A trading company in Importing Country A is attempting to import neckties from Italy, an FTA Contracting Country. These neckties are manufactured in Italy. In the production process of the neckties, materials sourced from non-FTA countries including:

• WOVEN FABRIC/MAIN
• INTERLINING
• BRAND LABEL
• CARE LABEL
• SEAMTHREAD

Are used. Will these neckties qualify for tariff reduction under the FTA’s rules of origin when imported in this manner?

2. Ruling Issuance Date

May 21, 2024

3. Product Name

Necktie

4. HS Code

6215.10

5. Product-specific Rule of Origin

“Weaving combined with making-up including cutting of fabric; or…”

Note: This rule is found in one of the agreements concluded by the EU among various FTAs. The rules may vary depending on each FTA. The product-specific rules do not use the change in tariff classification (CTC) or value-added (VA) criteria but specify only certain manufacturing processes.

6. List of Raw Materials

No	Material Name	HS Code	Description	Origin Determination
①	WOVEN FABRIC/MAIN	Ch.50	Woven fabric	Non-Contracting Country
②	INTERLINING	Ch.55	Interlining	Non-Contracting Country
③	BRAND LABEL	Ch.58	Polyester brand label	Non-Contracting Country
④	CARE LABEL	Ch.58	Polyester care label	Non-Contracting Country
⑤	SEAMTHREAD	Ch.54	Seam thread	Non-Contracting Country

7. Manufacturing Process

① WOVEN FABRIC/MAIN

• Cutting
• Weaving
• Finishing the fabric
• Sewing into the shape of a tie
• Final finishing and inspection

② INTERLINING

• Cutting
• Weaving
• Finishing the fabric
• Sewing into the shape of a tie
• Final finishing and inspection

The following three items have not undergone significant processing changes in Italy:

• ③ BRAND LABEL
• ④ CARE LABEL
• ⑤ SEAMTHREAD

8. Certification Reason

The necktie’s HS code is 6215.10, therefore the product-specific rule of origin is “Weaving combined with making-up including cutting of fabric.” An interesting aspect of the product-specific rules of origin applied in this agreement is that they do not use the change in tariff classification (CTC) or value-added (VA) criteria. Instead, they specify only certain manufacturing processes. This makes it challenging to meet the origin criteria when using non-originating materials that do not undergo significant processing in Italy, an FTA signatory country.

Upon reviewing the details of the raw materials, it is clear that the non-originating materials meet the criteria set by the product-specific rule of origin, thus the necktie qualifies as an FTA originating product. Specifically, ① WOVEN FABRIC/MAIN and ② INTERLINING are produced in non-contracting countries and undergo weaving and cutting processes in Italy, meeting these requirements.

③ BRAND LABEL and ④ CARE LABEL, being less than 10% of the total weight, comply with Article 3.6 Tolerances (often referred to as de minimis in non-EU agreements) and ANNEX 3-A Note 7-2 regulations.

ANNEX 3-A Note 7 (2)

⑤ SEAMTHREAD (Sewing Thread) was determined to meet the rules of origin despite being a non-originating material. The reason for this is that ANNEX 3-A Note 3-3 states “If a product specific rule of origin provides that a product shall be produced from a particular material, this does not prevent the use of other materials which cannot satisfy the requirement because of their inherent nature.” It was determined that SEAMTHREAD falls under this exception.

9. Conclusion

This case is intriguing because ③ BRAND LABEL and ④ CARE LABEL, being less than 10% of the total weight, are passed through applying tolerances (de minimis) to meet the rules of origin, and ⑤ SEAMTHREAD, despite not meeting the rules of origin, qualifies under ANNEX 3-A Note 3-3 which states that “The use of certain materials is not prevented if due to their inherent nature they cannot meet other rules.” This is due to their critical role in the product’s manufacturing process and the impossibility of their substitution.

Additionally, in cases like the current example where the product-specific rules do not use the change in tariff classification (CTC) or value-added (VA) criteria but specify only certain manufacturing processes, the provision allowing non-originating materials to be deemed as originating if they “cannot meet other rules due to their inherent nature” is a fascinating relief measure with potential broad applications. However, determining whether such conditions are met is crucial and requires thorough consultation with customs authorities. Applying this relief measure necessitates meticulous discussions with customs to ensure compliance. FTAs’ rules of origin contain various types of relief measures, so even if it appears that the rules of origin are not met at first glance, there may be hidden provisions that provide relief. It is important not to overlook these possibilities.

 

Introduction

An importer A is considering importing Nickel Powder from Exporting Country United Kingdom, an FTA Contracting Country. The Nickel Powder is manufactured in United Kingdom using raw materials sourced from Non-Contracting Countries. Specifically, raw materials such as crude nickel (HS 7501.20) and various gases like carbon monoxide, hydrogen, sulfur dioxide, ammonia, and oxygen (HS 28) are utilized in the production process within United Kingdom. This raises the question: Does this method of production meet the rules of origin under the FTA, allowing for reduced tariffs?

Ruling Information

Ruling Date	May 1, 2024
Product Name	Nickel Powder
HS Code	7504.00
Applicable Origin Rule	Change to Tariff Subheading (CTSH)

Origin Criteria for Nickel Powder

To qualify for preferential tariff treatment under the FTA between Importing Country A and United Kingdom, the Nickel Powder must satisfy the product-specific rule (PSR) of origin. According to the agreement, the product-specific rule for Nickel Powder under HS code 7504.00 requires a change to the tariff subheading (CTSH) during production.

Raw Materials and Origin Classification

Raw Material	HS Code	Description	Origin Classification
Crude Nickel	7501.20	Sourced from Non-Contracting Country	Non-Contracting Country
Carbon Monoxide	28	Sourced within Contracting Country	Neutral Element
Hydrogen	28	Sourced within Contracting Country	Neutral Element
Sulfur Dioxide	28	Sourced within Contracting Country	Neutral Element
Ammonia, Oxygen	28	Sourced within Contracting Country	Neutral Element

Manufacturing Process

Description
Gas Production
Thermal Decomposition
Nickel Powder Production

Reason for Approval

For the application of the FTA, the first consideration is the non-originating material, Crude Nickel (HS: 7501.20). Since the HS code of the final product, Nickel Powder, is 7504.00, and there has been a change in the 6-digit level HS code during manufacturing and processing in the FTA contracting country, the product-specific rule of origin (CTSH) is met.

Here is a part of the list from the annex of the FTA agreement, which specifies the product-specific rules of origin for each HS code.

Next, regarding the presence of the non-originating materials, carbon monoxide, hydrogen, sulfur dioxide, ammonia, and oxygen (all classified under HS code chapter 28), these are considered Neutral elements under the relevant FTA agreement. Therefore, it is not necessary to consider the originating status of these materials when determining whether the Nickel Powder qualifies as an originating product from the contracting country.

In this case, the FTA agreement specifies Neutral elements in article 3.13.
in this case, these materials fall under (a) fuel, energy, catalysts, and solvents.

Summary

Therefore, the Nickel Powder is recognized as originating from the FTA Contracting Country and is eligible for tariff reduction.

A notable point in this case is that when manufacturing a product in the FTA contracting country, even if non-originating materials sourced from non-contracting countries are used, these materials can be considered Neutral elements according to the applicable agreement. Specifically, in this case, these materials fall under (a) fuel, energy, catalysts, and solvents. This means that there was no need to individually assess whether these non-originating materials met the rules of origin.

If non-originating materials are used and do not meet the rules of origin, but are classified as Neutral elements, they can still meet the rules of origin. Therefore, it is crucial to identify such exception provisions from the agreement text.

By following the above manufacturing processes, the importing company can benefit from the preferential tariff rates. Importing Nickel Powder through the usual methods incurs higher production costs, but by sourcing non-originating materials in compliance with the FTA rules of origin, the company can significantly reduce tariffs. This results in considerable cost savings, making the importation process more efficient and profitable.

The Potential for Tariff Reduction Using FTAs

An import company in Country A is attempting to import shoes from Cambodia, a contracting party of an FTA. These shoes are manufactured in Cambodia using various raw materials sourced both domestically within Cambodia and from non-contracting countries. Will such shoes, produced under these conditions, qualify for reduced tariffs under the FTA’s rules of origin?

Date of Ruling Issuance

May 8, 2024

Product Name

Shoes

HS code

6402.99-

Rules of Origin for the Final Product

Product-specific rule: “CC”

List of Raw Materials

Raw Material Name	HS code	Representative Item	Origin Certification
Upper Material	Chapter 39	Plastics	Non-Contracting Country
Upper Material	Chapter 54	Man-made filaments	Non-Contracting Country
Upper Material	Chapter 59	Coated textile fabrics	Non-Contracting Country
Midsole Material	Chapter 39	Plastics	Non-Contracting Country
Midsole Material	Chapter 48	Paper and paperboard	Non-Contracting Country
Outsole Material	Chapter 39	Plastics	Non-Contracting Country
Insole Material	Chapter 39	Plastics	Non-Contracting Country
Adhesives, etc.	Chapter 35	Glues	Non-Contracting Country

Manufacturing Process

Description
Cutting of raw materials
Sewing of raw materials
Assembly of the product

Reason for Certification

The HS code for the shoes is 6402.99-. Therefore, the product-specific rule of origin is ‘CC’, which is the applicable rule of origin in this case. Upon reviewing the details of the raw materials, the non-originating materials meet the criteria set by the product-specific rule of origin. Hence, the product qualifies as an FTA originating product.

*“CC” stands for Change in Chapter, which requires that non-originating materials used in a product must undergo a change at the 2-digit HS code level during the final production process.

Summary

In this case, importing shoes manufactured in Cambodia not only achieved tariff reductions through the application of preferential tariffs but also successfully reduced overall costs. This was accomplished by sourcing raw materials, which are the components of the shoes, from third countries at lower prices. The materials were then processed, including cutting and sewing, in Cambodia.

While determining whether the components meet the FTA’s rules of origin can be complex due to the variety of materials involved, establishing such a system allows for long-term benefits from tariff reductions. Customs specialists play a crucial role in navigating these complexities and ensuring compliance with the FTA’s rules of origin.

FTAs provide significant opportunities for reducing tariffs and enhancing competitiveness by leveraging preferential tariff rates. By understanding and applying the FTA rules, customs specialists can help companies optimize their import processes, leading to substantial cost savings. This case exemplifies how strategic sourcing and compliance with FTA regulations can lead to sustainable economic advantages and improved competitiveness in the global market.

Introduction

A trading company in Importing Country A is planning to import sugar confectionery from FTA Contracting Country B. The sugar confectionery is manufactured in FTA Contracting Country B using sugar and glucose syrup sourced from within B, and additives such as acidulants, flavorings, colorants, and water from Non-Contracting Countries. Will this manufacturing process allow the sugar confectionery to meet the FTA origin rules and qualify for reduced tariffs?

Customs Ruling Details

Issuance Date

December 28, 2021

Product Name

Sugar Confectionery

HS Code

1704.90

Origin Rule

CTH (Change to Tariff Heading)

List of Raw Materials

Raw Material	HS Code	Origin
Sugar	1701	FTA Contracting Country
Glucose Syrup	1702	FTA Contracting Country
Acidulant	2918	Non-Contracting Country
Flavoring	3302	Non-Contracting Country
Colorant	3203	Non-Contracting Country
Water	2201	Non-Contracting Country

Manufacturing Process

Preparation of raw materials

Passing through magnet

Passing through filter

Boiling

Adding raw materials

Cooling and mixing

Laminating candy base

Stretching candy base

Cutting candy base

Shaping and inserting sticks

Cooling

Inspection with metal detector

Individual packaging and tagging

Re-inspection with metal detector

Inspection with X-ray machine

Temporary storage

Packing in decorative boxes

Packing in cardboard boxes

Pallet stacking

Shipping

Reason for Approval

The HS code for the sugar confectionery is 1704.90, and the product-specific rule of origin is *CTH. Upon reviewing the details of the raw materials, the acidulants, flavorings, colorants, and water sourced from non-FTA countries meet the criteria set by the product-specific rule of origin. Therefore, the sugar confectionery is recognized as an originating product under the FTA and is eligible for tariff reduction.

*“CTH” stands for Change to Tariff Heading, which requires that non-originating materials used in a product must undergo a change at the 4-digit HS code level during the final production process.

Conclusion

In this case study, we see a strategic approach to importing sugar confectionery that not only reduces tariffs but also lowers raw material costs. The main ingredients of the sugar confectionery, sugar and glucose syrup, are sourced from an FTA signatory country, ensuring that the final product is largely considered to be of FTA origin. This high purity level of the product underscores its compliance with FTA rules.

While the primary ingredients are procured from the FTA signatory country, supplementary materials such as acidulants, flavorings, colorants, and water are sourced from non-FTA countries at lower costs. This strategy allows the company to maintain the product’s high quality and purity while significantly reducing procurement costs.

By adhering to the product-specific rules of origin and strategically sourcing non-originating materials, the company qualifies for preferential tariff rates under the FTA. This dual approach of cost optimization and tariff reduction showcases the company’s effective use of FTAs to enhance profitability.
Understanding and leveraging FTAs strategically can lead to substantial business opportunities. This case demonstrates how knowledge of FTA rules and smart sourcing decisions can create a competitive edge in international trade.