In the first half of 2020, trade between the ASEAN region and China rose 5.6% to US$314 billion, accounting for 14.7% of China's total foreign trade volume1, signifying the growing trade relationship between China and the ASEAN region since the outbreak of the US-China trade war. This is also reflected in that the ASEAN region has now become China's largest trading partner and Chinese investment into the ASEAN manufacturing sector rapidly rose from US$1,449 million in 2018 to US$3,250 million in 2019.2 With FDI inflows to Vietnam reaching an all-time high of US$16 billion this year, particularly in the manufacturing sector3, there is increasing importance in navigating the rules of origin.
Vietnam has taken major steps in its global economic integration and is on its way to become an investment hub. Recent significant milestones include its entrances into the Comprehensive and Progressive Agreement for Trans-Pacific Partnership ("CPTPP") and EU-Vietnam Free Trade Agreement ("EVFTA"). These new-generation FTAs are expected to bring enormous benefits to Vietnam's economy through greater trade, with the tariff elimination boosting Vietnam's key export industries. To maximise benefits from the FTAs, Vietnam may face a variety of challenges, one of which is complying with the rules of origin - one of the most important aspects of the FTAs. This article provides companies a brief outlook on the legal and policy framework of Vietnam in application of the rules of origin under the new-generation free trade agreements.
- Tighter rules of origin under Vietnam's commitment to CPTPP and EVFTA
For general exported goods to be considered as "Made in Vietnam", they must be either wholly obtained or produced in Vietnam. If not, they must have a minimum Vietnam input value (LVC) of 30% or different Harmonised System (HS) classifications. Rules of origin under the CPTPP and EVFTA are much stricter and more complex to implement compared to the aforementioned rule. While both Acts define "Made in Vietnam" products if they are wholly obtained or produced extensively in Vietnam, under the CPTPP, products are also considered as 'originating from Vietnam' if they satisfy the Regional Value Content Rule (RVC). Meanwhile, the EVFTA provides for a different set of origin rules, under which a product is considered as originating from Vietnam if they satisfy product-specific rules (PSR) of EVFTA.
- Application for Certificate of Origin ("C/O")
Products exported from Vietnam to CPTPP and EU countries with a preferential origin must be accompanied by a C/O issued by a local competent authority. For export under EVFTA, a self-declaration of origin of an exporter for a consignment with the total value not exceeding EUR 6,000 should be provided, or an exporter approved/ registered on the database in accordance with regulations of the MOIT is also accepted. Circulars No. 03/2019/TT-BCT and No. 11/2020/TT-BCT provide for detailed guidance and application forms related to C/O.
- Inspection of Origin Qualification
In case of any suspicion of fraud or un-qualification in the origin of goods, the importing CPTPP country may conduct an inspection to verify the origin of goods exported from Vietnam from one or more of the following parties: (i) the competent Vietnamese authority; (ii) the importer of the goods; (iii) the exporter or producer of the goods; (iv) request for on-site investigation to the premises of the exporter or producer of the goods; and other procedures. Following the request with sufficient information from the importing country, the Vietnamese competent authority shall carry out inspections according to the procedure stipulated in Decree 31/2018/ND-CP.
Similar inspection procedures are applied under the EVFTA. According to the EVFTA, inspections of origin of goods can be carried out randomly or whenever the importing country has reasonable doubts as to the authenticity of the documents certifying the origin of goods.
- Potential Sanctions Imposed on Origin Mislabeling
If the authority concludes that the exported goods do not meet the "Made in Vietnam" criteria, the exporter may be held responsible for acts such as misdeclaration, manufacturing and trading of counterfeits and smuggling. Offenders under these acts may suffer administrative and criminal sanctions including fines, cessation of business operations and seizure of goods. If goods are being finished in Vietnam before being sent to the US, then any disruption in the supply chain can be very painful.
- Local Policy and Practice of Enforcement against Origin Mislabeling
On 31 December 2019, the Vietnamese Government introduced Resolution No. 119/NQ-CP on Emergency measures for enhancement of state management regarding prevention and combat against origin fraud and illegal goods transport ("Resolution 119"). Resolution 119 sets out further cooperation on developing legislation and facilitating policy implementation on goods origins and foreign investment, implementing stricter management on the issuance of C/O, adopting suitable routes for self-certification of goods origin and C/O via the Internet, and promoting international cooperation against evasion of trade remedies and origin fraud. It reflects the Government's strong commitment in combating origin fraud and developing a legal framework complying with the new origin standards under CPTPP and EVFTA.
Inspections into C/O by Vietnam Customs authorities have recently intensified. According to a Customs report, in the first 6 months of 2020, one-third of exporters inspected have been found to violate regulations on rules of origin. The amount of money collected through sanctions is over VND 33 billion (US$1.42 million).4] Goods most likely to be inspected vary in range, from computers, mobile phones, textiles, leather shoes and bags.5 However, Customs have also recently confiscated completed bicycles, bicycle parts and accessories for assembling kitchen cabinets6.
As the ASEAN region has now become China's largest trading partner, Chinese manufacturers are increasingly looking to the region for manufacturing support. To add to this, the trade war between US and China has led to more goods being manufactured outside China to avoid import duties and/or increasing costs. With multiple countries providing inputs for production, navigating the rules of origin is becoming more critical.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.