As international trade increases through progressive tariff reductions and preferential trading arrangements multiply, rules of origin play an increasingly crucial role in international trade policy. In general terms, the rules determining the origin of a product distinguish between products that have a natural origin (because they are either "wholly obtained" in one country or altogether produced in that country) and products that are produced in more than one country.

 

In the latter case, the origin of the product must be determined in accordance with a specific test, normally referred to as the "last substantial transformation test" or the "last substantial working or processing test." Origin is consequently determined on the basis of the last change that meets such test, regardless of whether the country in which this last change occurred was the place in which the major part of production was carried out.

 

As products are increasingly obtained through stages of production occurring in more than one country, it is important to understand the practical implications of the last substantial transformation, or last substantial working or processing test, on specific products.

 

Like many agricultural products, coffee is characterised by a clear division between the level of development of the countries in which the coffee beans are grown, typically developing countries such as Brazil, Colombia, India, Indonesia, Mexico and Vietnam, and the level of development of the countries in which most of the finished product is processed and consumed.

 

Coffee production includes a number of stages, such as the harvesting of the beans, initial processing, and blending of different beans and their roasting. During harvesting, coffee berries are picked by hand, stripped from the tree, or harvested mechanically. Ripe berries are then separated from sticks and leaves as well as unripe and overripe berries and pulped by pulping machines. The pulped beans are either dried or washed in fermenting tanks and then dried (i.e., the processing stage).

 

The coffee beans are typically shipped before the blending and roasting stage. Coffees of various origins and types (e.g., Arabica and Robusta) may be blended before or after roasting. The roasting process consists of different phases under which heat is transferred to the beans at different temperatures.

 

In short, green coffee beans are normally grown and processed in one or more developing countries (the producing countries) and then shipped to coffee processors in the importing countries (the processing or consuming countries), where the green coffee beans are blended and roasted before being packed and distributed to the final consumer.

 

The key issue, with respect to the rules of origin applicable to coffee, is whether preference should be accorded, in conferring origin, to producing or processing countries.

 

Rules of origin are also important in the coffee industry mainly for labelling purposes and the need to protect coffee producers’ trademark value. This is mainly true for well-branded coffee processors in industrialised countries. However, even coffee producing countries are sometimes conscious of their country’s brand value and reputation.

 

Both coffee producers and coffee processors also consider the strategic implications of rules of origin for customs purposes and the application of favourable tariffs and quotas. For these reasons, even though most coffee beans enter processing countries on a preferential basis, WTO negotiations on harmonised non-preferential rules of origin for coffee have become politically sensitive.

 

Vietnam is now the world’s second leading coffee exporter after Brazil, with 2007 predicted to be the first year that the nation’s coffee exports will surpass rice as the leading agricultural export.

 

Export volume of coffee in the first 10 months of 2007 was estimated to exceed a million tonnes, with a value of US$1.54bil. In comparison with the same period of 2006, coffee export volumes have increased 43% and turnover 84%.

 

Among the leading markets for Vietnamese coffee imports, Germany still holds first place, buying up 14% of Vietnam’s coffee. The US follows at over 10%. Switzerland, Italy and Spain each account for about 7% of market share.

 

Despite high export volumes and revenues, the price of Vietnamese coffee is still $50 to $70 per tonne lower than that of coffee from other coffee-producing countries, mainly due to its relatively low quality and non-uniform application of international standards.

 

As a WTO member, Vietnam can play a more pro-active role in international discussions and negotiations on the definition of shared and harmonised rules of origin. In fact, the existing WTO Agreement on Rules of Origin, and the negotiations currently underway at the WTO on the harmonisation of rules or origin, are of fundamental importance to the coffee trade. The roasting of coffee has been identified as one of the most difficult areas in which to reach a common understanding.

 

WTO members have already agreed that plants and plant products that are harvested, picked or gathered in a country must be considered wholly obtained in that country. This definition covers all plant life, including fruit, flowers, vegetables, trees, seaweed, fungi and live plants grown in that country. Green coffee beans harvested in one single country will consequently be considered wholly obtained in that country.

 

However, as noted above, coffee is usually not wholly obtained or produced in a single country. In order to determine origin, it is essential to look at where the last substantial transformation occurred. Decisive for the origin of coffee will typically be whether the process of blending and roasting of coffee is considered a substantial transformation.

 

A specific problem occurs if the blending and roasting is not conducted in the same country. In that case, it must be decided whether the processes of blending and roasting are enough to confer origin. The answer to this question will be of importance to coffee processors that may specialise in either blending or roasting or that may choose to blend and roast their coffee in different countries.

 

Given its status as a major producer of coffee and as both a new WTO member and member of ASEAN (which is in the process of negotiating a number of bilateral or multilateral trade agreements), Vietnam needs to proactively pursue a commercial strategy using rules of origin negotiations and negotiations of preferential market access.

 

It would not be unrealistic, for instance to imagine high-quality South American Arabica to one day be imported into Vietnam for blending and roasting with local Robusta into a processed product that could be exported at very competitive rates to China (ideally benefiting from preferential market access conditions negotiated in the framework of an ASEAN-China free trade agreement) or to other countries as a high quality finished product.

 

VNS