = (Originating Materials/Adjusted Value) X 100
Using the example above then:
We will assume that the adjusted value for the piece of furniture in question is $1000.00.
The value of non-originating materials used in the production of the good excludes, according to Article 5.5:
1) the costs of freight, insurance, packing, and all other costs incurred in transporting the material to the location of the producer;
2) duties, taxes, and customs brokerage fees on the material paid in the territory of one or both of the Parties, other than duties and taxes that are waived, refunded, refundable, or otherwise recoverable, including credit against duty or tax paid or payable;
3) the cost of waste and spoilage resulting from the use of the material in the production of the good, less the value of renewable scrap or byproducts;
4) the cost of processing incurred in the territory of a Party in the production of the non-originating materials; and
5) the cost of originating materials used in the production of the non-originating material in the territory of a Party
Our assumed Value of Non-originating Materials in this case is $500.00. Plugging this into the build-down formula:
Regional Value Content (RVC) = ($1000 - $500)/$1000 X 100 = 50%
We can see that the percentage is greater than the 45% required by the rule. Therefore, the good qualifies as originating.
If instead, we use the build-up formula (i.e., (value of originating materials / adjusted value) X 100):
Note: Certain expense may be added (as some are able to be deducted from non-originating materials covered above) to the value of originating materials. For more information on valuing materials, refer to Article 5.4 and 5.5 of the FTA.
Regional Value Content (RVC) = $500/$1000 X 100 = 50%
The RVC is again 50% and is greater than the 35% required by the rule. With either method, the good specified in this example qualifies as originating under the U.S.-Australia FTA.
Other Factors
In addition to the rules of origin, it is sometimes appropriate to consider other factors found in Chapter 5 of the U.S.-Australia FTA when determining the origin of a product.
De Minimis
Even if a good does not meet the rule of origin requirement, if foreign components do not exceed ten percent of the adjusted value of the good, i.e., a de minimis amount, and the good meets all other applicable criteria set forth in Chapter 5 for qualifying, then the good will be considered originating.
For textiles and apparel the de minimis rule requires all non-originating fibers and yarns make up less than seven percent of the total weight of the product.
There are some cases where the de minimis rule does not apply. To review these exceptions, go to Article 5.2 of the Agreement. For textiles and apparel refer to Article 4.2 of the Agreement.
Accumulation
Goods that are produced in either the United States or Australia, or both, qualify as originating in this Agreement. Thus, inputs from Australia are included in determining whether a good exported from the United States qualifies for FTA treatment.
Fungible Goods
To simplify origin claims, the U.S.-Australia FTA allows exporters to consolidate fungible inputs that originate from various foreign countries and use normal accounting rules to determine their origin. Fungible goods or materials refers to goods or materials that are interchangeable for commercial purposes and whose properties are essentially identical. Their origin may be decided based upon any of the inventory methods generally recognized in the exporting country, such as averaging, last-in first-out, or first-in first-out. Physical separation of the goods is not necessary.
Prepared by the Trade Information Center