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Government procurement in China: Does your product meet the criteria?

published on 28 June 2024 | reading time approx. 7 minutes

Government procurement in China offers companies great opportunities and sales potential. However, there are several requirements for participating in tenders and submitting bids. One of the exclusion criteria is that the product to be procured is not “Made in China” or is not a Chinese “domestic” product. The following article looks at the conditions under which a product is qualified to participate in a public tender.

„Made in China“ versus „domestic“ Product »
Government procurement »
The concept of “domestic” product »
Recourse to country of origin rules »
Substantial Transformation »
Conclusion »

„Made in China“ versus „domestic“ product

In recent years, products bearing the “Made in China” label have become increasingly popular in China. However, this trend is less a reflection of China as a country of origin and more a reflection of the growing national consciousness and pride of Chinese society. As a result, Chinese brands are using the "Made in China" label more as a marketing tool to gain competitive advantage. Only secondarily does the label serve as a mark of origin for the product.

Like “Made in Germany”, “Made in China” is not regulated by law. In order for a product to be labelled “Made in China”, a significant proportion of the value added must take place in China. Overall, the “Made in China” label is likely to be particularly important for consumer goods in the retail sector, also in terms of its function as a marketing tool.

The situation is different for Chinese “domestic” products. In the context of government procurement, but also in the procurement of goods such as machinery, equipment, other means of production and services from state-owned enterprises in China, the origin of a product plays a prominent role. The eligibility of a product for procurement does not depend on a “Made in China” label, but rather on meeting the legal requirements for China as the place of origin of the product.

Government procurement

According to China's Government Procurement Law (“Procurement Law”), “government procurement” refers to the use of taxpayers' money by government departments, public institutions and social organizations at all levels for the procurement of goods, projects and services. The law applies if the object of the procurement falls under the central procurement catalogue or the procurement value is above the threshold value. Public institutions can be particularly important as they include educational institutions such as schools and universities, as well as research institutions, hospitals and other public institutions, provided that the procurement is financed from public funds.

For procurement by the public sector, institutions and social organizations the Procurement Law explicitly stipulates that “domestic” products must be procured, unless one of the statutory exceptions applies (e.g. unavailability or use abroad). State-owned enterprises, on the other hand, are not directly covered by the Procurement Law. Therefore, they are in principle free to purchase goods and services, including foreign products. However, many state-owned enterprises stipulate that the goods and services to be procured must be primarily “domestic”. This may also apply to private companies if, for example, they receive state subsidies for investments.

The concept of “domestic” product

The Procurement Law does not define when a product or service is considered “domestic”. Instead, the law stipulates that the State Council should define the term “domestic”. Although the last amendment to the Procurement Law was passed and came into force in 2014, this has not yet happened. However, a public notice on the Procurement Law (“Notice on Seeking on Public Comments for the Second Time on the Government Procurement Law”) published in 2022 provides for a regulation that defines the term “domestic” product in more detail: If goods are produced within Chinese territory and meet the specified value-added percentage, they will be given preferential treatment in procurement.

This notice introduces the concept of the defined local value-added share. However, the exact definition is also the responsibility of the State Council, which has not yet taken place.

Recourse to country of origin rules

This means that, at present, the only way to define “domestic” is to refer to the country of origin rules that apply and are relevant in cross-border trade, i.e. imports and exports, unless definitions in trade agreements take precedence.

World Trade Law

There are currently no rules in world trade law to determine the place of origin. Although harmonization of non-preferential rules of origin is envisaged under the WTO Agreement on Rules of Origin, it has not yet taken place.

European Union Legislation

According to the Union Customs Code (Regulation (EU) No 952/2013), goods wholly obtained or produced in a single country or territory are considered to originate in that country or territory. Goods produced in several countries or territories are considered to originate in the country or territory where the last substantial, economically-justified processing or working took place. This must have taken place in an undertaking and must have resulted in a new product or been an important stage in production.

US Law

US law (“15 Code of Federal Regulations (CFR) § 30.1”) defines domestic goods as goods that have been grown, produced or manufactured in the United States. This includes previously imported goods that have been substantially altered in the United States from the condition in which they were imported, including alterations made in a U.S. free trade zone. Imported goods that have been substantially enhanced in value or improved in condition as a result of processing or manufacturing in the United States are also considered domestic goods under U.S. law.

Chinese Law

The Customs Law of the People's Republic of China (“Customs Law”) defines the place of origin as follows For goods produced entirely in one country or region, that country or region shall be the place of origin. If the goods are produced in two or more countries or regions, the country or region where the last substantial change was made shall be the place of origin. If international treaties or agreements concluded or acceded to by the People's Republic of China contain other provisions on the rules of origin, they shall prevail. The precise determination of the place of origin of imports shall be made in accordance with the Customs Law and the regulations of the State Council and its competent departments.

According to the Regulations of the People's Republic of China on the Place of Origin of Imports and Exports, if all the goods originate in one country or region, that country or region is the place of origin of the goods. If the goods are produced in two or more countries or regions, the country or region where the last substantial processing or working of the goods took place is the place of origin.

Substantial Transformation

The wording of all the relevant regulations has in common that goods can become “domestic” in a country or in the EU if a last significant or substantial change, processing, transformation or increase in value of previously imported goods has taken place in the respective country. However, there can be considerable differences in detail. For example, working or processing under the European Union Customs Code may result in a “Union product”, whereas the same working or processing under US law is not sufficient to create a “US product”.

Determination of a substantial transformation under Chinese law

According to the Chinese rules of origin, minor working or processing merely for the purposes of transport, storage, loading and unloading, packaging or sale is not taken into account in determining the country or region of origin of a product.

In order to determine whether there has been a substantial transformation of the goods, the rules of origin provide for a graduated sequence of checks. The main criterion for determining a substantial transformation is a change in the tariff classification. If a change in the tariff classification does not reflect a significant change, the percentage of value added or the manufacturing or processing method are considered secondary criteria.

Specification of the criteria for determining a “substantial transformation”

In order to correctly determine the origin of a product according to the aforementioned rules of origin, the Chinese legislator issued the Provisions on the Substantial Transformation of Criteria in Non-Preferential Rules of Origin (“Provisions”), which was last revised in 2018.

Under these Provisions, a “change in tariff classification” occurs, in simplified terms, when, after manufacture and processing in China using materials from another country, the product can be classified in a PRC tariff category different from that of the materials used.

The “value added percentage” indicates whether a product has added value in China after production or processing in China of non-Chinese inputs. This is done by comparing the value of the goods after processing with the value of the raw materials.

The rule of thumb for determining value added is: the Incoterm ex-works price of the product minus the value of non-original (i.e. non-Chinese) inputs (Incoterm CIF) x 100 percent. The value added must be at least 30 percent for the goods to be considered as originating in China. The calculation of value added must be in accordance with generally accepted accounting principles and import and export tariff regulations.

The “manufacturing or processing methods” are those that are carried out in a country or region and give the manufactured goods their essential characteristics. For a Chinese “domestic” product, these processes must therefore take place in China.

For products where substantial transformation is determined by the criteria of manufacturing or processing methods and percentage value added, the Provisions contain a detailed annex. The criteria listed in this annex determine whether or not a substantial transformation can be considered. For products not listed in the annex, substantial transformation is determined solely by the criterion of change in tariff classification.

Conclusion

Foreign-invested companies in China can generally participate in public tenders and submit bids, provided that their goods and products are considered “domestic” according to the above criteria. This means that, in principle, companies can import raw materials, (sub-)components or product parts for the final product into China, and only a significant amount of processing or manufacturing needs to take place in China, resulting in a change in the tariff classification of the final product or a significant increase in value of at least 30 percent. This is also the case if the working or processing that gives the final product its essential characteristics takes place in China.

In individual cases, however, it may be difficult to determine the exact extent of processing in China required to qualify the product as “domestic”. Companies that intend to import raw materials or intermediate or partial products into China in order to manufacture the final product in China and bid for public tenders should therefore carefully consider the specific criteria that apply to substantial transformation of their product in China. To this end, they should take appropriate precautions and adequately plan and implement the final production of the goods.