Free trade agreements and rules of origin

A free trade agreement is an agreement between two or more countries or regions whose main purpose is to create better conditions for trade between the parties.

In a free trade agreement, the parties seek to secure better terms than those already agreed under the WTO (World Trade Organization).

Trade agreements have traditionally focused on trade in goods, but more recent agreements also include provisions on investment, public procurement and trade in services. However, this guide only covers selected rules governing trade in goods.

When goods cross a national border, they will be subject to customs procedures in one form or another. The goods must clear customs before the buyer can use them freely, and customs duty and VAT will usually be payable.

A free trade agreement removes or reduces customs duties and other trade barriers, such as licences and quotas.

However, it is important to note that the goods must still go through customs clearance, although they may qualify for preferential tariff treatment under certain conditions.

When using free trade agreements, keep the following in mind:

• • Are the goods subject to customs duties when imported?
  • Which agreement applies?
  • What is or will be the origin of the product?
  • What should the documents state?

Preferential tariff treatment means that originating products may qualify for tariff benefits on import, resulting in zero duty or a lower tariff rate than would apply if the goods came from a country with which there is no free trade agreement (also known as a third country).

Conditions for preferential treatment

• • The importer must set requirements
  • The goods must be covered by the agreement
  • The goods must comply with the consignment rule
  • You must provide valid proof of origin

Where the product was manufactured and/or acquired its current form or characteristics. Read more under the 'Rules of origin' tab.

For an importer to benefit from preferential tariffs, the exporter must issue an EUR.1 movement certificate, an EUR-MED movement certificate, an invoice declaration or an EUR-MED invoice declaration. The different types of proof of origin have equal status.

Under some agreements, only an invoice declaration may be used. One example is the Singapore Agreement between EFTA and Singapore.

EUR-MED certificates only apply to countries participating in the Pan-Euro-Mediterranean cumulation system.

The Mediterranean cumulation system, which you can read more about under the 'rules of origin' tab, has not been implemented between all the countries participating in the system. You must therefore provide additional information in the proofs of origin about the countries from which the input materials originate. You must use an EUR-MED movement certificate or EUR-MED invoice declaration when cumulation between these countries has been applied.

In some importing countries, customs authorities or the customer may not accept an invoice declaration on the same basis as a movement certificate.

Contact us if you experience any problems with this. Please note that you should only issue these proofs of origin when exporting to countries or territories with which we have a free trade agreement.

A free trade area allows most originating products within the area to be traded freely. One example is EFTA (European Free Trade Association), of which Norway is a member. Tariffs and import and export restrictions are removed for originating products traded between countries in a free trade area. However, each country maintains its own trade policy and applies different tariff rates and import and export restrictions to countries outside the free trade area – known as third countries. Each country also has its own external customs border.

Within a customs union, customs duties and other trade barriers are removed. The EU (European Union) is an example of a customs union. A customs union has common rules for foreign trade, and there are no customs borders requiring goods to undergo customs clearance when shipped between member states. Once goods from a country outside the customs union have been imported and cleared through customs by one of the parties to the agreement, they can circulate freely throughout the customs union. All countries within a customs union apply a common tariff to goods from third countries, and their rules on restrictions are harmonised.

Remember that the various trade agreements Norway has entered into may have different rules.

You must always follow the rules of the free trade agreement that applies to the country you are exporting to. If you are exporting to Chile, you must follow the rules of the free trade agreement between EFTA and Chile. If the goods are produced in accordance with the rules of that agreement, the product can be imported into Chile duty-free or at a reduced tariff rate.

The same principle applies to exports to the EU, which are covered by the EEA Agreement, exports to South Korea, which are covered by the EFTA–South Korea Free Trade Agreement, and so on.

It is important to apply the rules that actually govern the agreement in question. Countries that are not party to an agreement are considered third countries, and differences between agreements may mean that goods qualify as originating under one trade agreement but not another. For example, products imported duty-free from Chile to Norway cannot benefit from preferential tariffs when re-exported to the EU, despite the EEA Agreement.

However, some free trade agreements are linked, allowing broader trade between several parties while the goods remain eligible for tariff benefits. One example is trade between the EU, EFTA and Türkiye. This is known as cumulation and is explained later in this guide.

In the next tab, we take a closer look at how you can benefit from the tariff preferences available under free trade agreements.

For a product to qualify for preferential tariff treatment, it must meet several conditions. These conditions are listed below and generally apply to all trade agreements entered into by Norway/EFTA, so it is important to understand them.

Product coverage

Not all goods qualify for preferential tariffs under the free trade agreements. Some products or product categories are exempt, and the importing country has not offered preferential tariffs for them.

Agricultural products are usually a category subject to exemptions, which means that when they are exported from Norway, the importer may not receive preferential tariff treatment.

Most industrial products are covered by the agreements. However, when importing into some partner countries, industrial products may also be subject to exemptions or phased tariff reductions over specified periods.

Origin status

Free trade agreements contain a set of rules of origin. These rules determine a product's country of origin and govern how goods must be produced to qualify for originating status.

The rules determine the extent to which you can use input materials from countries outside the free trade area and how you must process them.

You must comply with these rules before you can issue proof of origin.

Proof of origin

When the goods meet the requirements of the rules of origin, you can issue proof of origin. You issue this when exporting the goods to document their originating status. You must present the proof of origin to the customs authorities in the importing country. You can use a movement certificate or an invoice declaration. Read more about proof of origin in the tab above.

Direct shipment requirement

Shipping requirements are also set out in each individual agreement. As a general rule, goods must be shipped directly from the country of production to the recipient country (the party to the agreement) to qualify for the tariff benefits under the agreement.

Drawback

Most free trade agreements prohibit the use of drawback (repayment of customs duties). You must check the relevant free trade agreement for provisions prohibiting drawback or customs duty refunds. However, you can choose whether to apply for repayment of customs duties on the input materials used, or take advantage of the free trade agreement and sell your goods as originating products with proof of origin.

The rules of origin determine whether the goods qualify as originating products and whether proof of origin can be issued, allowing the recipient to benefit from duty-free treatment or a reduced tariff rate.

The rules of origin are set out in separate protocols or annexes to all free trade agreements. To qualify for preferential tariff treatment, you must comply with the rules of origin in the free trade agreement that applies to the export.

The rules of origin consist of a number of articles and annexes. Among other things, they govern whether materials from a country outside the free trade area (a third country) may be used to manufacture a finished product. The rules specify the degree of processing required for the product to qualify as an originating product.

All free trade agreements concluded by Norway/EFTA contain rules of origin. The principles are the same across all free trade agreements. It is important to note that a product granted originating status under the EEA Agreement, for example, will not necessarily qualify for originating status when exported to Chile under the EFTA–Chile Free Trade Agreement, even if the products are identical.

Main rule for obtaining originating status

Two main rules apply under all free trade agreements for a product to qualify as originating and potentially benefit from preferential tariffs when imported into a country with which Norway has a free trade agreement. The product must either be wholly obtained or sufficiently worked or processed within the free trade area.

Wholly obtained

A product qualifies as originating if it is 'wholly obtained' within the free trade area. This often applies to products such as minerals, animals, plants and fish. Please note that free trade agreements cover such products only to a limited extent.

Sufficient processing

If a product is not considered to be 'wholly obtained', it may qualify as originating if it has undergone sufficient working or processing. These rules specify how much material from a third country you may use and/or how extensively you must process it. To assess this, you need to apply the list rules, also known as the processing rules, set out in the free trade agreements.

List rules

The list rules (processing list) are essential for determining a product's originating status. The rules are based on the customs tariff number of the finished product. List rules exist for all goods, including goods that fall outside the scope of a free trade agreement. You therefore cannot use the list rules to determine whether the exported goods fall within the agreement's product scope. You only need to assess materials and inputs originating in a third country.

The processing rules have four columns. The first column shows the relevant chapter or heading in the customs tariff. Column 2 contains the product description, such as 'rotary pumps'. If 'ex' appears before the chapter or heading, the rule applies only to the product(s) specifically listed in column 2. The following columns, 3 and 4, contain the relevant list rules for the finished product. If both columns contain a list rule, you can choose which rule to use.

The most common list rules are the change of tariff heading rule and the value rule. Another frequently used rule is the tolerance rule. You can read more about all three below.

Change of tariff heading rule

This rule is based on the classification of both the finished product and the input materials under the customs tariff (tariff code). Under the list rule, a finished product qualifies as an originating product if the third-country materials used in its production fall under a different tariff heading from the finished product. Where the list rules refer to a heading, this means only the first four digits of the tariff code.

The value rule

The finished product qualifies as originating if it does not contain more non-originating materials than the percentage specified in the list rule. The percentage is always calculated based on the ex-works price of the finished product. The applicable percentage varies depending on the type of product and the agreement used.

The tolerance rule

In addition to the change of tariff heading rule and the value rule, there is also a tolerance rule. This rule allows you to use up to 10% non-originating materials in production, regardless of the list rule for finished products. For example, you can use 10% non-originating materials and your product can still qualify as being of Norwegian origin.

The expression 'a change from any other heading' or 'a change from any other subheading'

The expression means a change from any other heading in the Harmonised System (HS) or, where applicable, any other heading within the group of headings to which the rule applies.

Cumulation

In this context, the term cumulation means 'free use'.

Free trade agreements generally apply only between the parties to the agreement. In many cases, the EU and EFTA have agreements with the same countries and have therefore extended their free trade cooperation to include more countries and create better trading conditions. These extensions provide greater scope to use originating goods from countries linked to the cumulation systems, both in production and for resale. The products retain their originating status, making it easier for producers to manufacture goods that qualify as originating.

The cumulation systems can only be used if the rules of origin are identical across the various agreements.

The European cumulation system

This system links European free trade agreements. It establishes an extended European free trade area between the EU, the EFTA countries and Türkiye. As a Norwegian producer, you can freely use originating materials from any country participating in the system without having to consider the product's list rule. Materials from countries in the cumulation system are not considered third-country materials, unlike materials from countries such as the USA or Japan. You can also re-export originating products from countries participating in the cumulation system, for example products cleared through customs into Norway, to Türkiye and benefit from preferential tariffs.

Example

A manufacturer in the EU imports materials originating in Switzerland. It also imports materials from Türkiye. The EU manufacturer will export the resulting product to a customer in Norway. The trade is therefore governed by the EEA Agreement. Türkiye and Switzerland are not members of the EEA, so the materials would normally be considered 'third-country goods'. However, as all parties participate in the cumulation system, the inputs from Switzerland and Türkiye may be used freely, regardless of whether the list rule has been met.

Mediterranean cumulation

This scheme extends the European cumulation area to the Mediterranean region. Mediterranean cumulation is being expanded and implemented on an ongoing basis and gradually incorporated into the various agreements. The long-term aim is to establish a complete cumulation system. As with European cumulation, materials from all these countries may be used freely to manufacture goods in Norway.

The following countries are part of the system, but please note that it has not yet been implemented for all of them: the EFTA countries, the EU countries, Türkiye, Algeria, Egypt, Israel, Jordan, Lebanon, the West Bank and Gaza, Morocco, Syria, Tunisia and the Faroe Islands.

Example

Before Mediterranean cumulation was implemented for Tunisia, a Norwegian producer could only cumulate with (freely use) originating materials from the other EFTA countries and Tunisia. Following the extension, the same producer can also use input materials originating in the EU, Egypt, Jordan and Morocco.

New revised rules of origin came into effect on 1 September 2021 for some of the free trade agreements covered by the Convention on Rules of Origin. You can choose whether to use the existing rules of origin or the new revised rules. If you use the revised rules of origin, you must refer to 'Transitional rules' in the proof of origin. In most cases, the new rules of origin will make it easier to obtain originating status.

Most countries in Europe and the Mediterranean have joined the PEM Convention. The main exception is the United Kingdom, which is no longer part of the PEM Convention due to Brexit.

Read more about the Regional Convention on pan-Euro-Mediterranean preferential rules of origin on the Norwegian Customs website.

The term 'originating products' is used in many contexts and can often be difficult to define or explain. However, free trade agreements set out specific rules for what qualifies as an originating product, and each agreement has its own rules explaining this. Under the 'Rules of origin' tab, you will find a general explanation of the key principles and more information about how the agreements are structured.

Here is an example that applies some of the rules we have covered on free trade and origin.

Preferential tariff treatment?

A Norwegian manufacturer of rotary pumps has received an enquiry from a distributor in Germany looking to establish contact with a new pump supplier. The EU company has also received a quote from a supplier in the USA. The Norwegian manufacturer has an advantage over its US competitor because pumps manufactured in Norway may qualify for preferential tariff treatment. Under the EEA Agreement between Norway and Germany, the Norwegian manufacturer can offer the product duty-free, while the same product from the USA is subject to customs duty.

Use of inputs and materials from third countries

The Norwegian company has now signed a contract with the German company. The first delivery is due shortly. The company is exploring the possibility of using materials from a third country to manufacture the pumps. It is particularly interested in using parts from a supplier in China because they are both high-quality and inexpensive.

Which rules apply?

To determine whether the goods qualify for preferential tariff treatment, the producer must comply with the rules of the EEA Agreement. Protocol 4 to the EEA Agreement (on rules of origin) and its annexes set out the rules of origin that must be met.

How can the pumps obtain EEA originating status?

The pumps are classified under heading 84.13 of the customs tariff. You can find the table containing the current rules of origin in Annex II to Protocol 4 of the EEA Agreement. Columns 3 and 4 set out how much material from a third country you may use and/or how much processing it must undergo for the finished product – the pumps – to qualify for EEA originating status. Columns 3 and 4 apply only to materials from third countries. You can choose whether to apply the rule in column 3 or column 4.

As mentioned, you can also choose to apply the new revised rules of origin. ‘Ex 84.13’ is not included in the new rules of origin, so you must apply ex 84 instead. The product qualifies for originating status if it meets one of the conditions in column 3.

Change of tariff heading rule

Under this list rule, a finished product qualifies as originating if the third-country materials used in its production fall under a different tariff heading from the finished product. A heading corresponds to the first four digits of a customs tariff number.

Value rule

The finished product qualifies as originating if it does not contain more non-originating materials than the percentage specified in the list rule. The percentage is always calculated based on the finished product's ex-works price.

In the example above, this means that the manufacturer may use input materials from China, provided they are not classified under heading 84.13 of the customs tariff. In addition, the value of the materials from China must not exceed 40% of the finished product's ex-works price. Both requirements must be met.

To assess such a rule, the manufacturer must know both the customs tariff codes and the value of the input materials from China.

The rule in column 4 contains only a value rule, but with a lower percentage. In this case, the producer may not use more than 25% Chinese materials, calculated by comparing the value of the materials with the ex-works price of the rotary pump.

If the rules are met when using materials from China, the manufacturer can issue proof of origin when exporting, meaning the customer will not have to pay customs duty.