TPP: Rules of Origin

TPP: Rules of Origin

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April 20, 2016
TPP: Rules of Origin
Background
labeling, tariff classification, and many other laws relating
to U.S. imports.
What is the Trans-Pacific Partnership (TPP)? The TPP
is a proposed free trade agreement (FTA) among the United
Are there international rules of origin commitments?
States and 11 Asia-Pacific countries that would reduce and
The 1994 WTO Agreement on Rules of Origin requires
eliminate tariff and non-tariff barriers on goods, services,
WTO members not to use rules of origin to disrupt trade, to
and agriculture, and establish trade rules and disciplines
apply them in a consistent, transparent, non-discriminatory,
that expand on commitments at the World Trade
and reasonable manner, and to notify other members about
Organization (WTO) and address new “21st century”
any rule changes. The WTO agreement also set up a
issues, such as digital trade and state-owned enterprises. It
program to harmonize non-preferential rules, with
has both economic and foreign policy implications for the
negotiations conducted by a WTO Rules of Origin
United States, and raises potential strategic issues regarding
committee and a technical committee under the World
U.S. trade policy and broader U.S. engagement in the Asia-
Customs Organization (WCO), which is still ongoing. The
Pacific region.
WCO also facilitates trade by providing assistance to
customs administrations worldwide on interpreting ROO
What are Rules of Origin? Like all U.S. FTAs, the TPP
and other technical issues.
includes rules of origin (ROO)—laws, regulations and
procedures used to determine the country of origin of
Figure 1. Rules of Origin Uses
imported products so that goods from FTA trading partners
can qualify for the benefits under the agreement,
particularly with respect to tariffs. Parts of finished
products often come from many countries in today’s global
economy, which can make determining origin a complex
process.
Preferential ROO, as in the proposed TPP, apply to FTAs
like the proposed TPP, and other non-reciprocal trade
preference programs, like the African Growth and
Opportunity Act (AGOA) and the Generalized System of
Preferences (GSP). They ensure that only eligible trading
partners receive the tariff benefits from the program or

FTA, and some may also be crafted to limit the impact of
Source: World Customs Organization. Graphic by CRS.
these programs on import-sensitive industry sectors. They
Rules of Origin in the TPP
are unique to each special trade program or FTA.
All FTAs and trade preference programs have distinctive
Non-preferential ROO apply on a most-favored-nation basis
ROO, but there are many common elements across
to imports from all countries with which the importing
agreements.
country has normal trade relations (i.e., for the United
Originating Goods. To be made in a TPP country, and
States, all WTO members except those that have an FTA
receive lower tariffs, products must “originate” in a TPP
with the United States or receive preferential trade
country by satisfying one of three conditions. They must be:
treatment.) They are used to assess tariffs, enforce trade
(1) grown, harvested, or fished in TPP countries; (2)
remedies (e.g., antidumping and countervailing duties), and
produced in the TPP region using only TPP materials; or (3)
for other purposes.
produced in the TPP region with non-TPP country
Who writes ROO? For non-preferential rules of origin,
components while meeting additional product-specific
there is no specific U.S. law that specifically defines the
ROO requirements.
term “country of origin.” Instead, U.S. Customs and Border
Cumulation. Cumulation is a trade concept that means that
Protection (CBP) administers non-preferential rules based
countries that are part of an FTA or other preferential
on a body of CBP regulations, prior agency interpretations,
program may cumulate inputs of final products and still
and court decisions. In the proposed TPP, and in other
receive favorable tariff benefits. In the TPP, countries will
FTAs, the agreement’s preferential rules of origin are
be able to use unlimited inputs from other TPP partners,
negotiated by the trading partners and approved by
which could provide an incentive to further integrate
Congress as part of the FTA implementing legislation. For
production and value chains within the TPP region.
special U.S. trade programs like AGOA, they are drafted
and approved by Congress through legislation.
Types of Preferential Rules of Origin. As in other FTAs
preferential product-specific rules in the TPP generally take
Who enforces ROO? CBP interprets, administers and
one of three forms (see Figure 2). One ROO type requires
enforces rules of origin, as well as country of origin
that a product illustrate that it is “substantially transformed”
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TPP: Rules of Origin
by showing a “tariff shift,” i.e., a change in its Harmonized
Provisions. In most cases, the proposed TPP rules for
Tariff Schedule (HTS) tariff classification. The level of
textiles and apparel are “yarn-forward,” which requires the
change required varies from product to product.
use of U.S. or other TPP country yarns and fabrics in the
Another type of rule requires that a minimum percentage of
manufacture of textile and apparel products to qualify for
the product must be produced in the FTA region. These
preferential access under TPP.
regional value content (RVC) rules cover many TPP
Exceptions. Exceptions to the general yarn-forward ROO
products, including automobiles, appliances, footwear, and
in TPP include an “Earned Import Allowance Program”
machine tools. Alternatively, for some TPP products, it is
(EIAP) applicable to imports of certain men’s cotton
sufficient to show that the value of foreign content does not
trousers. This U.S. commitment is intended to provide an
exceed 10% (de minimis). Another common type of ROO
incentive for Vietnam to purchase U.S. fabric. Another
requires that some kind of manufacturing or processing
exception is a “short supply list” of 187 fabrics deemed
operation (e.g., a chemical reaction) be completed in the
commercially unavailable that may come from outside the
region.
TPP area. All but 8 of the short supply products will remain
Figure 2. Types of Preferential ROO
on the list permanently. TPP commitments for textiles and
apparel also provide a temporary emergency safeguard
provision if import surges cause “serious damage or actual
threat thereof.”
Motor Vehicles and Parts
TPP origin rules for cars, trucks, and auto parts seek to
prevent parts and vehicle manufacturers in non-TPP
countries—such as China, Thailand or Germany—from
taking advantage of TPP tariff reductions, especially the
eventual phase-out of the 2.5% U.S. tariff on cars and the
25% tariff on trucks. The ROO also seek to preserve the
highly integrated North American vehicle parts
manufacturing and automobile assembly market, a priority
for Canada and Mexico in the negotiations.

Source: World Customs Organization. Graphic by CRS.
Provisions. TPP ROO for automobiles and auto parts
Notes: HTS=Harmonized Tariff Schedule.
generally use a regional value content (RVC) approach,
with automakers choosing between a net cost calculation
TPP ROO for Key Sectors
method (requiring 45% TPP content) or a build-down
ROO are often an area of focus in import-sensitive
method (requiring 55%). TPP RVC for auto parts range
industries. In TPP, the textiles and apparel sector may be
from 35% to 45%, depending on the type of calculation
particularly sensitive due to Vietnam’s participation, the
method used and the product category. By comparison,
second largest supplier of apparel to the U.S. market after
under NAFTA, 62.5% of vehicle content and 60% of auto
China. In 2015, Vietnamese apparel made up 12% of all
parts (net cost) content must originate in the United States,
U.S. apparel imports. Motor vehicle ROO are also sensitive
Canada or Mexico. Even though the TPP RVC requirement
because TPP partners include the United States and Japan,
seems lower than in NAFTA, the calculation methods are
the second- and third-largest auto manufacturing nations in
different, so that the regional value content levels may not
the world. Japan’s historically low level of imported
be strictly comparable. Vehicle and parts manufacturers
vehicles has led to allegations for more than 30 years that it
producing and exporting within North America would be
uses non-tariff barriers to restrict sales of non-Japanese
able to choose whether to use NAFTA or TPP rules.
vehicles. Other auto producing countries in TPP include
Elimination of Non-Tariff Barriers. In addition to motor
Canada, Mexico, Malaysia, and Vietnam, and each of them
vehicle ROO and tariff reductions, Malaysia and Vietnam
had specific concerns in TPP negotiations about their
have agreed to provide more access to their motor vehicle
domestic auto industries.
and parts markets to U.S. and other TPP partners, and Japan
Textiles and Apparel
has agreed in bilateral side agreements with the United
A major factor shaping the U.S. ROO for textile and
States that seek to address specific non-tariff barriers that
apparel in TPP were U.S. manufacturers who expressed
may hinder sales of U.S. vehicles in that market.
concern that Vietnamese-made apparel could displace
garments manufactured with U.S. fabric in the Western
For more information, see CRS Report RL34524,
hemisphere—the most important export market for U.S.
International Trade: Rules of Origin, by Vivian C. Jones
yarns and fabrics. While the U.S. textile industry supports
Vivian C. Jones, Specialist in International Trade and
the rules of origin in the proposed TPP, the U.S. apparel
industry generally finds them more restrictive.
Finance
Bill Canis, Specialist in Industrial Organization and
Currently, Vietnam’s apparel sector sources the
Business
overwhelming majority of its yarns and fabrics regionally,
Michaela D. Platzer, Specialist in Industrial Organization
from non-TPP members such as China, Taiwan, and South
and Business
Korea, and currently purchases a relatively small amount of
yarns and fabrics (about $100 million in 2015) from the
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United States.
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TPP: Rules of Origin

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