Rules of Origin in the United States

Rules of origin with the European Union

The United States government (under the Obama Administration) believe that only qualifying U.S. and EU goods should benefit from the Transatlantic Trade and Investment Partnership (T-TIP) agreement, not goods produced in third countries. United States larger companies with complex supply chains and our smaller businesses that can’t afford consultants gain when they can determine whether their exports or imports will be subject to reduced or zero duties when crossing borders.

Through Transatlantic Trade and Investment Partnership (T-TIP), the United States will seek to put objective and transparent rules online that explain:

to U.S. exporters and producers whether their goods qualify for preferential treatment when shipped to the EU; and
to U.S. importers whether their goods qualify for preferential treatment when shipped from the EU.

Rules of origin would also establish clear, transparent procedures for claiming origin and record-keeping and other requirements for those who prepare origin certifications.

For more information on rules of origin, visit www.ustr.gov/trade-agreements/wto-multilateral-affairs/wto-issues/customs-issues/rules-origin.

Find more information on Rules of origin in relation to the Customs Trade Law in the legal Encyclopedias.

Rules of origin and the International Trade Law: in the NAFTA

Purpose

The NAFTA grants benefits to a variety of goods from the region. Maximum benefits are reserved for those goods that “originate” in the region. “Originating” is a term of art used to describe those goods that meet the requirements of Article 401 of the Agreement. Article 401 of the Agreement establishes which goods originate and precludes goods from other countries from obtaining those benefits by merely passing through Canada, Mexico or the United States. Thus, not all goods made in Canada, Mexico and the United States qualify for NAFTA benefits.

Traders must carefully research the terms of the Agreement to determine whether their goods are entitled to NAFTA benefits–they should not assume that they are entitled to NAFTA benefits merely because they were made in a NAFTA country. It is possible, for instance, for goods not to originate in Canada, Mexico or the United States as that term is defined in the NAFTA, but still be an article of Canada, Mexico or the United States for country of origin marking, statistical or other purposes.

Article 401 of the Agreement defines “originating” in four ways: goods wholly obtained or produced in the NAFTA region; goods meeting the Annex 401 origin rule; goods produced in the NAFTA region wholly from originating materials; and unassembled goods and goods classified with their parts which do not met the Annex 401 rule of origin but contain 60 percent regional value content using the transaction method (50 percent using the net cost method).

Meets Annex 401 Origin Criterion

Article 401(b) indicates that goods may “originate” in Canada, Mexico or the United States, even if they contain non-originating materials, if the materials satisfy the rule of origin specified in Annex 401 of the Agreement. The Annex 401 rules of origin are commonly referred to as specific rules of origin and are based on a change in tariff classification, a regional value-content requirement or both. Annex 401 is organized by Harmonized Tariff Schedule (HTS) number, so one must know the HTS number of a good, and the HTS numbers of all the non-NAFTA materials used to produce the good, to find its specific rule of origin and determine if the rule has been met. Annex 401 gives the applicable rule of origin opposite the HTS number. For up-to-date Annex 401 information, refer to the specific Rules of Origin found in General Note 12 (t) of the Harmonized Tariff Schedule (US), D Memorandum 11-5-2 and any Customs Notices (CA) and the Diario Oficial dated March 27, 1996 and the Decree promulgating the modifications of NAFTA’s Annex 401 published in the Diario Oficial dated March 27, 1996 (MX).

Tariff Change

When a rule of origin is based on a change in tariff classification, each of the non-originating materials used in the production of the goods must undergo the applicable change as a result of production occurring entirely in the NAFTA region. This means that the non-originating materials are classified under one tariff provision prior to processing and classified under another upon completion of processing. The specific rule of origin in Annex 401 defines exactly what change in tariff classification must occur for the goods to be considered “originating.” (Please see the entry on “de minimis” in this American legal Encyclopedia.)

Regional Value Content

Some Annex 401 specific rules of origin require that a good have a minimum regional value content, meaning that a certain percentage of the value of the goods must be from North America. Article 402 gives two formulas for calculating the regional value content. In general, the exporter or producer may choose between these two formulas: the “transaction value” method or the “net cost” method. Having two methods gives producers more than one way of demonstrating that the rule of origin has been satisfied. The transaction value method is generally simpler to use but a producer may choose whichever method is most advantageous.

The transaction value method calculates the value of the non-originating materials as a percentage of the GATT transaction value of the good, which is the total price paid for the good, with certain adjustments for packing and other items, and is based on principles of the GATT Customs Valuation Code. The essence of this method is that the value of non-originating materials can be calculated as a percentage of the invoice price which is usually the price actually paid for them. Because the transaction value method permits the producer to count all of its costs and profit as territorial, the required percentage of regional value content under this method is higher than under the net cost method.

However, there are a number of situations where the transaction value method cannot be used and the net cost method is the only alternative. The net cost method must be used when there is no transaction value, in some related party transactions, for certain motor vehicles and parts, when a producer is accumulating regional value content (see Chapter 3 for a discussion of accumulation), as well as to determine the regional value content for designated intermediate materials (see Chapter 3). The producer may also revert to the net cost method if the result using the transaction value method is unfavorable.

The net cost method calculates the regional value content as a percentage of the net cost to produce the good. Net cost represents all of the costs incurred by the producer minus expenses for sales promotion (including marketing and after-sales service), royalties, shipping and packing costs and non-allowable interest costs. The percentage content required for the net cost method is lower that the percentage content required under the transaction value method because of the exclusion of certain costs from the net cost calculation.

Produced in the NAFTA Territory Wholly of Originating Materials

Goods also originate if they are produced entirely in Canada, Mexico and/or the United States exclusively from materials that are considered to be originating according to the terms of the Agreement.

Unassembled Goods and Goods Classified with Their Parts

In some cases, a good that has not undergone the required tariff change can still qualify for preferential NAFTA treatment if a regional value-content requirement is met. This NAFTA provision may only be used under two very specific circumstances. However, it may never be used for wearing apparel provided for in Chapters 61 and 62, and textile articles of Chapter 63 of the Harmonized System. The two circumstances where the provision may be used are where goods do not undergo the tariff change required by Annex 401 because:

the goods are imported into Canada, Mexico or the United States in an unassembled or a disassembled form but are classified as assembled goods pursuant to General Rule of Interpretation 2(a) of the Harmonized System, or
the goods are produced using materials imported into a NAFTA country that are provided for as parts according to the Harmonized System, and those parts are classified in the same subheading or undivided heading as the finished goods.

Resources

Rules of Origin in the International Business Landscape

Definition of Rules of Origin in the context of U.S. international business and public trade policy: Rules to determine which goods will benefit from reduced trade barriers in regional trading blocs.

Rules of Origin