Rules of Origin

Rules of Origin (RoO) are the criteria used to determine the national source of a product. They are essential for implementing trade agreements, calculating tariffs, enforcing trade policies, and applying trade preferences.

Purpose:

•Tariff Determination: Rules of origin help in deciding which products qualify for preferential treatment (like reduced tariffs) under a Free Trade Agreement (FTA) or customs union.
•Trade Policy Enforcement: They prevent trade circumvention, where goods from non-participating countries try to take advantage of preferential tariffs by passing through countries with trade agreements.
•Anti-Dumping Measures: RoO are also critical for ensuring that products meet local content requirements to avoid being classified as “dumped” into a market.

Types of Rules of Origin:

1.Preferential Rules of Origin: Applied in the context of free trade agreements or preferential trade regimes (e.g., the European Union or NAFTA). They dictate the conditions under which goods qualify for reduced tariffs or duty-free treatment.
2.Non-Preferential Rules of Origin: These apply to regular trade where no special trade agreement exists. They are used for purposes such as labeling, anti-dumping duties, or applying import quotas.

Key Criteria Used:

•Wholly Obtained or Produced: Goods are fully produced or obtained in a specific country (e.g., agricultural products grown and harvested in the country).
•Substantial Transformation: The product has undergone significant manufacturing in a specific country, changing its classification or value.
•Percentage of Local Content: The value of local materials and processing exceeds a certain threshold, allowing the product to be deemed as originating from that country.

Example:

A car manufacturer in Mexico under the USMCA (United States-Mexico-Canada Agreement) needs to comply with the agreement’s rules of origin. For the car to qualify for zero tariffs when exported to the U.S., a certain percentage of the car’s value must come from within North America. If the car includes too many parts sourced from outside the region, it won’t qualify for tariff-free status.

RoO help protect the integrity of trade agreements and ensure that only eligible goods benefit from the agreed-upon terms.