Rules of Origin

Rules of Origin

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Updated February 17, 2021
Rules of Origin
Background
Enforcement. CBP interprets, administers, and enforces
rules of origin, as well as country of origin labeling, tariff
What are Rules of Origin? Rules of origin (ROO) are
classification, customs valuation, and many other laws
laws, regulations, and procedures used for ascertaining the
relating to U.S. imports.
“nationality” of imported products. ROO are important for
many reasons, including determining the admissibility of
International Commitments. The 1994 WTO Agreement
imported goods, assessing duty rates, country of origin
on Rules of Origin requires WTO members not to use ROO
marking, applying tariff quotas, enforcing U.S. trade laws,
to disrupt trade, to apply ROO in a consistent, transparent,
establishing eligibility for preferential programs and free-
non-discriminatory, and reasonable manner, and to notify
trade agreements (FTAs), and collecting trade statistics.
other members about any rule changes. The WTO
agreement also set up an ongoing program to harmonize
Determining origin is relatively straightforward if all of a
non-preferential rules, with negotiations conducted by a
product’s raw materials and parts are manufactured and
WTO Rules of Origin committee and a technical committee
assembled in one country. However, in today’s global
under the World Customs Organization (WCO). The WCO
economy, parts of manufactured goods to be assembled into
also facilitates trade by providing assistance to customs
products such as automobiles, computers, or clothing, often
administrations worldwide on interpreting ROO and other
come from many countries. This can make determining
technical issues.
origin a complex process.
Figure 1. Rules of Origin Uses
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
legislative methodology that specifically defines the term

“country of origin.” Instead, U.S. Customs and Border
Source: World Customs Organization. Graphic by CRS.
Protection (CBP) administers non-preferential rules based
Rules of Origin in FTAs
on a body of CBP regulations, prior agency interpretations,
ROO in FTAs generally stipulate how much manufacturing
and court decisions. When the country of origin is in doubt,
must come from within the FTA region in order to receive
an importer may apply to CBP for an advance customs
trade benefits (e.g., duty-free treatment). Although FTAs
ruling.
are individually negotiated, there are many common
Preferential ROO apply to FTAs such as the United
elements across agreements.
States-Mexico-Canada Agreement (USMCA) and certain
Originating Goods. In order to receive the benefits of an
non-reciprocal trade preferences, like the African Growth
FTA, imported products must “originate” in one of the
and Opportunity Act (AGOA) and the Generalized System
partner countries by satisfying one of three conditions.
of Preferences (GSP). Preferential ROO are important
They must be: (1) grown, harvested, or fished in the FTA
because they ensure only eligible trading partners receive
region; (2) produced in the FTA region using only materials
the tariff benefits of the special program or FTA. Some
made in the FTA region; or (3) produced in the FTA region
preferential ROO may also be crafted to limit the impact of
with non-FTA country components while meeting
these programs on import-sensitive industries. They are
additional product-specific ROO requirements.
unique to each special trade program or FTA.
Specific Rules of Origin. Each U.S. FTA has a chapter
Preferential ROO in FTAs are negotiated by the parties to
containing general ROO provisions, combined with an
the agreement and approved by Congress as part of the FTA
annex that lists ROO for individual products. These
implementing legislation. For special U.S. trade programs
product-specific ROO generally take one of three forms
like AGOA and GSP, they are drafted and approved by
(see Figure 2).
Congress.
Change of Tariff Classification or “tariff-shift” rules
require that a product be “substantially transformed” as
illustrated by a change in its Harmonized Tariff Schedule
https://crsreports.congress.gov

Rules of Origin
(HTS) tariff classification. The level of change required
Supporters contend that these measures are important for
varies from product to product. One example of a tariff-
reducing FTA opposition from adversely affected
shift rule is the so-called “yarn forward” rule for textiles
industries, thus making its enactment more politically
and apparel. Yarn-forward means that all yarn and fabric
feasible. Two particularly sensitive sectors for the United
used to make a textile or apparel product must be formed in
States are the textile and automobile industries, which have
the FTA region (see below).
dutiable rates from non-FTA partners as high as 32% for
Figure 2. Types of Preferential ROO
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 the North
America Free Trade Agreement (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 apparel
must comply with a “fiber forward” rule (more restrictive)

or a “fabric forward” rule (more liberal).
Source: World Customs Organization. Graphic by CRS.
Motor Vehicles and Parts
Notes: HTS=Harmonized Tariff Schedule.
As with textiles and apparel, ROO for cars, trucks, and auto
A Regional Value Content (RVC) rule requires that a
parts in FTAs are designed to prevent vehicle and parts
minimum percentage of the product be produced in the
manufacturers in non-FTA countries from taking advantage
FTA region. Value can be calculated in various ways, such
of tariff reductions available to FTA partners. ROO for
as "building down" from the value of the finished product
autos and parts in U.S. FTAs generally use a regional value
or "building up" from the value of the originating materials,
content (RVC) approach. NAFTA had a RVC requirement
as follows:
for automotive products at 62.5%, which reflected the

already integrated North American auto market at the time
Build-up method calculations add together the costs
of negotiation. USMCA, which replaced NAFTA, increases
originating in the FTA region, including factory, parts,
the RVC requirement for automotive products to 75% and
labor, insurance, packing, and transportation, duties,
also includes a labor value content (LVC) requirement that
taxes, customs brokerage fees, and waste/spoilage of
was not in NAFTA. The LVC requirement stipulates that
production material.
40-45% of auto content be made by workers earning more
 Build-down method calculations subtract the non-
than $16 per hour.
originating costs (see individual costs above) from the
ROO Implementation in USMCA
adjusted value of the finished project.
CBP published USMCA implementing instructions on June
 Net cost method calculations capture the direct
30, 2020 and provided all U.S. importers a 6-month
manufacturing costs per unit, such as factory labor,
transition period (until December 31, 2020) to fully comply
materials, and direct overhead.
with USMCA ROO requirements.
Technical rules require that some kind of manufacturing or
The largest differences between NAFTA and USMCA are
processing operation be conducted in the FTA region for
in the automotive sector, including the increase in the RVC
the product to originate. For example, chemical reactions,
requirement, the LVC requirement, and additional RVC
purification, deliberately controlled mixing and blending, or
requirements for steel and aluminum. CBP will require
specifically defined changes in particle size confer origin of
additional certification to ensure these conditions are met,
certain chemicals and related products.
and up to 5 years of transition time is being provided to
Cumulation means that producers in FTA countries may
auto manufacturers to come into full compliance.
manufacture goods from parts originating in more than one
USMCA also marks the first time that a labor wage
FTA country and the end product will still receive duty-free
component (for auto workers only) is included in the ROO
FTA status. For example, in USMCA, a product can be
of a U.S. FTA. On July 1, 2020, the Labor Department’s
produced “in the territory of one or more of the Parties,” as
Wage and Hour Division published interim final rules in the
long as any of the parts not coming from the region (non-
Federal Register for implementation of these requirements,
originating materials) undergo a tariff classification change.
and opened a public comment period until August 31, 2020.
The end product must also meet any regional value content
No further information has been released as of this writing.
requirement, and any other applicable ROO requirements.
FTA ROO for Key Sectors
Vivian C. Jones, Specialist in International Trade and
Since ROO are negotiated industry by industry, some critics
Finance
assert that negotiators use them to shield import-sensitive
Liana Wong, Analyst in International Trade and Finance
industries or products from the effects of an FTA.
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Rules of Origin

IF10754

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https://crsreports.congress.gov | IF10754 · VERSION 6 · UPDATED