By Sue Senger email | bio

When fully implemented, the Central America-Dominican Republic-United States Free Trade Agreement (CAFTA-DR) will provide duty-free trade on most goods traded between the United States, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua.

My first article in this series addressed the implementation of the CAFTA-DR on a rolling basis as countries make sufficient progress to complete their commitments under the Agreement. My last article discussed how to declare that a good is originating and claiming preferential tariff treatment was detailed. This final article in the series addresses the rules of origin.

The Rules of Origin for the U.S.-Central American and Dominican Republic Free Trade Agreement (CAFTA-DR) were largely modeled upon the North American Free Trade Agreement (NAFTA) and the U.S.-Chile Free Trade Agreement. There are, however, some important differences that require the close attention of the U.S. exporter.

How to Read the Rules of Origin

Rules of origin are written in terms of the Harmonized System (HS) of Tariff Classification. The HS classification system uses six to ten digit codes to identify goods. The first six digits of an HS number are harmonized among the majority of the world's countries. The last four digits are unique to each country. The vast majority of the product-specific rules of origin under the CAFTA-DR use an HS classification number.

The first step in interpreting the "rules" is to obtain the appropriate code for the good in question. Please Note: The Harmonized Schedule will be updated January 1, 2007, with some substantial changes. This modification may cause your current classification numbers to change. (Refer to my previous article on the Harmonized Schedule for help in classifying your products.)

A rule of origin may consist of:

1) A change in tariff classification (also called a tariff shift);

2) A regional value-content requirement;

3) Both a change in tariff classification and a regional value content requirement.

It is necessary to refer to the rule associated with the product being exported. Regional value content can only be applied when it is allowed under a product-specific rule. You can view the product specific rules of origin (Annex 4.1) online.

Regional Value Content

The Regional Value Content test allows the good to qualify using either one of two methods. These are the build-down and build-up methods.

Build-down method: Regional Value Content (RVC) = ((Adjusted Value — Value of Non-Originating Materials)/Adjusted Value) x 100

Build-up method: Regional Value Content (RVC) = (Value of Originating Materials/Adjusted Value) x 100

For non-originating materials used in the production of a good, the following expenses may be deducted from the value of that material in accordance with Article 4.4:

1) the costs of freight, insurance, packing and all other costs incurred in transporting the material within a party’s territory or between territories of two or more parties to the location of the producer;

2) duties, taxes and Customs brokerage fees on the material paid in the territory of one or more of the parties other than duties and taxes that are waived, refunded, refundable or otherwise recoverable, including credit against duty or tax paid or payable;

3) the cost of waste and spoilage resulting from the use of the material in the production of the good, less the value of renewable scrap or by-product; and

4) the cost of originating materials used in the production of the non-originating material in the territory of a party.

Note: The percentage of RVC content may vary from 25% to 65%, so it is important that you review the specific requirements stated in Annex 4.1.

Other Factors

A thorough reading of Chapter Four of the CAFTA-DR is necessary to determine the origin of a product, and thus, whether it is eligible for preferential duty treatment. However, below are some of the factors, beyond the product-specific rules of origin, which may be considered in making a determination of origin.

De Minimis Rule

All non-originating materials used in the production of the finished good that do not undergo a change in tariff classification are considered originating if the value of all those non-originating materials does not exceed 10% of the adjusted value of the good, i.e., the de minimis amount. This is provided that the good meets all other applicable qualification criteria set forth in Chapter 4.

The de minimis rule does not apply when using the “build-down” method to calculate the RVC. The value of all non-originating materials used in the production of a good must be included in the calculation.

For textiles and apparel, refer to Article 3.25.7 and Annex 4.1 of the CAFTA-DR for the relevant de minimis rule.

There are some cases where the de minimis rule does not apply. To review these exceptions, go to Annex 4.6 of the CAFTA-DR. For textiles and apparel refer to Article 3.25.7.

Accumulation

Originating goods or materials refers from one or more parties to the CAFTA-DR that are incorporated into a good in the territory of another party to the Agreement are considered originating materials of the party where the incorporation takes place.

A good is originating when the good is produced in the territory of one or more of the countries participating in CAFTA provided that the good qualifies under the rules, as discussed above, of the CAFTA-DR.

Fungible Goods and Materials

Fungible goods or materials refers to goods or materials that are interchangeable for commercial purposes and whose properties are essentially identical. The CAFTA-DR allows importers to claim a fungible good or material as originating where the importer, exporter or producer has either physically segregated each fungible good or material or used any inventory management system that is recognized in the Generally Accepted Accounting Principles or is otherwise accepted by the party where the production is performed.

Examples of inventory methods include: averaging, last-in first-out (LIFO), or first-in first-out (FIFO). Please note that physical separation of the goods is not necessary but may be used for each fungible good or material.

Indirect Materials

Indirect materials are considered to be originating materials regardless of where they are produced. An indirect material is defined as a good used in the production, testing or inspection of a good but not physically incorporated into the good, or a good used in the maintenance of buildings or the operation of equipment associated with the production of a good, including:

a) fuel and energy;

b) tools, dies and molds;

c) spare parts and materials used in the maintenance of equipment and buildings;

d) lubricants, greases, compounding materials and other materials used in production or used to operate equipment and buildings;

e) gloves, glasses, footwear, clothing, safety equipment and supplies;

f) equipment, devices and supplies used for testing or inspecting the good;

g) catalysts and solvents; and

h) any other goods that are not incorporated into the good but whose use in the production of the good can reasonably be demonstrated to be a part of that production.

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