Navigating the Rules of Origin: Vietnam’s Trade Landscape in the ASEAN-China Context

In the first half of 2020, trade between the ASEAN (Association of Southeast Asian Nations) region and China witnessed a notable increase of 5.6%, totaling US$314 billion. This accounted for 14.7% of China’s total foreign trade volume, signaling a significant evolution in the trade dynamics fostered by the ongoing US-China trade war. The ASEAN region has now firmly established itself as China’s largest trading partner. This shift in trading patterns is further evidenced by the rapid increase in Chinese investment in the ASEAN manufacturing sector, which surged from US$1,449 million in 2018 to US$3,250 million in 2019. Notably, Vietnam has attracted a burgeoning foreign direct investment (FDI) inflow, reaching an all-time high of US$16 billion in recent times, particularly within the manufacturing domain. As these economic relationships strengthen, understanding and navigating the rules of origin becomes increasingly critical for businesses operating in these markets.

Understanding the Importance of Rules of Origin

Rules of origin determine the national source of a product and are essential for trade preferences under free trade agreements (FTAs). For a product to be labeled as “Made in Vietnam,” it must either be wholly obtained or produced within Vietnam, or it must meet specific local value content (LVC) requirements. For instance, under new-generation FTAs like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU-Vietnam Free Trade Agreement (EVFTA), the criteria for determining origin have become considerably stricter. These complexities underscore the importance of adhering to these regulations to maximize the benefits derived from trade agreements.

Tighter Rules of Origin Under CPTPP and EVFTA

Under the CPTPP, products can be considered as originating from Vietnam if they meet the Regional Value Content (RVC) rule. This rule mandates that a minimum percentage of the product’s value must be generated within the country for it to qualify for preferential treatment. Meanwhile, under the EVFTA, the determination of origin relies on a set of product-specific rules (PSR). These differing standards necessitate that businesses remain vigilant and well-informed about the regulations governing the goods they produce and export.

Application for Certificate of Origin (C/O)

To benefit from trade preferences under the CPTPP and EVFTA, products exported from Vietnam must be accompanied by a valid Certificate of Origin (C/O). This document certifies that the products qualify for preferential tariffs. The process requires that exporters provide a self-declaration for goods under the value threshold of EUR 6,000 or apply for registration within an approved database in accordance with the Ministry of Industry and Trade (MOIT) regulations. Recent Circulars, including No. 03/2019/TT-BCT and No. 11/2020/TT-BCT, provide detailed guidance regarding the application and issuance of C/Os, facilitating a clear path for compliance.

The Role of Inspections in Ensuring Compliance

As international trade grows, so does the risk of fraud. The importing country within the CPTPP may request inspections to verify the origin of goods if there are suspicions regarding misrepresentation. These inspections can involve multiple parties, including competent Vietnamese authorities and the exporter themselves. The same standards apply under the EVFTA, where inspections may be conducted randomly or initiated due to reasonable doubts about the authenticity of C/O documents.

Potential Sanctions for Origin Mislabeling

Violating rules regarding origin can have serious consequences. If authorities determine that goods do not meet the qualifications for being labeled “Made in Vietnam,” exporters could face significant penalties, including misdeclaration, counterfeiting, and even smuggling charges. These actions may lead to administrative sanctions, including fines or suspensions of business operations. The penalties emphasize the necessity for manufacturers to maintain diligence across their supply chains, particularly as trade routes become more complex.

Local Policies Reinforcing Compliance

Recognizing the growing challenges associated with origin fraud, the Vietnamese Government has responded with proactive measures. The introduction of Resolution No. 119/NQ-CP on December 31, 2019, outlines strategies to enhance the management of goods’ origins and combat illegal transport. It emphasizes improved cooperation in developing legislation and implementing stricter regulations surrounding the C/O issuance. Recent reports indicate an uptick in inspections, with a significant portion of exporters flagged for non-compliance, reinforcing the need for businesses to align closely with local regulations.

The Landscape Ahead

The evolving dynamics of trade between Vietnam, China, and the ASEAN region pose both opportunities and challenges. As businesses seek to leverage the benefits from FTAs, the complexities brought by rules of origin require careful navigation. With increasing cooperation among nations and stricter enforcement mechanisms, understanding the legal and policy framework surrounding these trade regulations is vital for sustainable growth and competitiveness in the international market.

As we explore the intricacies of trade relationships and regulations, it’s clear that Vietnam plays a significant role in the ASEAN landscape, poised for growth while facing the challenges of compliance and global trade dynamics.

Written by: Chris Vale, Trung Tran, and Nhi Nguyen.