Cambodia: Made In Cambodia: New Law On Rules Of Origin Brings Clarity To International Trade

Made in Cambodia: New Law on Rules of Origin Brings Clarity to International Trade

Cambodia's new Law on Rules of Origin, which was published on July 5, 2023, is an important legal development that will help the country become a more important trading, manufacturing, and processing hub in the ASEAN region.

This legal development accords with the government's aims to increase consumer protection and clarity on product origin, encourage cross-border trade, position Cambodia as a source for quality manufacturing and processing, and push the "Made in Cambodia" quality label.

These new, much clearer rules of origin also bring Cambodia's legal framework in line with trading obligations set by ASEAN and the WTO. Furthermore, the new rules help clarify the implementation of several multilateral and bilateral trade agreements that Cambodia has concluded in recent years, such as free trade agreements with China and South Korea and the Regional Comprehensive Economic Partnership.

Rules of Origin and Cambodia's Role

In international trade, products often make multiple trips before they end up with the consumer—the raw materials may be sourced in one country and processed in another, and then the product may be finished in a third country before the finished product is exported to a different country altogether.

Rules of origin determine which country in the production chain qualifies as the country of origin. This is important because the country of origin may be subject to a preferential trading scheme, or there may be legal requirements to declare the correct origin in the country of sale, for example, based on labeling and consumer protection rules.

Prior to the new Law on Rules of Origin, ad hoc rules of origin applied in Cambodia, often depending on bilateral agreements, multilateral agreements, or international preferential trading schemes.

For example, the EU, US, and Japan have individually adopted preferential trading schemes with selected countries through Generalized Scheme of Preferences (GSP) programs. These GSP programs often set their own rules of origin for products in a bid to regulate what types of products are eligible for preferential treatment.

The origin rules ideally ensure that the origin country is accurately and fairly attributed so that the exporting country benefits from the preferential treatment. When an exporting country receives preferential treatment, it often leads to higher investment in quality manufacturing and processing—which is the goal of the GSP programs.

The rules of origin may differ, depending on the export destination. For example, the GSP for the EU generally requires a minimum 40% input, meaning that at least 40% of the content of the product must come from the origin country. The US sets this at 35%, and permits qualifying ASEAN members to be treated as one country of origin for the calculations.

When an exporter does not seek preferential treatment, the importing country may still apply rules of origin under its own legal framework. In trade that involved Cambodia as the exporting country, different applications and interpretations of rules often applied. This meant that a gap in rules existed, creating uncertainties for exporters on how to declare origin in compliance with the law in both the exporting country and the importing country.

The new Law on Rules of Origin helps to remove some of these uncertainties, creating a clearer and fairer playing field for Cambodian exporters and other traders that rely on rules of origin.

Cambodian Perspectives on International Trade and Rules of Origin

Exporters of products from Cambodia are mainly interested in whether they qualify for preferential treatment using the rules of origin to determine that the source country of their product is indeed Cambodia.

Depending on the applicable preferential trading scheme or international agreement, the origin is usually determined using the raw material input and the level of processing or manufacturing taking place in Cambodia. Specifying Cambodia as the source country often leads to preferred access to markets, including a zero import duty rate in many cases.

Such preferred access greatly facilitates exports benefiting Cambodia and is intended to only apply to products that truly originate in Cambodia. This spurs investment in quality manufacturing and processing in Cambodia, as attaining the necessary level of raw material inputs or the sophistication of processing cannot be reached by merely rerouting goods through Cambodia.

Rules of origin have also been a concern to many Cambodian exporters that did not seek to qualify for preferential treatment, as these rules would determine their labeling obligations for shipments and final products.

In recent years, with the Cambodian government's push to use the "Made in Cambodia" marking, authorities occasionally would not permit products marked as made in another country to be exported from a Cambodia facility. However, the basis for requiring this "Made in Cambodia" marking was not always clear, causing exporters to risk violating rules of origin in the importing country.

For example, if Cambodia had only a minor role in the production chain—such as the input of raw materials from Cambodia being only 10%, or only simple assembly taking place in Cambodia—a "Made in Cambodia" marking would not always be appropriate or compliant. Therefore, authorities' insistence on the marking could cause issues for exporters.

Clarifying the rules of origin is thus essential to facilitating trade for Cambodia, both for preferential access to markets and for general exports.

Cambodia's New Law on Rules of Origin

The new law sets out how to manage and apply rules of origin and provides guidance on the rules of origin themselves. Furthermore, the law appoints authorities to manage and enforce it and sets penalties for falsifying product origins and other violations.

The law contains several key rules of origin pertaining to products that are subject to a preferential trading scheme, those that are not subject to such schemes, and country-of-origin markings.

Products Seeking Preferential Trading Access

Under the new law, preferential trading access is still determined by the rules of origin of the preferential trading schemes and international trading agreements, which set their own rules of origin for access. The international schemes and agreements determine the rules, so all members follow and implement the same rules of origin.

The Law on Rules of Origin does not set its own rules for these types of products—it merely confirms that the rules of origin of the schemes and agreements apply. However, the law does provide guidance on how government institutions should apply the rules in order to facilitate Cambodian exporters' access to preferential trading schemes. For example, the Law on Rules of Origin addresses certificates of origin (COs), appointing the Ministry of Commerce's General Department of Trade Services as the authority regulating and issuing COs. The Cambodian authorities will need to apply the rules of origin of the relevant trading schemes and agreements when issuing a CO to confirm that the product has Cambodia as its origin and qualifies for the preferential treatment.

Products Not Seeking Preferential Trading Access

More interestingly, the new law provides rules of origin for products not seeking preferential treatment. This issue was particularly unclear prior to the new law.

Under the new Law on Rules of Origin, products wholly made or extracted in one country are considered to originate from that country. For example, mineral products (including petroleum), when extracted from land, water, or seabed, are deemed to originate from the country of extraction. Or a shirt made in Cambodia, using cotton harvested in Cambodia, is considered to originate from Cambodia.

If multiple countries are in the production chain, the determining factor is where the product underwent "essential processing." One scenario that would amount to "essential processing" is product processing that changes the classification heading of the product under the Harmonized System of tariff nomenclature. The product would then be considered to originate in the country where it underwent this change—that is, where it underwent "essential processing" under the law.

Further rules on "essential processing" will need to be determined through an implementing joint regulation (i.e., an interministerial prakas) from the Ministry of Commerce and the Ministry of Economy and Finance.

It seems likely that this prakas will follow ASEAN regulations on the subject, requiring a minimum percentage of raw materials for a given country to be classified as the country of origin. It also remains to be seen whether the prakas will include a rule on "substantial transformation" as part of essential processing, as well as a value-added rule.

According to the Law on Rules of Origin, activities that would not be enough to change a product's country of origin (that is, would not amount to "essential processing") include storage, repacking, and simple assembly of products.

Country-of-Origin Markings: "Made in..."?

The Law on Rules of Origin states that rules on country-of-origin markings will be further determined by another implementing joint regulation from the Ministry of Commerce and the Ministry of Economy and Finance, leaving some uncertainty on the "Made in..." issue until then.

Nonetheless, the law does require that this joint regulation be made in accordance with the applicable preferential trading regime in the importing country, the international preferential trading schemes or agreements, or the rules of origin provided elsewhere in the law.

Therefore, although both joint regulations mentioned above are yet to be seen, the Law on Rules of Origin does provide guidance as it highlights the importance of the rules of the importing country, preferential trading schemes, and international agreements.

This guidance may also help authorities make a fair assessment if any "Made in..." issues arise before the joint regulations are issued, as the rules of origin of the importing country may be considered dominant unless stipulated otherwise.

Conclusion

The Law on Rules of Origin is a positive step forward for Cambodia's aim to be a reliable trading partner. The new law clarifies rules of origin, authorities, and penalties, although implementing regulations still need to be adopted. This is, however, normal practice—the law sets out the main legal aspects and appoints authorities, and it then lets lower regulations deal with implementation on a more practical level.

The newly clarified rules of origin for products not seeking preferential trading access are especially welcome. This area was rather ambiguous, and this law clarifies the rules and sets a route for further beneficial regulations on this issue.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.