Can origin status be granted by applying the De Minimis rule to materials specified in the Korea-ASEAN FTA PSR provisos, regardless of whether the Change in Tariff Classification criteria are met? Released

The inquiry regarding whether the De Minimis Rule (Tolerance Rule) can be applied to specific materials specified in the proviso clauses of the Product Specific Rules (PSR) under the Korea-ASEAN Free Trade Agreement (AKFTA) to grant originating status, regardless of whether the Change in Tariff Classification (CTC) criteria are met, addresses a very important issue in the application of rules of origin. To start with the conclusion, the De Minimis Rule does not apply to the proviso clauses in the AKFTA Product Specific Rules.

First, it is necessary to clearly understand the essence and role of the De Minimis Rule. The De Minimis Rule is one of the FTA rules of origin, serving as a type of Tolerance Rule that allows a product to be recognized as an originating good even if it contains a small amount of non-originating materials that fail to satisfy the PSR, particularly the Change in Tariff Classification (CTC) criteria. For example, if the CTC rule requires a 'Change in Chapter,' but the non-originating materials fall within the same chapter as the finished good and thus fail the rule, this rule can be applied if the value of those non-originating materials does not exceed a certain percentage (7% in the case of AKFTA) of the FOB price or weight of the finished product. In other words, the De Minimis Rule is a provision that allows the "failure" of non-originating materials to satisfy origin criteria within a limited scope.

However, the 'proviso clause' in the AKFTA Product Specific Rules mentioned in your inquiry differs in nature and purpose from the De Minimis Rule. Let’s re-examine the PSR for AKFTA HS Heading 1901.90 (Food Preparations), which was used as an example in the original response.

• ① A change to goods of subheading 1901.90 from any other heading. Provided that goods of headings 0401 to 0404 and materials of Chapter 10 and Chapter 11 are originating in any Party.
• ② A regional value content (FOB price) of not less than 40 percent. Provided that goods of headings 0401 to 0404 and materials of Chapter 10 and Chapter 11 are originating in any Party.

The sentence starting with 'Provided that' is the 'proviso clause.' This proviso clause imposes an absolute condition that, when manufacturing specific items like those in 1901.90, materials corresponding to headings 0401 to 0404 (e.g., dairy products such as milk and cream) and Chapters 10 (Cereals) and 11 (Products of the milling industry) must be "originating goods" produced in a Party to the agreement (Korea or an ASEAN member state) when determining origin. This directly requires the originating status of specific core materials themselves, regardless of whether those materials underwent a tariff classification change. Such clauses are used to increase the stringency of origin for specific raw materials in certain industries or to encourage regional production.

Therefore, if the specific materials specified in the proviso clause are non-originating materials, the proviso clause will not be satisfied. Since this proviso clause does not concern whether the materials underwent a tariff change but rather sets the originating status of the material itself as a condition, the proviso clause cannot be satisfied if even 1% of non-originating materials are included. The De Minimis Rule allows exceptions for minor discrepancies that may occur during the application of general PSRs, such as the CTC rule; it is not a regulation meant to relax absolute origin requirements for specific materials.

In summary, the De Minimis Rule is a concept that provides flexibility by stating, "Although the non-originating materials failed to satisfy general origin criteria such as CTC, they will be granted originating status because their proportion is negligible." In contrast, a proviso clause is a clear and mandatory condition stating, "This specific material must be originating in a Party." These two concepts have different purposes, and in the case of a proviso clause, the use of non-originating material itself makes it impossible for the item to obtain originating status. This is similar to a condition stating that 'the main ingredients of a product must be organic,' where one cannot claim it is acceptable simply because 'less than 10% of the ingredients are non-organic.'

Consequently, in most FTAs, including AKFTA, the De Minimis Rule pertains to satisfying general PSRs such as CTC or value-added criteria and does not apply to proviso clauses that absolutely require the origin of specific core materials. Therefore, if materials falling under headings 0401 to 0404 and Chapters 10 and 11 are not originating in an AKFTA Party, the finished good (e.g., 1901.90) cannot be recognized as an AKFTA originating good, even if it satisfies all other criteria. It is very important to accurately understand and comply with the significance of these proviso clauses when applying rules of origin.