Rules of Origin in the U.S. Context
U.S. Non-preferential Rules of Origin:
Non-preferential Rules of Origin (RoO) are used to determine the country of origin of goods for statistical purposes; establish admissibility requirements for U.S. Customs and Border Protection (CBP) and Partner Government Agencies (PGAs); government procurement eligibility; country of origin marking; and Most Favored Nation (MFN)/Normal Trade Relations (NTR) column 1 duty rates. These tariff rates are indicated in the “General” column of the Harmonized Tariff Schedule of the United States (USITC, 2021).
The “wholly obtained” and “substantial transformation” concepts are the primary criteria for determining country of origin. An example of “wholly obtained” is tulips grown and harvested in the Netherlands before being exported. According to U.S. CBP’s Informed Compliance Publication on Rules of Origin (2004), the “substantial transformation” criterion is applied to imports on a case-by-case basis. CBP explains substantial transformation thus: “an article that consists in whole or in part of materials from more than one country is a product of the country in which it has been substantially transformed into a new and different article of commerce with a name, character, and use distinct from that of the article or articles from which is was so transformed” (CBP, 2004).
Non-preferential RoO also play an important role in U.S. trade policy and are a priority enforcement area. For example, non-preferential country of origin determinations on MFN/NTR origin importations may determine whether or not they are subject to antidumping/countervailing (AD/CVD) duties and/or Section 232 and Section 301 tariffs (on certain aluminum and steel and Chinese origin goods respectively). It’s the duty of the CBP to ensure that imports into the United States reflect an accurate country of origin on declarations and were not goods trans-shipped from a country other than where it was manufactured, as this may be done to evade Section 232 or section 301 tariffs and/or antidumping or countervailing duties.
U.S. Preferential Rules of Origin:
According to the World Trade Organization (n.d.), “Preferential rules or origin are those which apply in reciprocal trade preferences (i.e. regional trade agreements or customs unions) or in non-reciprocal trade preferences for developing or Least Developed Countries or “LDCs” (i.e. preferences in favour of developing countries or LDCs). (WTO, n.d.)
In the U.S. context, there are two primary sources for preferential RoO, Free Trade Agreements (FTAs) that cover exports as well as imports; and non- reciprocal preferential tariff preferences on imports of qualifying goods from developing countries. Preferential duty rates on products imported into the U.S.A are identified in the “Special” column of the HTSUS with a unique special program indicator for each preferential program (HTSUS, 2021)
The texts of FTAs, including their related specific Rules of Origin, are generally uploaded to the website of the United States Trade Representative (USTR, n.d.). Preferential RoO may be based on a change in tariff classification, a defined value added or regional value content threshold, or a combination of both. The following are examples of reciprocal and non-reciprocal preferential RoO found in the General Notes section of the HTSUS:
Example of a Specific Reciprocal Preferential Rule of Origin from the USMCA:
“8518.90 A change to subheading 8518.90 from any other heading;
or A change to subheading 8518.90 from any other subheading within heading 85.18, whether or not there is also a change from any other heading, provided there is a regional value content of not less than: (a) 30 percent where the transaction value method is used; or (b) 25 percent where the net cost method is used.” (USITC General Notes, 2021)
Example of Specific Non- Reciprocal Preferential Rule of Origin from the Generalized System of Preferences (GSP):
“………the sum of (1) the cost or value of the materials produced in the beneficiary developing country or any 2 or more countries which are members of the same association of countries which is treated as one country under section 507(2) of the Trade Act of 1974, plus (2) the direct costs of processing operations performed in such beneficiary developing country or such member countries is not less than 35 percent of the appraised value of such article at the time of its entry into the customs territory of the United States. No article or material of a beneficiary developing country shall be eligible for such treatment by virtue of having merely undergone simple combining or packing operations, or mere dilution with water or mere dilution with another substance that does not materially alter the character.” (USITC General Notes, 2021)
Global Efforts to Harmonize RoO:
After years of work on the harmonization of RoO (preferential and non-preferential) after the World Trade Organization (WTO) Agreement on Rules of Origin, there is still no globally harmonized system for Non-preferential or Preferential Rules of Origin (RoO). This makes it more difficult for traders of all sizes, but especially for Small and Medium Enterprises (SMEs) to understand how to properly use RoOs as well as for Customs Administrations to enforce them in a consistent fashion (WTO, n.d.) and (WCO, n.d.).
Although the Harmonization of Rules of Origin efforts have primarily focused on non-preferential ones, work on Preferential RoO has also taken place. The WTO Committee on Rules of Origin (CRO) and the WCO Technical Committee on Rules of Origin (TCRO) have worked in a collaborative fashion in order to enhance the harmonization of RoO as ultimately the issue as an important impact on trade facilitation and economic development (WCO, n.d.).
A lack of harmonization of RoO globally means that CBP may interpret and enforce non-preferential and preferential rules differently than the Customs authorities of other countries. Consequently, businesses that are engaged in international trade with the United States would be well served by understanding these differences. In order to provide traders with more certainty and transparency, Advance Rulings (AR) or Binding Rulings as they are known in the United States, may be requested on country of origin and preferential tariff treatment eligibility issues (CBP Rulings and Legal Decisions, n.d.).
Office of the United States Trade Representative. (n.d.). Free Trade Agreements. Retrieved from Free Trade Agreements | United States Trade Representative (ustr.gov)
U.S. International Trade Commission. (2021) Harmonized Tariff Schedule of the United States General Notes. Retrieved from General Notes (10).pdf
U.S. International Trade Commission. (2021) Harmonized Tariff Schedule of the United States. Retrieved from Harmonized Tariff Schedule PDFs (usitc.gov)
U.S. Customs and Border Protection (CBP). (2004). What Every Member of the Trade Community Should Know About About Rules of Origin: Preferential and Non-Preferential Rules of Origin. Retrieved from ICP - U.S. Rules of Origin (cbp.gov)
U.S. Customs and Border Protection. (n.d.). Rulings and Legal Decisions. Retrieved from Rulings and Legal Decisions | U.S. Customs and Border Protection (cbp.gov)
World Customs Organization. (n.d.). Non-preferential rules of origin. Retrieved from World Customs Organization (wcoomd.org)
World Trade Organization. (n.d.).Trade Topics- Rules of Origin. Retrieved from WTO | Trade topics - Rules of origin gateway