Order Code RL34524
International Trade: Rules of Origin
June 10, 2008
Vivian C. Jones
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Michael F. Martin
Analyst in Asian Trade and Finance
Foreign Affairs, Defense, and Trade Division

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International Trade and Rules of Origin: Implications of
Globalized Manufacturing
Summary
Determining the country of origin of a product is important for properly
assessing tariffs, enforcing trade remedies (such as antidumping and countervailing
duties) or quantitative restrictions (tariff quotas), and statistical purposes. Other
commercial trade policies are also linked with origin determinations, such as country
of origin labeling and government procurement regulations.
Rules of origin (ROO), used to determine the country of origin of merchandise
entering the U.S. market, can be very simple, noncontroversial tools of international
trade as long as all of the parts of a product are manufactured and assembled
primarily in one country. However, when a finished product’s component parts
originate in many countries, as is often the case in today’s global trading
environment, determining origin can be a very complex, sometimes subjective, and
time-consuming process.
U.S. Customs and Border Protection (CBP) is the agency responsible for
determining country of origin using various ROO schemes. Non-preferential rules
of origin are used to determine the origin of goods imported from countries with
which the United States has most-favored-nation (MFN) status. They are the
principal regulatory tools for accurate assessment of tariffs on imports, addressing
country of origin labeling issues, qualifying goods for government procurement, and
enforcing trade remedy actions and trade sanctions.
Preferential rules are used to determine the eligibility of imported goods from
certain U.S. free trade agreement (FTA) partners and certain developing country
beneficiaries to receive duty-free or reduced tariff benefits under bilateral or regional
FTAs, trade preference programs (such as the Generalized System of Preferences),
and other special import programs. Preferential rules of origin are specific to each
FTA, which means that they vary from agreement to agreement and preference to
preference.
This report deals with ROO in three parts. First, we describe in more detail the
reasons that country of origin rules are important and briefly describe U.S. laws and
methods that provide direction in making these determinations. Second, we discuss
briefly some of the more controversial issues involving rules of origin, including the
apparently subjective nature of some CBP origin determinations, and the effects of
the global manufacturing process on ROO. Third, we conclude with some
alternatives and options that Congress could consider that might assist in simplifying
the process.
This report will be updated as events warrant.

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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Rules of Origin in U.S. Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Non-Preferential Rules of Origin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
International Agreements on ROO . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Preferential Rules of Origin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Pros and Cons of U.S. Rules of Origin Methodology . . . . . . . . . . . . . . . . . . . . . . 6
Proliferation of Preferential ROO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Concerns about Inefficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Influence of Domestic Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
CBP Country of Origin Determinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Proposed Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Subsequent Hearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Global Manufacturing and Rules of Origin . . . . . . . . . . . . . . . . . . . . . . . . . 11
The Case of the Apple iPod . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Effects on Rules of Origin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Counter to U.S. Policy Objectives? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Quotas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Trade Embargoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
“Yarn Forward” Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Food Imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
“Buy American” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Conclusion and Options for Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

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International Trade: Rules of Origin and
Manufacturing
Introduction
Recent trade policy issues have pointed to the framework used by the United
States and other countries to regulate imports, including the process of determining
country of origin using “rules of origin” (ROO). Such rules can be very simple,
noncontroversial tools of international trade as long as all of the parts of a product
are manufactured and assembled primarily in one country.1 However, when a
finished product’s component parts originate in many countries, as is often the case
in today’s global trading environment, determining origin can be a very complex,
sometimes subjective, and time-consuming process.
The determination of a product’s country of origin can have significant
implications for the imported product’s treatment with respect to a number of
different U.S. trade programs and government policies. For example, the United
States currently has restrictions on the import of products from certain countries
(including Burma, Cuba, and North Korea) as part of larger foreign policy
considerations. The U.S. government also seeks to promote the growth of imports
from developing nations via the Generalized System of Preferences (GSP) and other
programs in an effort to foster economic growth and prosperity in those nations.
These policies, and many others, rely on country of origin determination in order to
fulfill their stated goals and objectives and, in turn, the determination of country of
origin relies on U.S. implementation of rules of origin.
Certain key characteristics of contemporary globalized manufacturing may also
prove challenging to the ROO process and its implementation procedures. These key
characteristics include multinational manufacturing; the subcontracting of
manufacturing; and highly-competitive manufacturing. Some observers mention that
the combined effects of these three characteristics have created a globalized
manufacturing environment that is sufficiently intricate and flexible to make the
application of ROO more complex, potentially misleading, or both. In addition,
businesses operating in the current globalized manufacturing environment are
increasingly able to respond to changes in U.S. trade policies by manipulating their
supply chains in ways that are able to circumvent the intended goals and objectives
of those policies.
This report first provides a general overview of the U.S. ROO system, including
its implementation as it applies to manufactured imports. Second, advantages and
1 LaNassa, Joseph A. “Rules of Origin and the Uruguay Round’s Effectiveness in
Harmonizing and Regulating Them,” The American Journal of International Law, 90:4
(October 1996), pp. 625-640.

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disadvantages of the ROO schemes as implemented by the United States are also
discussed. Third, the report illustrates ways in which the application of the rules of
origin system can lead to country of origin determinations that could be inconsistent
with U.S. policy objectives or goals, or encourage businesses to circumvent them.
The report concludes with some options that Congress could consider in order to
improve the ROO process.
Rules of Origin in U.S. Practice
The country of origin of an imported product is defined in U.S. law and
Customs regulations as the country of manufacture, production, or growth of any
article of foreign origin entering customs territory of the United States.2 Non-
preferential rules of origin are used to determine the origin of goods imported from
countries with which the United States has most-favored-nation (MFN) status, and
are the principal regulatory tools for accurate assessment of tariffs on imports,
addressing country of origin labeling issues, qualifying goods for government
procurement, and enforcing trade remedy actions and trade sanctions. Preferential
rules of origin are used to determine the eligibility of imported goods from certain
U.S. free trade agreement (FTA) partners and certain developing country
beneficiaries to receive duty-free or reduced tariff benefits under bilateral or regional
FTAs, trade preference programs (such as the Generalized System of Preferences),
and other special import programs. Preferential ROO schemes vary from agreement
to agreement and preference to preference.
There is no specific U.S. statute that provides an overall definition of “rules of
origin” or “country of origin.” Instead, U.S. Customs and Border Protection (CBP)—
the agency primarily responsible for determining country of origin (as it is for
enforcing the tariff, customs, and other laws that apply to imported products)— relies
on a body of established CBP regulatory and legal precedents to confer origin on an
import if the matter is in doubt.3
Although CBP is tasked with enforcing U.S. trade laws, the Customs
Modernization Act (Title VI of P.L. 103-182) shifted much of the responsibility for
complying with customs laws and regulations from CBP to the importer.4 This
means that the importer of record must understand customs procedures (including,
for example, the applicability of a preferential ROO scheme to his or her product),
and apply “reasonable care” to enter, properly classify, and determine the value of
merchandise so that CBP can properly assess duties, collect accurate statistics, and
2 19 C.F.R. § 134.1. The customs territory of the United States is defined in General Note
2 of the Harmonized Tariff Schedule as the 50 states, the District of Columbia, and Puerto
Rico.
3 Most CBP rulings from 1989 to the present are available in a searchable database known
as the Customs Rulings Online Search System (CROSS), at [http://rulings.cbp.gov/].
4 Title VI of the North American Free Trade Agreement Implementation Act, P.L. 103-182.
Also known as the “Mod Act.”

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CRS-3
determine whether all other applicable legal requirements have been met.5 In cases
where the country of origin is unclear, importers may seek advance ROO rulings
from CBP in an effort to accelerate the import process.
Non-Preferential Rules of Origin
Imports from countries that the United States has granted MFN status receive
more favorable tariff treatment than imports from countries that do not receive this
status.6 Non-preferential ROO ensure that imports from U.S. trading partners receive
the proper tariff treatment. Non-preferential ROO are also important for country of
origin labeling, government procurement, and enforcement of trade remedy actions,
compilation of trade statistics, supply-chain security issues, and other laws.7
Under non-preferential rules, two major principles apply. First, goods that are
wholly the growth, product, or manufacture of one particular country are attributed
to that country. This is known as the wholly obtained criterion.
Second, if an imported product consists of components that are from more than
one country, a criterion known as substantial transformation is used to confer origin.
In most cases, the origin of the good is determined to be the last place in which it was
substantially transformed into a new and distinct article of commerce8 based on a
change in name, character, or use. Making the determination about what constitutes
a change sufficient for a product to be considered substantially transformed is the
juncture at which an origin ruling can prove to be quite complex. When determining
origin, CBP takes into account one or more of the following factors:
! the character/name/use of the article;
! the nature of the article’s manufacturing process, as compared to the
processes used to make the imported parts, components, or other
materials used to make the product;
! the value added by the manufacturing process (as well as the cost of
production, the amount of capital investment, or labor required)
compared to the value imparted by other component parts; and
5 U.S. Customs and Border Protection, What Every Member of the Trade Community Should
Know about Recordkeeping, Informed Compliance Series, January 2005. See also, U.S.
Customs and Border Protection, What Every Member of the Trade Community Should Know
about Reasonable Care, Informed Compliance Series, February 2004.
6 As a member of the World Trade Organization (WTO), the United States must grant
immediate and unconditional most-favored-nation (MFN) treatment to the products of other
Members with respect to tariffs and other trade-related measures. The only two countries
not currently afforded MFN status are Cuba and North Korea.
7 United States International Trade Commission, Country of Origin Marking: Review of
Laws, Regulations, and Practices, USITC Publication 2975, July 1996, pp. 2-4 (hereinafter
COO Marking Report).
8 U.S. Customs and Border Protection, What Every Member of the Trade Community Should
Know about U.S. Rules of Origin, Informed Compliance Series, May 2004, p. 9.

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! whether the essential character is established by the manufacturing
process or by the essential character of the imported parts or
materials.9
Origin determinations are very fact-specific, but as CBP itself has acknowledged,
there can still be considerable uncertainty about what is deemed to be substantial
transformation due to a certain amount of subjectivity which may be involved in CBP
interpretations of these facts.10
International Agreements on ROO. Participating countries in the Uruguay
Round of multilateral trade talks recognized the need for rules of origin to be
objective, understandable, predictable, and transparent. In the Agreement on Rules
of Origin, World Trade Organization (WTO) members agreed not to use rules of
origin to pursue trade policy objectives in a manner that would disrupt trade, and to
apply them in a consistent, uniform, impartial and reasonable manner.11 WTO
members also agreed to notify other members about preferential ROO, including a
listing of the preferential arrangements which they implement, along with all
applicable administrative decisions and rulings.12
Non-Preferential Harmonization Program. The Agreement established
a three-year (beginning in 1996) Harmonization Work Program (HWP) in an effort
to develop uniform, cooperative, and coherent non-preferential rules of origin to be
used by all WTO members.13 Ongoing negotiations are carried out by the WTO
Committee on Rules of Origin (CRO) under the WTO Council for Trade in Goods,
and the World Customs Organization (WCO) Technical Committee on Rules of
Origin (TCRO).14 A first draft of a consolidated text was issued in 1998, and a
technical review was completed in 1999. These efforts have secured agreement on
an overall design for harmonized rules of origin, including definitions, general rules,
and two appendices (one on definitions of wholly obtained goods and one on
product-specific rules of origin).15
In the Trade Act of 2002 (P.L. 107-210), one of the principal negotiating
objectives set forth was the conclusion of an agreement on rules of origin.16
According to the United States Trade Representative (USTR), reaching agreements
9 COO Marking Report, pp. 2-5.
10 In January 1994, the U.S. Customs Service proposed setting uniform rules of origin for
imports (59 F.R. 141) See also, U.S. House of Representatives, Committee on Ways and
Means, Subcommittee on Trade. Rules of Origin. Hearing. 104th Congress, 1st Session, July
11, 1995. Serial 104-27.
11 World Trade Organization, Agreement on Rules of Origin, Part II, Article 2, “Disciplines
During the Transition Period.”
12 Ibid., Annex II (4).
13 Ibid., Part IV, Article 9.
14 World Customs Organization home page, at [http://www.wcoomd.org/].
15 Ibid.
16 P.L. 107-210, sec. 2102 (13).

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on the technical aspects of the HWP have turned out to be more complex than
initially envisioned, and negotiations are expected to continue through 2008.17
Preferential Rules of Origin
Preferential rules of origin are used to verify that products are eligible for duty-
free status under U.S. trade preference programs such as the Generalized System of
Preferences (GSP), the African Growth and Opportunity Act (AGOA), or free trade
agreements (FTAs), such as the North American Free Trade Agreement (NAFTA).18
As with non-preferential ROO, if goods are “wholly the product” of a
beneficiary of preference program or FTA, establishing origin is usually fairly
straightforward. However, if a good was not entirely grown or manufactured in the
targeted country/region, specific rules of origin may apply. These ROO can be very
detailed and specific, and vary from agreement to agreement and preference to
preference.
For example, in some agreements, a tariff shift method, or change in tariff
classification (as a result of production occurring entirely in one or more of the
parties), may be used to determine whether or not the product qualifies for these
benefits. The NAFTA is one example in which this methodology is used.19 With
certain products, a technical test may be used, meaning that specific processing
operations must occur in the originating country.20
For most FTAs and preference programs, a local content test, requiring that a
product contain a minimum percentage of domestic value-added (component or
manufacturing process) in the originating country is required in order to confer origin
and thus receive the tariff benefit.21 The amount of local content required may vary
among the different trade arrangements, and from product category to product
17 Ibid.; U.S. Trade Representative. 2008 Trade Policy Agenda and 2007 Annual Report of
the President of the United States on the Trade Agreements Program, March 2008, p. 41
(hereinafter USTR Trade Policy Agenda).
18 Preferential ROO apply to the African Growth and Opportunity Act (AGOA); the Andean
Trade Preference Act (ATPA); the Andean Trade Promotion and Drug Eradication Act
(ATPDEA); the Automotive Products Trade Act; the Caribbean Basin Economic Recovery
Act (CBERA); the Compact of Free Association Act (FAS); the Generalized System of
Preferences (GSP); the Haitian Hemispheric Opportunity through Partnership
Encouragement (HOPE) Act of 2006 (an amendment to CBERA); Insular Possessions of
the United States; the North American Free Trade Agreement (NAFTA); products of the
West Bank, the Gaza Strip, and associated Qualifying Industrial Zones; the United States-
Caribbean Basin Trade Partnership Act (CBTPA); the Dominican Republic-Central
America-United States Free Trade Agreement (CAFTA-DR); and United States bilateral
FTAs with Israel, Jordan, Chile, Singapore, Australia, Morocco, and Bahrain.
19 19 C.F.R. § 102. These rules are also known as the “NAFTA marking rules.”
20 Hirsch, Moishe “International Trade Law, Political Economy and Rules of Origin — A
Plea for a Reform of the WTO Regime on Rules of Origin,” Journal of World Trade (36)
2002, p. 171.
21 Ibid.

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category within an arrangement. In some cases, the local content requirement may
be fulfilled on a regional basis. For example, in order to qualify for duty-free
treatment under the Generalized System of Preferences, (1) the cost or value of the
materials produced in that developing country (or produced in one or more members
of an association of countries treated as one country under GSP), and (2) the direct
cost of processing operations performed in that beneficiary country (or association
of countries as described above), is at least 35 percent of the appraised value of the
product.22
Pros and Cons of U.S. Rules of Origin Methodology
Due to their obscure and technical nature, rules of origin schemes are generally
not in the forefront of the continuing debates on trade liberalization or globalization.
Nevertheless, the role of ROO schemes (both preferential and non-preferential) is
central to the international trading system and trade negotiations. In order for goods
to receive the benefits of trade agreements which the United States has entered into,
or trade preferences that the United States grants to certain countries, importers (or
importers/manufacturers) must comply with preferential rules of origin that are often
very detailed and specific. Non-preferential rules of origin are equally important
because they qualify goods for entry into the United States, and receipt of MFN tariff
rates. In addition, non-preferential ROO assist CPB and other officials in the
implementation and enforcement of key U.S. laws and policies, including
government procurement laws, trade remedy actions, country of origin labeling
requirements, and other provisions.
The ROO methodology employed in determining country of origin has become
a matter of debate among economists and other trade policy experts for several
reasons. First, the United States has entered into a number of bilateral and regional
free trade agreements—each with its own preferential ROO scheme—which adds
new complexities for importers and manufacturers desiring to benefit from these
agreements, thus inserting economic inefficiencies into the international trading
system. Second, since CBP has little legislative guidance in interpreting ROO, the
agency often makes case-by-case country of origin determinations based on its own
regulations and precedents. Some importers have criticized CBP because they
believe that some origin determinations are subjective and/or inconsistent or may run
contrary to congressional (legislative) intent. Third, in an international trading
environment in which components of goods originate in many countries and
assembly occurs in a completely different country, some observers suggest that one-
country origin determinations may be misleading in some respects. Fourth, some
express concern that current systems for determining country of origin may run
counter to, or may be insufficient to enforce, other U.S. trade policies or trade
objectives.
22 U.S. International Trade Commission. Harmonized Tariff Schedule of the United States.
General Note 4 (19 U.S.C. § 1202).

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Proliferation of Preferential ROO
The intent of preferential rules of origin is to ensure that goods from countries
that qualify for duty-free or reduced rates of duty under a preference or FTA are able
to receive these favorable tariff benefits, and that products from countries that are not
parties to the agreement or preference are excluded.
Concerns about Inefficiency. Since preferential rules of origin are FTA-
(or trade preference-) specific, assembling the proper documentation to ensure that
products qualify for benefits under one of these programs can be a very complex and
costly process. Some in the business community mention that the administrative
costs associated with navigating the increasingly complex patchwork of regulations
involved in establishing origin can outweigh the tariff benefits of FTAs.23 Some
economists also complain that the proliferation of FTAs between trading partners has
led to an inefficient “spaghetti bowl” approach to trade policy—to a large degree
because of rules of origin requirements.24 The lack of transparency of preferential
ROO is also a matter of concern for some. An often-repeated example of this is this
is the so-called triple-transformation rule for apparel products within the NAFTA —
meaning that the raw materials (fiber), the cloth, and the garment itself must all be
processed within the FTA region in order to be NAFTA-eligible.25 The triple
transformation rule is not immediately discernable to the average person, nor are the
costs of compliance.
However, others might argue that FTAs can still provide importers with greater
flexibility in sourcing goods and more cost-effective means of entering the U.S.
market. Importers always have the option of importing products under MFN (in
which case non-preferential rules of origin would apply) status if they determine that
this is the most cost-effective method of entry. Therefore, an FTA could be seen as
providing importers and manufacturers with additional flexibility in choosing
suppliers, as well as modes of entry (i.e., under preferential or non-preferential
ROO). Importers can weigh the costs of compliance (combined with the more
favorable FTA tariff rate) against importing goods from suppliers outside the FTA.
For example, a study of rules of origin under the NAFTA illustrated that when the
MFN tariff on a product is equal or more favorable than the NAFTA tariff, importers
will typically choose to import under the MFN rate in order to avoid the additional
compliance costs. However, when importers determine that the NAFTA rate (plus
additional transaction costs) is more favorable, they choose to enter the goods under
23 Ollilla, Jorma and Sutherland, Peter. “Business is Fearful as Doha Nears the Precipice,”
Financial Times, April 23, 2006. See also, Ikenson, Daniel J. Leading the Way: How
U.S.Trade Policy Can Overcome Doha's Failings, Cato Institute, Trade Policy Analysis No.
33, June 19, 2006, p. 13, at [http://www.freetrade.org/node/28].
24 Bhagwwati, Jagdish and Krueger, Anne O. “U.S. Trade Policy: the Infatuation with Free
Trade Agreements,” in The Dangerous Drift to Preferential Trade Agreements, AEI Press,
1995.
25 Krueger, Anne O. “Are Preferential Trading Arrangements Trade-Liberalizing or
Protectionist?,” The Journal of Economic Perspectives 13:4 (Autumn 1999), p. 112. Cadot,
O. and de Melo, J. 2007. Why OECD Countries Should Reform Rules of Origin. Center for
Economic Policy Research (CEPR) Discussion Paper (6172).

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the NAFTA.26 Importers may, in some cases, decide not to enter goods under an
FTA, but the availability of such preferences gives them greater flexibility to
purchase and import products in the most cost-effective manner available. The fact
remains, however, that the utilization of trade preferences under preferential rules of
origin is sometimes costly, and can inhibit the use of preferences in some cases.
In addition, from a trade policy perspective, preferential rules of origin are
essential to reserve the benefits of an FTA for those countries who have entered into
the agreement. Without preferential ROO, it would be possible for imports from
non-FTA countries to enter the FTA partner with the lowest external tariff, and then
serve the rest of the region under the FTA rate. This could force a convergence of
external tariffs and possibly a competitive devaluation of external tariffs in the
region.27 Therefore, preferential ROO have a pivotal role in (1) reserving the benefits
of the FTA for those countries who have entered into the agreement, and (2) ensuring
that each FTA party can maintain a separate and independent external trade policy.28
The key challenges of constructing rules of origin in preferential trading
relationships, therefore, are first, finding the balance between the effectiveness and
the efficiency of ROO, and second, simplifying them and making them more
transparent.
Influence of Domestic Industries. Some critics of rules of origin tests
used in FTAs allege that because ROO are negotiated product by product and
industry by industry, there is “enormous scope for well-organized industries to
essentially insulate themselves from the effects of the FTA by devising suitable
ROO,” thus diminishing its trade liberalizing effects overall.29 As a result, more
restrictive (and often more complex) ROO are often crafted to compensate domestic
manufacturers that stand to lose protection as a result of an FTA or preference.30 In
addition, whole categories of goods may be completely restricted. However, others
state that such measures are often successful in softening the opposition from import-
competing groups, thus enhancing the political feasibility of subsequent FTA
implementation (after congressional approval).31 Thus, many supporters of FTAs
believe that the complexity of ROO for certain products may be a critical factor in
garnering support for the FTA.
In addition, some studies indicate that more restrictive rules of origin, such as
higher local content requirements, may also encourage producers of finished goods
in an FTA region to shift from lower-cost suppliers of intermediate goods outside the
26 Kunimoto, Robert and Sawchuck, Gary. NAFTA Rules of Origin. Government of Canada.
Policy Research Initiative Discussion Paper, June 2005, pp. 6-7.
27 Ibid., p. 3.
28 Ibid.
29 Krisha, Kala. “Understanding Rules of Origin,” European Financial Management
Association (EFMA) Meetings, Helsinki (2003), p. 1.
30 Ibid.
31 Ibid.

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FTA to higher-cost suppliers within the FTA region (often U.S. suppliers) in order
to qualify for more favorable FTA tariff benefits. Thus, more restrictive ROO can
be used to provide “protection” to these regional suppliers (as well as maintain
existing protection against outsiders), to the extent that they provide sufficient
incentive for FTA producers to buy more inputs inside the region.32 Therefore, more
restrictive local (or regional) content requirements can spread the benefits of the FTA
to manufacturers of intermediate products in the region. This, in turn, can lead to
additional support for an FTA within the domestic/regional manufacturing sector.
The following example illustrates the interest that the U.S. automobile sector
demonstrated in influencing ROO during negotiations on the NAFTA:
All three [U.S.] automakers had an interest in a reasonably high rule of origin to
make it more difficult for European and Japanese competitors to locate assembly
plants in Canada or Mexico and thereby ship finished automobiles to the United
States duty-free. But GM differed from Chrysler . . .Because of [its] joint
venture with Isuzu in Canada, GM favored a lower rule of origin, around 60
percent [regional content requirement]. For reasons that reflected their own
patterns of production and competitive position, Ford and Chrysler preferred a
higher rule, approximately 70 percent. Auto parts makers had every incentive to
push for as high as a percentage as possible, since high percentages protected
them from foreign competitors.33
CBP Country of Origin Determinations
Country of origin rulings can be quite complex and lengthy, especially when
questions on what processes or procedures are sufficient for a product to be
“substantially transformed” come into play. Prior to importing a product, importers
may also search the Customs Rulings Online Search System (CROSS) for a ruling
on a product similar to theirs for guidance, or may request a binding ruling in
advance of importation from the CBP Office of Regulations and Rulings.34 A 2003
Government Accountability Office (GAO) report acknowledged that the CBP Office
of Regulations and Rulings had improved its timeliness by issuing rulings within the
Customs Commissioner’s stated 90-day goal about 65% of the time.35 One might
argue, however, that for businesses trying to get products to market, even a 90-day
waiting period might prove to be burdensome.
A major reason for this complexity is that, especially in situations involving
non-preferential (MFN) origin rules, CBP officials often make these determinations
on a “case by case” basis, using case law and prior CBP rulings as precedent. CBP
32 Chase, Kerry A. “Industry Lobbying and Rules of Origin in Free Trade Agreements,”
International Studies Association 48th Annual Convention, Chicago, Illinois, February
28-March 3, 2007.
33 Mayer, Frederick W. Interpreting NAFTA: The Science and Art of Political Analysis. New
York: Columbia University Press, 1998, pp. 157-158.
34 19 C.F.R. 177.
35 Government Accountability Office (GAO). U.S. Customs Service: Prospective Rulings
More Timely, but Database Reliability Questions Remain. GAO-03-828, August 2003.

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itself has admitted that even though these determinations are very fact-specific, a
certain amount of subjectivity can be involved in CBP interpretations of these facts.36
Proposed Changes. In early 1994, CBP (then known as the U.S. Customs
Service) acknowledged that application of the substantial transformation rule —
applied when an article is not wholly the growth, product, or manufacture of one
country — “often involves subjective judgements as to what constitutes a new and
different article or as to whether processing has resulted in an new name, character
and use.” At the time, CBP proposed to amend its existing rules to provide rules that
are more “objective and transparent and thereby to provide greater certainty and
predictability for both the trade community and the Customs Service as required
under existing laws and regulations.”37 In particular, CBP suggested that the rules
of origin specified under the-then U.S.-Canada Free Trade Agreement, which were
later incorporated into the North American Free Trade Agreement (NAFTA), also be
used as a model for all non-preferential rules of origin.38 This ROO scheme is also
known as the “NAFTA Marking Rules” or “NAFTA annex 311 rules,” set down in
CBP regulations under 19 CFR § 102. In addition to the “wholly obtained” method,
these rules include (1) a “tariff shift” methodology where origin is conferred to
certain products if they have undergone “an applicable change in tariff
classification;”39 (2) an “essential character” test, in which the country of origin is
the “country or countries of origin of the single material that imparts the essential
character to the good;”40 and/or (3) a factory processing/assembly test.41
Subsequent Hearing. A hearing was held by the Trade Subcommittee of the
House Committee on Ways and Means on the proposal in July 1995.42 Testimony
at the hearing indicated that — while all U.S. importers and manufacturers present
favored an objective, fair, and transparent form of determining origin — many were
concerned that using the NAFTA Marking Rules and the “tariff shift”method, as
opposed to the concept of substantial transformation, would cause prohibitive
regulatory compliance adjustment costs.
In addition, some domestic importers of intermediate goods, including the
pharmaceutical, hand tools, coffee, electronics, food, and textile industries, indicated
at the hearing and in prior conversations with Customs officials that they would be
36 59 F.R. 141. The subjectivity issue is more applicable to non-preferential rules because
preferential ROO schemes provide more specific guidance.
37 Ibid.
38 Ibid.
39 19 C.F.R. § 102.11(a)(3).
40 19 C.F.R. § 102.11(b) and (c). If origin cannot be determined on that basis, an inventory
management method may be used to determine origin.
41 19 C.F.R.§ 102.11(d).
42 U.S. Congress. House of Representatives. Committee on Ways and Means. Subcommittee
on Trade. Rules of Origin. Hearing, 104th Congress, July 11, 1995. Serial 104-27.
Comments of Chairman Crane, p. 4.

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adversely affected by the measure.43 The recently-begun harmonization effort on
non-preferential rules in the WTO/WCO was also acknowledged, and some
lawmakers recommended that Congress and the Customs Service wait for a
resolution of these talks before changing the U.S. rules. As a result of the influence
of these potentially adversely affected industry groups, and in anticipation of the
completion of the WTO harmonization process, the Customs proposal was not
adopted.
Global Manufacturing and Rules of Origin
Rapid advancements in science and technology since World War II have
contributed to a major transformation of modern manufacturing. New manufacturing
techniques have made it possible for less skilled workers to manufacture higher
quality products with little waste or loss. In addition, the development of faster and
more efficient communications and transportation technology has made it possible
to reliably construct and ship components, parts and materials from multiple
locations to the site of final assembly, making the manufacturing process more
complex and intricate. As a result, an increasing variety of products incorporate parts
and components from many different nations, often with the manufacture and
assembly conducted in several different countries.
In addition to the increased competition among manufacturers, there has also
been a restructuring of the overall manufacturing process toward subcontracting or
“outsourcing” production. For many light consumer goods such as toys and
electronics, major retailers or brand-name distributors traditionally considered “U.S.
companies” have disengaged themselves from direct participation in the
manufacturing of their products, relying instead on global trading companies to
manage their product supply chains. Well-known retailers (such as Walmart, Sears,
and the Gap) and brand-name distributors of consumer products (such as Mattel,
Nike, and Dell) utilize manufacturing companies in China and other countries to
engage in the actual production and delivery of their products.
These characteristics of modern manufacturing have significant implications for
international trade, including the following:
! The “nationality” of the product and the “nationality” of the
manufacturer and/or initial owner are often different;
! Importers and/or initial owners may know very little about where or
how a product was made;
! Frequently a relatively small percentage of the product’s total value
was created in the attributed country of origin; and
! Globalized production can be simultaneously efficient and
inefficient.
The Case of the Apple iPod. The manufacture of the Apple iPod provides
a very clear case study of how electronics and other products are often produced in
the global manufacturing environment. A recent study focusing on the iPod
43 Ibid.

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illustrated that the national home of the designer/importer of record, the components,
and the ascribed country of origin of the product may indeed be very different.
Researchers at the Personal Computing Industry Center of the Paul Merage School
of Business at the University of California, Irvine, analyzed the value content of the
production of a $299 Apple iPod by dividing each step in the production process
between gross margin and input costs.44 According to their preliminary results, of the
$299 retail price:
! $45 went to the retailer’s gross margin;45
! $30 went to the distributors gross margin;
! $80 went to Apple’s gross margin;
! $144 went to the cost of the inputs of the iPod.
As to the $144 cost of inputs, the researchers were able to further break down the cost
of seven key component worth $116 — including $33 in gross margins and $83 in
input costs. The remaining $28 in total input costs had not yet been analyzed, nor had
the $83 in inputs costs for the seven key components been fully analyzed.46
The iPod study also discovered that the typical iPod may contain parts and
components manufactured in six different countries (China, Japan, Korea, Singapore,
Taiwan, and the United States) by companies based in four different countries
(Japan, Korea, Taiwan, and the United States).47 However, under U.S. country of
origin procedures, the finished iPod was generally considered a product of China —
the last place of substantial transformation.
Effects on Rules of Origin. As illustrated above, in the increasingly global
manufacturing environment, the assembly point of the manufactured product and of
its individual components are frequently different. These rapidly accelerating
changes in the manufacturing process can lead to additional complexities in ROO
determinations because officials must ascribe origin to a single country for import
purposes.
In turn, these complexities can lead to apparent inconsistencies. For example,
in some cases, CBP officials may decide that the assembly process (the value added
by labor costs) is sufficient to confer origin, as it is the “last place of substantial
transformation.”48 In other cases, officials have determined that the final assembly
44 Linden, Greg, Kraemer, Kenneth L., and Dedrick, Jason “Who Captures Value in a Global
Innovation System? The Case of Apple’s iPod,” Personal Computing Industry Center, The
Paul Merage School of Business, University of California, Irvine, June 2007.
45 A measure of corporate profitability defined as total revenue less the cost of the goods
sold.
46 Linden, et al. (2007).
47 Ibid.
48 In Customs Ruling HQ HO127620, Country of Origin of a Flashlight and Replacement
Part, CBP determined that a military-grade flashlight and a replacement part were of U.S
origin for purposes of the “Buy American Act” even though many of the parts were of
(continued...)

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CRS-13
process and labor costs incurred are actually not sufficient to confer this essential
character.49
On the other hand, since CBP has the legal flexibility to be able to consider “the
totality of the circumstances and makes such decisions on a case-by-case basis,” the
agency is able to fully consider the extent and technical nature of the processing that
occurs in each country, thus taking into account the “resources expended on product
design and development, extent and nature of post-assembly inspection procedures,
and worker skill required during the actual manufacturing process” when making
country of origin determinations.50 Therefore, the flexibility to analyze individual
components and manufacturing processes could lead to more precise country of
origin determinations, despite the complex nature of global manufacturing.
Counter to U.S. Policy Objectives?
In the modern manufacturing environment, a U.S. (or multinational) company
responsible for product design and manufacture may have very little knowledge about
where and how imported goods are made, because the actual manufacture of the
products has been subcontracted to a global manufacturing company that operates in
many countries. While some major retailers and brand-name distributors have
established social responsibility codes and employ vendor compliance officers to
make sure that contracted factories comply with agreed codes of conduct, others rely
on their global trading companies to ensure that their products are being made
according to their corporate rules and procedures. While the origin of the product
might be easily determined (i.e., as the last place of substantial transformation for
MFN purposes), the possible lack of knowledge about intermediate steps in the
manufacturing of the product can pose concerns for product safety and, in some
cases, import security.
In addition, the global manufacturing market can be very responsive to changes
in economic conditions such as the imposition of trade remedies and trade
48 (...continued)
foreign origin, including the lenses, circuit boards, lens reflectors, rubber gaskets, and
plastic bodies. CBP found that the various imported components “lose their identities . . .
are substantially transformed as a result of the operations in the United States and become
an integral part of a new article possessing a new name, character, and use.” In addition,
CBP found that the assembly process and a light-emitting-diode (LED assembly) of U.S.
origin represented a majority of the costs involved in making the product. See Customs
Rulings Online Search System (CROSS), at [http://rulings.cbp.gov].
49 In Customs Ruling HQ H021398 Country of Origin of Ball Seals, CBP determined that
two types of ball seals made of five parts (three of U.S. origin and two sourced in China)
that were shipped to China for a final assembly process were of U.S. origin for purposes of
the “Buy American Act” because “the U.S.-origin components import the essential character
to the assembled seals” and that “the Chinese operations are simple assembly operations that
involve a small number of components and do not appear to require a considerable amount
of time, skill, or attention to detail.” See Customs Rulings Online Search System (CROSS),
at [http://rulings.cbp.gov].
50 Ibid.

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CRS-14
embargoes. Multinational manufacturers are increasingly able to shift the location
of their operations in such a way that they are able to receive a country of origin
determination that would avoid the additional duties payable in an antidumping case,
or fend off any barriers to entry caused by a trade embargo.51 This may be the reason
that more trade remedy cases are brought forward on chemicals, raw materials, and
intermediate goods rather than on finished manufactured goods or textiles and
apparel.52
Quotas. An often-mentioned example of circumvention of U.S. quotas existed
under the former World Trade Organization’s Multifibre Agreement (MFA) and
Agreement on Textiles and Clothing (ATC).53 Under first the MFA and then the
ATC, a number of WTO members — including the United States — placed quantity
quotas on clothing imports from a number of countries. In the case of the United
States, the trade policy objective was, in part, to protect the U.S. textile and apparel
industry, and in part, to provide certain developing countries with access to the U.S.
market which they would not otherwise have. However, when one country’s quota
was used up, clothing manufacturers, were often able to adjust the assembly of the
apparel items being produced to obtain the desired country of origin determination
— and thus, the necessary quota allowance — from U.S. customs officials. While the
MFA and ATC are no longer in effect, quotas are important means of regulating
imports of textiles and apparel entering under preferential rules (such as NAFTA),
and of certain products claiming preferential treatment under programs such as the
Generalized System of Preferences. Quotas are also sometimes used to protect
import-competing U.S. manufacturers through trade remedy actions, such as import
safeguards.
Trade Embargoes. The United States has long-standing trade embargoes
barring international trade with countries such as Burma (Myanmar) and North
Korea. Following the recent violent suppression of peaceful protests in Burma,
legislation was introduced in both the House of Representatives and the Senate to
further tighten economic and trade sanctions on the military junta in power.54 These
bills include language to block the import of products made using precious
gemstones mined and lumber harvested in Burma. Such legislation was deemed
51 The apparel industry has been engaged in offshore sourcing since the late 1950s in order
to avoid quantitative limitations and additional duties on clothing exports. See Jin,
Buyoungho “Apparel Industry in East Asian Newly Industrialized Countries: Competitive
Advantage, Challenge, and Implications,” Journal of Fashion Marketing and Management,
8:2, 2004, p. 230. Web-based supply chain technology, as well as access to more efficient
transportation and other infrastructure needs, has enabled other manufacturing sectors to
develop similar flexibilities.
52 See the ITC website for a list of AD and CVD orders by product category, at
[http://www.usitc.gov/trade_remedy/731_ad_701_cvd/investigations/antidump_counterv
ailing/index.htm].
53 The WTO’s MFA was in effect from 1974-1994; the WTO’s ATC was in effect from
1995 to 2004.
54 These include the Block Burmese Junta’s Anti-Democractic Efforts (JADE) Act, H.R.
3890, the Saffron Revolution Support Act of 2007, S. 2172, and the Burma Democracy
Promotion Act of 2007, S. 2257.

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CRS-15
necessary because the the Burmese Freedom and Democracy Act of 2003 (P.L. 108-
61), which banned the direct importation of Burmese products into the United States,
still allows Burmese raw materials such as gemstones and lumber to enter the United
States provided that they are cut, polished or otherwise sufficiently transformed in
a third country (such as India, China, or Thailand) so that origin is conferred to that
country. Therefore, jewelry and furniture importers are allegedly processing
Burmese jewels and lumber in other countries so that they can be legally import them
into the United States.
Another current issue dealing with enforcement of U.S. policy objectives is the
treatment of goods and products manufactured in the Kaesong Industrial Complex
(KIC) located in North Korea.55 While the KIC is physically located in North Korea,
many of its manufacturing operations are owned and run by South Korean
companies. The South Korean government has asked the United States to treat the
products made in the KIC by South Korean companies as South Korean products,
even though current U.S. rules of origin laws and regulations would designate them
as being products of North Korea. The United States currently has a trade embargo
on products from North Korea, and the United States has never granted North Korea
“normal trade relations” (NTR) status. Whether or not the United States agrees to
this proposal, there is nothing to prevent South Korean firms from performing
intermediate manufacturing operations in North Korea, and then performing final
manufacturing processes (sufficient to confer origin) in South Korea.
“Yarn Forward” Rule. A third example of potential tension between the
conferring of country of origin to products and other aspects of U.S. trade policy is
the preferential origin rule included in the Dominican Republic-Central
America-United States Free Trade Agreement (CAFTA-DR) for certain clothing
manufactured in CAFTA-DR nations.56 Under the terms of CAFTA-DR, clothing
manufactured in the region may be imported into the United States duty-free,
provided that they are made of U.S. yarn and fabric under the so-called “yarn
forward” rule. While this program is popular among U.S. textile manufacturers,
there was concern during congressional consideration of CAFTA-DR that the “yarn
forward” rule could be manipulated by non-CAFTA-DR nations to obtain duty-free
access to the U.S. market. In addition, the existence of this program that provides
indirect support for the U.S. textile industry has undermined U.S. criticisms of export
subsidy programs of other nations.
Food Imports. Recent concerns about the safety of imported food have also
revealed the potential for country of origin designation to pose problems for
achieving desired trade objectives. Several bills have been introduced in Congress
to bolster current federal laws governing the safety of imported foods, often with
provisions allowing for an import prohibition on categories of food from a country
55 For a more complete analysis of this issue, see CRS Report RL34093, The Kaesong
North-South Korean Industrial Complex, by Dick K. Nanto and Mark E. Manyin.
56 For more information on the provisions of CAFTA-DR, see CRS Report RL31870, The
Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR),
by J. F. Hornbeck.

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if there is an established records of safety concerns for those goods.57 While the
intent of such provisions may be clear, the ability of manufacturers to shift key food
processing operations to locations in other countries may reduce the effectiveness of
some proposed import prohibitions.
“Buy American”. Another example of the possible effect of country of origin
procedures on trade policies and objectives is illustrated by the “Buy American Act”
[41 U.S.C. §§ 10a - 10d].58 The act requires that the federal government procure
manufactured products defined as being from the United States. A manufactured
article is a U.S. product if it: (1) was manufactured in the United States; and (2) the
cost of the U.S.-made components constitutes more than 50 percent of the overall
cost of components.59 Non-manufactured articles are considered U.S. products if
they were mined or produced within the United States or “any place subject to the
jurisdiction thereof.” While one of the stated goals of the “Buy American Act” is to
protect U.S. workers, nothing in the act or current U.S. country of origin policies
require that the products must be made and extracted by U.S. nationals.
In the 1990s, there was a controversy over the U.S. government purchase of
clothing manufactured in Saipan, the capital of the United States Commonwealth of
the Northern Mariana Islands (CNMI), using mainland Chinese, Thai, Philippina and
Bangladeshi workers in factories owned and operated by Chinese, Japanese and
Korean subcontractors under allegedly “sweatshop conditions.”60 Because articles
of clothing manufactured in Saipan are legally U.S. products, they were able to
qualify for U.S. government procurement, provided that over half of the cost of the
product (including the value added by labor performed in the United States or a U.S.
territory) came from U.S. sources.
Conclusion and Options for Congress
Rules of origin are central components of trade policy. Preferential rules of
origin are especially important for ensuring that only goods qualified to receive
benefits under an FTA receive those benefits, and may also be constructed to ensure
57 These bills include the Assured Food Safety Act of 2007, H.R. 2997, the Foreign Seafood
Safety Act of 2007, H.R. 3077, the Import Safety Act of 2007, H.R. 3100, the Food and
Drug Import Safety Act of 2007, H.R. 3610, the Consumer Food Safety Act of 2007, H.R.
3624, the Food Import Safety Act of 2007, H.R. 3937, the Imported Food Safety
Improvement Act of 2007, H.R. 3967, and the Imported Food Security Act of 2007, S. 1776.
58 For a summary of the “Buy American Act, see CRS Report 97-765, The Buy American
Act: Requiring Government Procurements to Come from Domestic Sources, by John R.
Luckey.
59 Exceptions to the requirement to procure U.S. products are allowed in five cases: 1) it is
deemed inconsistent with the public interest, 2) the cost is considered unreasonable, 3) the
products are for use outside of the United States, 4) the products are not produced or
manufactured in the United States in sufficient quantities or of satisfactory quality, and 5)
the procurement is for less that $2,500.
60 Christensen, Jean “More Retailers Agree to Settle Saipan Garment Worker Lawsuits,”
Associated Press, March 20, 2000.

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that import-competing U.S. producers are not adversely affected by the FTA, thus
possibly assuring a degree of public support for the measure. Non-preferential rules
are essential for making sure that goods coming from countries that enjoy MFN
status with the United States are charged the proper tariffs, and are also key to
supporting other U.S. trade laws, such as country of origin labeling.
At present, CBP makes country of origin determinations primarily based on an
established body of regulatory and legal precedents. For many imports, determining
origin is relatively straightforward. However, if the matter is in doubt, the origin
question is decided on a case-by-case basis with input, records, and samples provided
by the importer of record.
Although origin rulings are very fact-specific, there is sometimes uncertainty
over what will be deemed as substantial transformation. Businesses sometimes
criticize CBP and the current process as lacking clarity, consistency, and
predictability.61 Additionally, given the expanding use of preferential ROO as the
United States potentially enters into additional FTAs, determining country of origin
(or waiting for rulings from CBP) may prove to be a significant burden on importers,
especially on smaller firms.
With regard to non-preferential rules, the United States has agreed to an ongoing
Harmonization Work Program (HWP). Negotiations are ongoing under the auspices
of the WTO Committee on Rules of Origin and the World Customs Organization.
According to the USTR, however, reaching agreements on the technical aspects of
the HWP have turned out to be more complex than initially envisioned, and
negotiations are expected to continue through 2008.62 Although these negotiations
have lasted much longer than the originally specified three-year time period, progress
has been made in resolving these differences. Congress could, through legislation
or other means, encourage the administration to exercise leadership in this area with
a view toward reaching a resolution to these negotiations. In fact, one of the
principal negotiating objectives set forth in the Trade Act of 2002 was the conclusion
of an agreement on rules of origin.63
The lack of transparency and apparent economic inefficiency of preferential
rules of origin continue to be a matter of concern for some. However, as the USTR
recently announced, the NAFTA partners implemented liberalizing changes to the
NAFTA rules of origin (including certain apparel products) covering about $15
billion in annual trilateral trade, and the NAFTA Free Trade Commission agreed in
August 2007 on another set of liberalizing changes to the NAFTA rules of origin
(covering over $100 billion) to be implemented some time in 2008.64 This illustrates
that it is possible for preferential ROO to be simplified through mutual agreement of
the parties even after an FTA is implemented. If Congress desires to provide greater
preferential access to the U.S. market (and gain reciprocal access to the markets of
61 COO Marking Report, pp. 2-5.
62 Ibid.; USTR Trade Policy Agenda.
63 P.L. 107-210, sec. 2102 (13).
64 USTR Trade Policy Agenda, p. 119.

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trading partners), it could encourage further liberalizing preferential rules of origin,
and could also encourage U.S. negotiators to develop a uniform set of preferential
ROO (or a ROO template) to be applied in future FTA negotiations.
Since the processes of globalization described above are likely to continue
making origin determinations even more complex, Congress might also consider
providing CBP with additional legislative guidance, especially in the area of non-
preferential rules. However, such efforts may adversely affect importers and
manufactures who benefit from the current system. In addition, even though the
determination process may be complex and lengthy, CBP now has the flexibility to
examine the complete manufacturing process, including design, sources of
intermediate components, labor costs, and assembly processes in order to make its
country of origin determination.
Some trade policy analysts have called for the liberalization or abolition of
preferential rules of origin. Others advocate the abolition of rules of origin entirely,
because they inject a large amount of inefficiency in the world trading system, and
because they can effectively serve as a form of protection for import-competing
industries. This approach might be the simplest way of counteracting the negative
effects of preferential ROO, for example, by excluding sensitive products from trade
preference schemes.65 Some observers argue for the multilateral elimination of
tariffs, which, they say, would eliminate the need for ROO entirely.66 However, the
end of tariffs would automatically lead to the end of all preference programs and the
benefits of FTAs as well, because the gains that accrue to these trading relationships
are largely based on receipt of more favorable tariffs (or duty-free access of goods).
In addition, eliminating rules of origin entirely could pose issues for other trade
policy objectives such as country of origin labeling, implementing trade sanctions,
enforcing trade remedies, and other trade policy objectives.
65 Estevadeoral, Antoni and Suominen, Kati. “Rules of Origin: A World Map and Trade
Effects.” Paper delivered at conference on Rules of Origin in Regional Trade Agreements:
Conceptual and Empirical Approaches. February 2004.
66 Ibid.

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