Goods are considered as originating if the goods undergo specific manufacturing or processing such as
chemical reaction, distillation, purification, etc. in the territory of a party/country.

Retrieved from: Outline of Rules of Origin for EPA in Japan

Definition of Specific manufacturing

Regardless of any change in its classification or the extent of value added,
a product is considered to be substantially transformed when it has undergone
a specific manufacturing or processing operation which is described in the
product specific list rules.

A good is considered as originating when the manufacturing operation described
for the respective commodity was carried out.

Example

In the case of “Chemical Products”

PSR for glycerol of subheading 2905.45 under Japan-Australia EPA:
“the good has undergone a chemical reaction in the area of a party.
Chemical reaction is defined as a process which results in a molecule with a new structure.”

Retrieved from: Outline of Rules of Origin for EPA in Japan

In the case of “Marble Products”

PSR for Marble of heading 25.15 under PAN-EURO-MED origin system:
Cutting, by sawing or otherwise, of marble (even if already
sawn) of a thickness exceeding 25 cm

Retrieved from:Comparative Study on Preferential Rules of Origin

In the case of “Polypropylene paste “

PSR for Polypropylene paste of subheading 3902.10 under
Japan-Singapore Economic Partnership Agreement(JSEPA):
No required change in tariff
classification to heading 39.01 through
39.26, provided that non-originating
materials used undergo a chemical
reaction, purification, isomer
separation or biotechnological
processes in a Party.

Assessment: Polypropylene paste is produced from propylene by a process known as
metallocene catalysis polymerization, which is a form of chemical reaction. As,
Polypropylene meets the ROO under JSEPA, it is an originating good.

Retrieved from:Handbook on Rules of Origin for Preferential Certificates of Origin

The methodology of specific manufacturing/processing operations is widely used in the
PAN-EURO-MED origin system. In the textile and apparel sector, this methodology is
commonly used in the ATIGA, the NAFTA, the PAN-EURO-MED and the TPP origin systems.

The Specific Manufacturing or Processing Operations criterion has specific features as follows:
Features of the Specific Manufacturing or Processing Operations Criterion:
■Specific manufacturing operations are objective and unambiguous;
■Rules can be drafted in an easily understandable manner;
■Frequent modifications may be needed to catch up with technical developments;
■To be precise, longer and more detailed texts are needed;
■The rules vary from product to product;
■Frequent need of new rules for new products.

When the value added to a good through the production in a Party satisfies some
value content, the good can be qualified as an originating good of the Party.

Retrieved from: Outline of Rules of Origin for EPA in Japan

Regardless of changes in its tariff classification, a good is considered as originating when
the value of the product is increased up to a specified level expressed by an ad valorem percentage.

Retrieved from: Outline of Rules of Origin for EPA in Japan

RVC is the Regional Value Content of a good, expressed as a percentage.
QVC is the Qualifying Value Content of a good, expressed as a percentage.
(RVC and QVC are same meaning words)

VNM is the value of non-originating materials used in the production of a good.

Method of “Value-added criterion”

The rules-based on a value-added/ad-valorem criterion may largely be
described in two distinct ways:

1.Build-down method

a maximum allowance for non-originating materials
(maximum third country content allowance), meaning that a final product can be
considered as an originating product provided that the foreign inputs do not
exceed a certain threshold; or

2.Build-up method

a minimum requirement of domestic content (minimum local content
requirement)

Example Case study of “Value-added criterion”

Build-down method Case

Product-Specific Rules(PSR) for a passenger vehicle of heading 87.03 under
Japan-Australia EPA:
the value added in the country of manufacture (Qualifying Value Content) is not
less than 40% and the last process of production has been performed in the
exporting party

The QVC(RVC) of the vehicle is 80%. As the vehicle meet the ROO requirement under
Japan-Australia EPA, it is an originating good.

Build-up and Build-down method Case

Product-Specific Rules(PSR) for a Biscuit of heading 1905 under
ASEAN Trade In Goods Agreement(ATIGA):
A RVC of not less than 40 percent of the FOB value.

The RVC of the biscuit is 36%(less than 40%). As the biscuit does not meet
the ROO requirement under ATIGA, it is a non-originating good.

Comparison of Build-up and Build-down

Hair curling iron (8516.32) Case

An electric smoothing iron (subheading 8516.40) is made in TPP Party A from
non-originating parts (8516.90).
The value of the materials and costs associated with the production of the good are
as follows:

Retrieved from:Comparative Study on Preferential Rules of Origin

(a) Using the build-up method
Regional value content requirement (build-up method)
In case of the build-up method, the value added requirement (regional value
content of not less than 35 per cent) can also be used.
RVC = 2.00 x 100 / 5.25 ≈ 38.1%
This rule is fulfilled since the RVC is 38.1% when using the build-up method.

(b) Using the build-down method
Regional value content requirement (build-down method)
The value added requirement according to the build-down method (regional value
content of not less than 45 per cent) can be used.
FOB price US $ 5.25; the value of the non-originating smoothing iron parts is US
$ 1.00.
RVC = (5.25-1.00) x 100 / 5.25 ≈ 81%
This rule is fulfilled since the RVC is 81% when using the build-down method.

The Harmonized Commodity Description and Coding System, generally referred to as “Harmonized System” or simply “HS“ is a multipurpose international product nomenclature developed under the auspices of the World Customs Organization (WCO), an independent intergovernmental body.
The tariff schedule containing the headings, subheadings and the corresponding number codes, the notes to the Sections, of the Chapters and the Subheadings, as well as the General Rules for the interpretation of the HS.

THE HS CONTAINS
〇21 SECTIONS
〇96 CHAPTERS
〇1.200 HEADINGS
〇5,000 six figure groups called Subheadings
〇124 CONTRACTING PARTIES AND ONE CUSTOMS UNION.
〇202 COUNTRIES USE THEIR TARIFF SCHEDULE.

GOVERNMENTS USE HS FOR:
〇Exchange of trade data.
〇Establish duties and other taxes.
〇Control of regulated substances.
〇Development of Rules of Origin.
〇Preparation of statistics.
〇Price and quota controls.
〇Economic research and analysis.

All the HS codes can be searched from the WCO webpage.

All countries must classify the same substance under the same Subheading
〇Chapter (2Digits)
〇Heading (4Digits)
〇Subheading (6Digits)

They are arranged in a legal and logical structure and supported by well-defined rules to achieve uniform classification. You will need to understand how HS is structured before you can apply them in Rules of Origin (ROOs) as the
origin criteria(on) of a good in the Product-Specific Rule (PSR) Annex are arranged according to the HS classification numbers.

Below illustrates how Cranberry Juice is structured in the HS:2009.81.10

Retrieved from:Handbook on Rules of Origin for Preferential Certificates of Origin

Below illustrates how Vacuum Cleaners is structured in the HS:8508.70.00.90

Retrieved from: RULES OF ORIGIN FACILITATOR

Product-Specific Rules (PSR)

Even if the materials from third countries (non-originating materials) are used in the production, goods
are considered as originating when the goods satisfy the requirement set out in the product-specific rules (PSR).

product-specific rules(PSR) is generally provided as an annex to each EPA.
In most of the EPAs, PSR is stipulated in the form of either:
“change in tariff classification”,
“qualifying/regional value content”,
“specific manufacturing or processing”, or a combination of these.

Here is an example of PSR stipulated in the Annex to EPA.

If the materials from third countries (non-originating materials) are used in the production,
Usually, we need to check PSR stipulated in the Annex to EPA.

How to read Product-Specific Rules(PSR)

e.g. under Japan-Thailand EPA

In this situation, we need to check if a toasted bread can be qualified as an originating
good of Thailand Under Japan-Thailand EPA.

Retrieved from: Outline of Rules of Origin for EPA in Japan

It looks like the toasted bread is Thailand origin, but found out that the materials
from third countries (non-originating materials) are used in the production.

Retrieved from: Outline of Rules of Origin for EPA in Japan

The Flour and Butter are non-originating since they are imported from Non-Parties to Japan-Thailand EPA

The Toasted Bread is classified under 1905.40 while the Flour is classified
under chapters 11 and The Butter is classified under chapters 04 respectively.

The Toasted Bread is an originating good under Japan-Thailand EPA because
a change from chapters 11 and 04 to chapter 19 has occurred.

e.g. Japan-Vietnam EPA

Example of under Japan-Thailand EPA The Toasted Bread is considered as an originating good.
Here is another example of  Japan-Vietnam EPA.

Even the same production, The Toasted Bread is not considered as an originating good under Japan-Vietnam EPA,
because “PSR of Japan-Vietnam EPA” is different from “PSR of Japan-Thailand EPA”.

Here is PSR of Japan-Vietnam EPA (Annex 2)

PSR for toasted bread is “CC except from Chapter 11” of CTC rule (require Chapter in Change).
In this production Flour (HS Chapter 11) is used as a non-originating material.
It does not satisfy the PSR.

Without applicable exceptions to the substantial transformation criterion
toasted bread can not be qualified as an originating good of Vietnam.

e.g. under Japan-Singapore EPA

Good: Strawberries Jam (HS 2007.99)

PSR: A Change to heading 20.07 from any other Chapter (CC).

The strawberries jam is classified under chapter 20 while the strawberries
fruit and sugar are classified under chapters 08 and 17 respectively. The strawberries fruit
and sugar are non-originating since they are imported from Korea and Australia
respectively (Non-Parties to JSEPA). The strawberries jam is an originating good under
JSEPA because a change from chapters 08 and 17 to chapter 20 has occurred.

e.g. under Korea-Singapore EPA

Good: Crocodile Leather Handbag (HS 4202.21)

PSR:A Change to heading 42.01 through 42.03 from any other Heading (CTH).

The crocodile leather (HS Heading 41.15) is a non-originating material as it
is imported from Indonesia, a non-Party to KSFTA. The leather handbag is an originating
good under KSFTA because a change from HS Heading 41.15 to HS Heading 42.02 has
occurred.

e.g. under Japan-Thailand EPA

Good: soya sauce (HS 21.03)

PSR: Change of heading (change in the first 4 digits of the HS)(CTH)

The Soya beans (HS Heading 12.01) is a non-originating material as it
is imported from USA, a non-Party to Japan-Thailand EPA. The Soya sauce is an originating
good under Japan-Thailand EPA because a change from HS Heading 12.01 to
HS Heading 21.03 has occurred.

Here is the difference between
“Goods satisfy the requirement set out in the product-specific rules”
and
“Goods produced exclusively from originating materials”

“Goods satisfy the requirement set out in the product-specific rules”

For more detail see:What is “Goods produced exclusively from originating materials

“Goods produced exclusively from originating materials”

When the HS code of a good differs from all HS codes of non-originating materials,
the good is qualified as an originating good.

This method is called “Change in tariff classification criterion(CTC)”

Retrieved from: Outline of Rules of Origin for EPA in Japan

Harmonized System(HS)

Before explaining “Change in tariff classification criterion(CTC)”,
basic knowledge of Harmonized System(HS) is needed.

The Harmonized Commodity Description and Coding System, generally referred to as “Harmonized System” or simply “HS“ is a multipurpose international product nomenclature developed under the auspices of the World Customs Organization (WCO), an independent intergovernmental body.
The tariff schedule containing the headings, subheadings and the corresponding number codes, the notes to the Sections, of the Chapters and the Subheadings, as well as the General Rules for the interpretation of the HS.

THE HS CONTAINS
〇21 SECTIONS
〇96 CHAPTERS
〇1.200 HEADINGS
〇5,000 six figure groups called Subheadings
〇124 CONTRACTING PARTIES AND ONE CUSTOMS UNION.
〇202 COUNTRIES USE THEIR TARIFF SCHEDULE.

GOVERNMENTS USE HS FOR:
〇Exchange of trade data.
〇Establish duties and other taxes.
〇Control of regulated substances.
〇Development of Rules of Origin.
〇Preparation of statistics.
〇Price and quota controls.
〇Economic research and analysis.

All the HS codes can be searched from the WCO webpage.

All countries must classify the same substance under the same Subheading
〇Chapter (2Digits)
〇Heading (4Digits)
〇Subheading (6Digits)

Retrieved from:Identifying: World Customs Organization (WCO) Harmonized Codes

“Change in tariff classification criterion(CTC)” method is applicable only to non-originating materials. To qualify under this origin criterion, non-originating materials that are used in the production of the good must not have
the same HS classification (e.g. Chapter level, Heading level or Sub Heading Level) as the final good.

Retrieved from:Identifying:Handbook on Rules of Origin for Preferential Certificates of Origin

Depending on the Free Trade Agreement (FTA) requirements, the good would
have to undergo either a change in Chapter, Heading or Sub Heading level in order to qualify
for preferential treatment under the FTA.
Therefore, to use this method, manufacturers and/or exporters are required to know the HS
classification of the final good and the non-originating raw materials.

Product-Specific Rules (PSR)

Even if the materials from third countries (non-originating materials) are used in the production, goods
are considered as originating when the goods satisfy the requirement set out in the product-specific rules (PSR).

PSR is generally provided as an annex to each EPA.
In most of the EPAs, PSR is stipulated in the form of either: “change in tariff classification”,
“qualifying/regional value content”, “specific manufacturing or processing”, or a combination of these.

Here is an example of PSR stipulated in the Annex to EPA.

If the materials from third countries (non-originating materials) are used in the production,
Usually, we need to check PSR stipulated in the Annex to EPA.

How to read Product-Specific Rules(PSR)

e.g. under Japan-Thailand EPA

In this situation, we need to check if a toasted bread can be qualified as an originating
good of Thailand Under Japan-Thailand EPA.

Retrieved from: Outline of Rules of Origin for EPA in Japan

It looks like the toasted bread is Thailand origin, but found out that the materials
from third countries (non-originating materials) are used in the production.

Retrieved from: Outline of Rules of Origin for EPA in Japan

The Flour and Butter are non-originating since they are imported from Non-Parties to Japan-Thailand EPA

The Toasted Bread is classified under 1905.40 while the Flour is classified
under chapters 11 and The Butter is classified under chapters 04 respectively.

The Toasted Bread is an originating good under Japan-Thailand EPA because
a change from chapters 11 and 04 to chapter 19 has occurred.

e.g. Japan-Vietnam EPA

Example of under Japan-Thailand EPA The Toasted Bread is considered as an originating good.
Here is another example of  Japan-Vietnam EPA.

Even the same production, The Toasted Bread is not considered as an originating good under Japan-Vietnam EPA,
because “PSR of Japan-Vietnam EPA” is different from “PSR of Japan-Thailand EPA”.

Here is PSR of Japan-Vietnam EPA (Annex 2)

PSR for toasted bread is “CC except from Chapter 11” of CTC rule (require Chapter in Change).
In this production Flour (HS Chapter 11) is used as a non-originating material.
It does not satisfy the PSR.

Without applicable exceptions to the substantial transformation criterion
toasted bread can not be qualified as an originating good of Vietnam.

e.g. under Japan-Singapore EPA

Good: Strawberries Jam (HS 2007.99)

PSR: A Change to heading 20.07 from any other Chapter (CC).

The strawberries jam is classified under chapter 20 while the strawberries
fruit and sugar are classified under chapters 08 and 17 respectively. The strawberries fruit
and sugar are non-originating since they are imported from Korea and Australia
respectively (Non-Parties to JSEPA). The strawberries jam is an originating good under
JSEPA because a change from chapters 08 and 17 to chapter 20 has occurred.

e.g. under Korea-Singapore EPA

Good: Crocodile Leather Handbag (HS 4202.21)

PSR:A Change to heading 42.01 through 42.03 from any other Heading (CTH).

The crocodile leather (HS Heading 41.15) is a non-originating material as it
is imported from Indonesia, a non-Party to KSFTA. The leather handbag is an originating
good under KSFTA because a change from HS Heading 41.15 to HS Heading 42.02 has
occurred.

e.g. under Japan-Thailand EPA

Good: soya sauce (HS 21.03)

PSR: Change of heading (change in the first 4 digits of the HS)(CTH)

The Soya beans (HS Heading 12.01) is a non-originating material as it
is imported from USA, a non-Party to Japan-Thailand EPA. The Soya sauce is an originating
good under Japan-Thailand EPA because a change from HS Heading 12.01 to
HS Heading 21.03 has occurred.

Here is an example of an item which does not satisfy the ROO in CTC case
In the case of not fulfilling the CTC rule

Goods that are produced using non-originating materials will have to undergo
substantial transformation in a country for the good to be qualified as originating.
The methods “product-specific rules (PSR)” used to measure the transformation are:

a) “Change in tariff classification criterion(CTC)”,
b) “Value-added criterion (VA,RVC)”, or
c) “Specific manufacturing or processing operation criterion (SP)”.

These 3 methods can be used in combination or standalone, depending on the origin criteria(on) for the good in a Free Trade Agreement (FTA).
The origin of these goods would be dependent on the country where the last substantial transformation is performed.

Retrieved from: Outline of Rules of Origin for EPA in Japan

PSR is stipulated in an annex to each FTA

Even if the materials from third countries (non-originating materials) are used in the
production, goods are considered as originating when the goods satisfy the
requirement set out in the product-specific rules(PSR).

PSR is generally provided as an annex to each FTA.

Here is an example of Product-Specific Rules (PSR) stipulated in an annex to
Japan-Thailand EPA

Here is an example of Product-Specific Rules (PSR) stipulated in an annex to
Japan-Vietnam EPA

Require “Big change” to be considered as an originating good

Retrieved from: Outline of Rules of Origin for EPA in Japan

This “Big change” is named as “substantial transformation” and a Party in which such a big change happened is considered as an origin of the Party.
Goods underwent big change are named as “Goods satisfied substantial transformation criterion”.

3 types of Substantial Transformation (Big Change)

(1) Change-in-tariff-classification Criterion (CTC rule)

When the HS code of a good differs from all HS codes of non-originating materials,
the good is qualified as an originating good.
For more details see What is “Change in tariff classification criterion(CTC)”

(2) Value-added criterion (VA rule)

When the value added to a good through its production in a Party satisfies some value content
the good is qualified as a Party satisfies some value content, the good is qualified as an
originating good.
For more details see What is “Value-added criterion”

(3) Specific manufacturing or processing operation  (SP rule)

When specific manufacturing or processing operation is applied to all non-originating materials,
the good is qualified as an originating good.
For more details see What is “Specific manufacturing or processing operation criterion (SP)”

Example of PSR

PSR for subheading 3904.10(Polyvinyl Chloride) under Japan-Thailand EPA

PSR for a good classified in subheading 3904.10 is composed of 3 criteria and
there is no priority order among these criteria (Co-equal rule) If one of these
criteria is met it satisfies PSR.