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The China Plus One Strategy in Vietnam - Part 3: Trade Agreements, Rules of Origin, and Tariff Avoidance

05/02/2020
Vietnam’s network of trade agreements is one of its most important assets as a China plus one candidate. Companies that set up operations within the country will be able to import components from China at a reduced cost and export finished goods at a discount

 

 

Rules of Origin

Unlike many of Vietnam’s neighbors that offer investors access to development promotion initiatives, such as US Generalized System of Preferences (GSP), Vietnam’s trade agreement network is the result of proactive foreign policy.
 
To gain access to Vietnam’s trade agreement network, investors need to identify the specific agreements that govern their supply chain and to understand the rules and regulations that govern these agreements.
 
  Companies pursuing a China plus production model will likely leave elements of their production in China, and may import components or raw materials to support their Chinese production. Components or finished products that are not wholly produced and sourced within a single country need to meet specific requirements in order to be considered originating in a country. Countries and their trade agreements may use any of the following to determine the origin of a good.

Vietnam's Free Trade Agreement Network
 

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Regional Value Content (RVC): RVC requires that a certain percentage of the good’s value must originate in a free trade agreement (FTA) member country for the good  to  be  considered as originating.
 
Change in Tariff Classification (CTC): To qualify as originating under the CTC rule, the non- originating material used in the  production of the good must not have the same HS classification as the final good.
 
Specific Process Rule (SPR): The goods are considered as originating only if it is produced through a specific chemical process that occurred in a FTA member country.
 
Importing components from China under ACFTA
Companies importing from China to Vietnam are eligible for tariff reductions under the ASEAN- China Free Trade Agreement. As of 2018, the majority of tariffs imposed by Vietnamese customs have been brought to zero. Investors are required to comply with the agreements rules of origin provisions in order for their goods to be treated as made in China.
 
ACFTA imposed a minimum RVC of 40 percent percent for most goods with additional CTC or SPR requirements imposed for specific goods.
 
Exporting finished goods
Companies exporting from Vietnam must obtain a relevant certificate of origin (CO) for each shipment; verifying the origin of the product. This will be required to determine the tariff that will be applied by an importing market and to determine any applicable tariff concessions provided under an FTA. Exporters can acquire a CO from Vietnam’s Ministry of International Trade.
 

Frequently Asked Trade War Questions

Investors with factories in China and buyers in the US have been subject to increased tariffs since early July and are at risk of being hit with  a tariff rate of 25 percent from January 1, 2018
  Companies are working to develop risk mitigation and management strategies. Below are some of the most common questions.
 
Can I reclassify my goods under an HS code that is not subject to tariffs in the US?
Tariff reclassification is a good starting point for companies and is a relatively low cost mitigation tool that can be evaluated as companies assess their exposure to tariffs.
 
Most companies, however, find that tariff reclassification is not a viable strategy given the breadth of US tariffs.
 
Can I re-route finished goods through Vietnam to reduce exposure to US Tariffs?
No. US customs requires that goods undergo  a substantial transformation in value or tariff classification to justify an adjustment of origin. Further, transport costs alone will not be sufficient to qualify for an adjustment.
 
Can I make small adjustments to finished goods in Vietnam to qualify them as made in Vietnam?
No. Packaging or other small adjustments will not change the classification of the good in question. In these cases, the value-add is often not deemed sufficient.
 
What is the minimum amount of processing that can be done in Vietnam?
This will depend on the good in question. Generally, the HS code for the product will need to be shifted. In most cases, this will require that companies outsource assembly, rather than finishing, to Vietnam.
 
How do US customs enforce its Rules of Origin Provisions?
While Vietnam issues certificates of origin, US Customs, through the Enforce and Protect Act enforces US customs policy. Companies should understand that even if Vietnam issues a certificate of origin stating that a product is made in Vietnam, US customs may review or dispute this assessment.

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