Advice on Rules of Origin under International Treaties and Agreements
We give advice on rules of origin under international treaties and agreements. But first, let's understand the concept of 'Rules of Origin'.
Origin can be understood as the economic nationality of the good. All internationally traded goods are required to have an origin when they are declared to customs at the point of import. Rules of origin enable to establish the origin of the good.
There are two types of origin: preferential (which are the key focus of this tool) and non-preferential. Both are determined by respective rules of origin.
Preferential origin is related to trade agreements that grant members access to domestic market at preferential tariffs.
Preferential rules of origin are used to determine whether the good qualifies for the preferential tariff offered under the agreement. They are a set of criteria that the good needs to comply with in order to be considered originating in the territory of the trade agreement. The goods are checked against these criteria to establish whether they can be considered originating in a country when exported to an FTA partner.
The rules are based on the HS Classification and are, in most cases, product-specific: each HS code eligible for preferential tariff under a trade agreement has a rule of origin. They can be set at different levels: some rules cover an entire Chapter, and some are specific to Headings or Subheadings. In certain cases, rules of origin can be defined at the commodity code / national tariff line level or even for a certain type of products within one HS or commodity code.
Rules of origin are negotiated separately for every FTA and are attached to the main agreement in the form of a protocol or an annex on product specific rules of origin. As such, rules of origin vary significantly across agreements.
There are two main types of product-specific rules of origin: a) Wholly obtained b) Substantial transformation
a) Wholly obtained
Wholly obtained products are goods obtained entirely in the territory of an FTA party without the addition of any non-originating materials. Examples include live animals born and raised there, mineral products extracted from the ground, food products grown and harvested in the territory of the party (e.g. fruits, grains).
In some agreements, a wholly produced category of goods is introduced. Wholly produced goods are those produced or manufactured exclusively from wholly obtained inputs. Such goods typically receive the same treatment as wholly obtained products– they are considered to fulfil the wholly obtained rule of origin if all the inputs are wholly obtained.
A specific list detailing what constitutes a wholly obtained product and additional requirements can be found in each trade agreement.
b) Substantial transformation
Substantial transformation is a type of rule of origin that requires a good to undergo a certain process in order to be considered originating in a given country.
Substantial transformation can be expressed in three different ways:
1) Change in tariff classification: a rule that requires non-originating materials to have undergone a change in HS Classification in order to obtain originating status.
2) Value added calculations: a rule that requires a certain percentage of the total value of the final product to be added in the FTA territory.
The rules can be expressed in two ways, i.e. a maximum allowance for non-originating inputs or a minimum requirement for local content.
3) Specific processing: a rule that requires that a specific processing be undertaken at a particular stage of the production process.
The three types of substantial transformation can be used in combination with one another. In addition, different types of exceptions and allowances can be used within each of the three types. They can specify parts of the rule that apply only to certain categories of products and allow certain relaxations for elements of the rule under special conditions.
In addition to the product specific rules, each agreement also includes general provisions related to the administration of rules of origin and claiming preferential tariffs. These rules cover additional relaxations such as cumulation or de minimis as well as administrative provisions around the proof of preferential origin.
Non-preferential origin applies to goods traded between countries not linked by any preferential trade agreement (in the absence of any preferential agreement or when the goods are not covered by an existing FTA).
Non-preferential origin does not lead to a reduction in tariffs but is used for a number of other purposes such as quotas, anti-dumping and countervailing duties. It is also used for trade statistics and for the purpose of labeling.
Non-preferential rules of origin are decided by each country.
In general, non-preferential rules of origin are based on two criteria:
a) Wholly obtained – similarly to preferential rules, wholly obtained products are goods obtained entirely in the territory of one country without the addition of any non-originating materials.
b) Last substantial transformation – in a case where more than one country was involved in the production of the good, the country where the last substantial transformation took place determines the origin of the good. Substantial transformation can be defined in different ways as it is the case for preferential origin.