RCEP: Access to the world’s largest free trade area

On June 2, the Regional Comprehensive Economic Partnership (RCEP) agreement finally came into force in the Philippines.

The RCEP agreement, which was adopted by other signatories as early as Jan. 1, 2022, is an ASEAN-led initiative that creates the world’s largest free trade area in terms of combined Gross Domestic Product (GDP) and market size, accounting for almost one-third of the world’s population. The RCEP’s signatories include the 10 ASEAN member states plus Australia, China, Japan, South Korea, and New Zealand.

So, what’s the big deal? Since it is a free trade agreement, one of the standout features of RCEP is the harmonization of the rules of origin (ROO). Think of ROO as a passport for products — a means of determining a product’s nationality and its eligibility for preferential tariff treatment. This is a game-changer for businesses, helping them reduce costs and boost their competitiveness within the regional market.

Why does this matter? These new rules are simpler and more flexible than those provided under existing agreements, such as the ASEAN Trade in Goods Agreement (ATIGA). RCEP has thrown open the doors for full cumulation, meaning that any production or material originating in an RCEP country can count as originating from any other member country. The RCEP is a cooperative effort to open up wider product coverage, lower Regional Value Content (RVC) thresholds, and longer transition periods for some goods.

In the Philippines, the benefits granted by RCEP can be enjoyed by importers and exporters by following the guidelines under Customs Memorandum Order (CMO) No. 12-2023 on proving the products’ origin, obtaining preferential tariff treatment, and verifying procedures under RCEP.

As for proving the products’ origin, CMO No.12-2023 provides for the two main types of origin criteria under the RCEP: (1) A Change in Tariff Classification (CTC), or (2) RVC. A CTC means that the non-originating materials used to produce the final product have undergone a change in their tariff classification at a certain level (e.g., chapter, heading, or subheading) in the Harmonized System (HS) of tariff nomenclature. An RVC, on the other hand, means that the value of the originating materials, labor, and overhead involved in producing the final product is at least a certain percentage of its total value.

To illustrate these origin criteria, in the case of garments, such as shirts, trousers, or dresses, the product-specific rules of origin under the RCEP require either a CTC at the four-digit level (HS heading) or an RVC of 40% or more.

Let’s take for example, a shirt that has an HS code of 6205. If the non-originating fabrics used to make the shirt have a different HS heading (e.g., 5208 for cotton fabrics), then the shirt satisfies the CTC criterion. Alternatively, if the value of the originating fabrics, labor, and overhead involved in making the shirt is at least 40% of its total value, then the shirt satisfies the RVC criterion.

In addition to meeting any of these origin criteria, CMO No. 12-2023 requires that the garments must also be accompanied by a proof of origin to claim preferential tariff treatment under RCEP. The proof of origin can either be a certificate of origin issued by an authorized body, or a declaration of origin made by an exporter or producer. It must also contain information such as: (1) the name and address of the exporter or producer, (2) the description and HS code of the product, (3) the origin criteria met by the product, and (4) a signature or electronic authentication by the exporter or producer.

Therefore, a Philippine garment manufacturer using fabrics from Vietnam, buttons from Thailand, zippers from China and labels from Indonesia, can still enjoy lower tariffs when exporting to Australia, as long as the garments meet either CTC or RVC criteria and have a valid proof of origin. The same is true if a Philippine importer buys a shirt from Thailand.

CMO No. 12-2023 also addresses tariff differentials, which refer to the difference between the RCEP preferential tariff rate and the applied rate at the time of import. In cases where the RCEP preferential tariff rate is higher than the applied rate, the importer can apply for a refund of any excess duties and taxes paid for originating goods within one year from the date of payment.

Finally, the CMO also outlines a verification process to ensure that importers and exporters alike comply with the rules and do not abuse the process. Exporters will be required to submit an application with the Export Coordination Division (ECD) of the Bureau of Customs, which is responsible for conducting verification upon request of the RCEP importing party or based on risk analysis criteria. The verification can be accomplished through documents requested from the exporter or producer or by inspections at their premises. Verification requests may occur up to three years from the date of import.

In sum, RCEP and CMO No. 12-2023 offer importers and exporters real perks like lower costs and greater market access. But it’s not all smooth sailing — importers and exporters should be wise to the differences between RCEP and other agreements like ATIGA, pick the right options for their goods, and follow the rules for preferential tariff treatments.