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October 16, 2017
Rules of Origin
Background
classification, customs valuation, and many other laws
relating to U.S. imports.
What are Rules of Origin? Rules of origin (ROO) are
laws, regulations, and procedures used for ascertaining the
International Commitments. The 1994 WTO Agreement
“nationality” of imported products. ROO are important for
on Rules of Origin requires WTO members not to use ROO
many reasons, including determining the admissibility of
to disrupt trade, to apply ROO in a consistent, transparent,
imported goods, assessing duty rates, country of origin
non-discriminatory, and reasonable manner, and to notify
marking, applying tariff quotas, enforcing U.S trade laws,
other members about any rule changes. The WTO
establishing eligibility for preferential programs and free-
agreement also set up an ongoing program to harmonize
trade agreements (FTAs), and collecting trade statistics.
non-preferential rules, with negotiations conducted by a
WTO Rules of Origin committee and a technical committee
Determining origin is relatively straightforward if all of a
under the World Customs Organization (WCO). The WCO
product’s raw materials and parts are manufactured and
also facilitates trade by providing assistance to customs
assembled in one country. However, in today’s global
administrations worldwide on interpreting ROO and other
economy, parts of manufactured goods to be assembled into
technical issues.
products such as automobiles, computers, or clothing, often
come from many countries. This can make determining
Figure 1. Rules of Origin Uses
origin a complex process.
Non-preferential ROO apply to imports from all countries
with which the importing country has normal trade relations
(NTR), and are consistent with World Trade Organization
(WTO) obligations. For the United States, NTR applies to
all WTO members, except those that have an FTA with the
United States or receive another kind of U.S. preferential
trade treatment. Non-preferential ROO are used to assess
tariffs, enforce trade laws (e.g., antidumping and
countervailing duties), collect statistics, and for other
purposes.
For non-preferential ROO, there is no specific U.S. law or
Source: World Customs Organization. Graphic by CRS.
legislative methodology that specifically defines the term
Rules of Origin in FTAs
“country of origin.” Instead, U.S. Customs and Border
ROO in FTAs generally stipulate how much manufacturing
Protection (CBP) administers non-preferential rules based
must come from within the FTA region in order to receive
on a body of CBP regulations, prior agency interpretations,
trade benefits (e.g., duty-free treatment). Although FTAs
and court decisions. When the country of origin is in doubt,
are individually negotiated, there are many common
an importer may apply to CBP for an advance customs
elements across agreements.
ruling.
Originating Goods. In order to receive the benefits of an
Preferential ROO apply to FTAs such as the North
FTA, imported products must “originate” in one of the
American Free Trade Agreement (NAFTA) and certain
partner countries by satisfying one of three conditions.
non-reciprocal trade preferences, like the African Growth
They must be: (1) grown, harvested, or fished in the FTA
and Opportunity Act (AGOA) and the Generalized System
region; (2) produced in the FTA region using only materials
of Preferences (GSP). Preferential ROO are important
made in the FTA; or (3) produced in the FTA region with
because they ensure only eligible trading partners receive
non-FTA country components while meeting additional
the tariff benefits of the special program or FTA. Some
product-specific ROO requirements.
preferential ROO may also be crafted to limit the impact of
Specific Rules of Origin. Each U.S. FTA has a chapter
these programs on import-sensitive industry sectors. They
containing general ROO provisions, combined with an
are unique to each special trade program or FTA.
annex that lists ROO for individual products. These
Preferential ROO in FTAs are negotiated by the parties to
product-specific ROO generally take one of three forms
the agreement and approved by Congress as part of the FTA
(see Figure 2).
implementing legislation. For special U.S. trade programs
Change of Tariff Classification or “tariff-shift” rules
like AGOA and GSP, they are drafted and approved by
require that a product be “substantially transformed” as
Congress.
illustrated by a change in its Harmonized Tariff Schedule
Enforcement. CBP interprets, administers, and enforces
(HTS) tariff classification. The level of change required
rules of origin, as well as country of origin labeling, tariff
varies from product to product. One example of a tariff-
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Rules of Origin
shift rule is the so-called “yarn forward” rule for textiles
industries or products from the effects of an FTA.
and apparel. Yarn-forward means that all yarn and fabric
Supporters contend that these measures are important for
used to make a textile or apparel product must be formed in
reducing FTA opposition from adversely affected
the FTA region (see below).
industries, thus making its enactment more politically
Figure 2. Types of Preferential ROO
feasible. Two particularly sensitive sectors for the United
States are the textile and automobile industries, which have
dutiable rates from non-FTA partners as high as 32% for
certain apparel products and 25% for light-duty trucks.
Textiles and Apparel
Most bilateral and regional FTAs negotiated by the United
States over the past two decades, beginning with NAFTA,
have included the “yarn forward rule” for most textile and
apparel products. This requires that in order to receive the
tariff-free benefits of an FTA, although fibers may be
produced in any country, all subsequent manufacture,
including spinning into yarn; weaving or knitting; dyeing;
printing; finishing; cutting and sewing; or other assembly
into a finished garment or textile product must take place in
one of the FTA partners. Depending on the product, some
Source: World Customs Organization. Graphic by CRS.
apparel must comply with a “fiber forward” rule (more
Notes: HTS=Harmonized Tariff Schedule.
restrictive) or a “fabric forward” rule (more liberal).
Motor Vehicles and Parts
A Regional Value Content (RVC) rules requires that a
As with textiles and apparel, ROO for cars, trucks, and auto
minimum percentage of the product be produced in the
parts in FTAs are designed to prevent vehicle and parts
FTA region. Value can be calculated in various ways, such
manufacturers in non-FTA countries from taking advantage
as "building down" from the value of the finished product
of tariff reductions available FTA partners. ROO for autos
or "building up" from the value of the originating materials,
and parts in U.S. FTAs generally use a regional value
as follows:
content (RVC) approach. NAFTA has the highest RVC
Build-up method calculations add together the costs
requirement for automotive products at 62.5% using the net
originating in the FTA region, including factory, parts,
cost method, meaning that nearly two-thirds of the value of
labor, insurance, packing, and transportation, duties,
the vehicle must originate in the United States, Canada, or
taxes, customs brokerage fees, and waste/spoilage of
Mexico. This high RVC requirement reflects the fact that
production material.
the North American auto market was already highly
Build-down method calculations subtract the non-
integrated at the time of NAFTA’s negotiation.
originating costs (see individual costs above) from the
ROO in NAFTA Modernization
adjusted value of the finished project.
Net cost method calculations capture the direct
On May 18, 2017, the U.S Trade Representative (USTR)
manufacturing costs per unit, such as factory labor,
notified Congress of the President’s intention to begin
materials, and direct overhead.
negotiations on NAFTA modernization. U.S. ROO
objectives include: (1) ensuring that NAFTA benefits go to
products made in the United States and North America; (2)
Technical rules require that some kind of manufacturing or
processing operation be conducted in the FTA region for
incentivizing sourcing of goods in the United States and
the product to originate. For example, chemical reactions,
North America; (3) streamlining ROO certification,
verification, and enforcement; and (4) promoting customs
purification, deliberately controlled mixing and blending, or
specifically defined changes in particle size confer origin of
cooperation to combat duty evasion and customs offenses.
certain chemicals and related products.
Differentiating between U.S. and regional content could
indicate that the United States aims to require increased
Cumulation. Cumulation means that producers in FTA
U.S. content in autos, auto parts, and other products. This
countries may manufacture goods from parts originating in
negotiating objective would likely be a point of contention
more than one FTA country and the end product will still
with Mexico and Canada. U.S. industries emphasize the
receive duty-free FTA status. For example, in NAFTA, a
need to strike the proper balance between protecting U.S.
product can be produced “in the territory of one or more of
industries and providing incentives to source in the NAFTA
the Parties,” as long as any of the parts not coming from the
region. They also ask that U.S. negotiators “do no harm” to
region (non-originating materials) undergo a tariff
industry supply chains.
classification change. The end product must also meet any
regional value content requirement, and any other
Vivian C. Jones, Specialist in International Trade and
applicable ROO requirements.
Finance
FTA ROO for Key Sectors
IF10754
Since ROO are negotiated industry by industry, some critics
assert that negotiators use them to shield import-sensitive
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Rules of Origin
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https://crsreports.congress.gov | IF10754 · VERSION 3 · NEW