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Institute for Workplace Studies----------------- Professor Samuel B. Bacharach

School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies

Cornell University

16 East 34th Street, 4th floor---------------------- Stuart Basefsky

New York, NY 10016 -------------------------------Director, IWS News Bureau

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Congressional Research Service (CRS)

 

International Trade: Rules of Origin

Vivian C. Jones, Specialist in International Trade and Finance

Michael F. Martin, Analyst in Asian Trade and Finance

January 5, 2012

http://fpc.state.gov/documents/organization/180678.pdf

[full-text, 22 pages]

 

Summary

Determining the country of origin of a product is important for properly assessing tariffs,

enforcing trade remedies (such as antidumping and countervailing duties) or quantitative

restrictions (tariff quotas), and statistical purposes. Other commercial trade policies are also

linked with origin determinations, such as country of origin labeling and government

procurement regulations.

 

Rules of origin (ROO) can be very simple, noncontroversial tools of international trade as long as

all of the parts of a product are manufactured and assembled primarily in one country. However,

when a finished product’s component parts originate in many countries—as is often the case in

today’s global trading environment—determining origin can be a very complex, sometimes

subjective, and time-consuming process.

 

U.S. Customs and Border Protection (CBP) is the agency responsible for determining country of

origin using various ROO schemes. Non-preferential rules of origin are used to determine the

origin of goods imported from countries with which the United States has most-favored-nation

(MFN) status. Preferential rules are used to determine the eligibility of imported goods from

certain U.S. free trade agreement (FTA) partners and certain developing country beneficiaries to

receive duty-free or reduced tariff benefits under bilateral or regional FTAs and trade preference

programs. Preferential rules of origin are generally specific to each FTA, or preference, meaning

that they vary from agreement to agreement and preference to preference.

 

CBP has periodically proposed implementing a more uniform system of ROO as an alternative to

the “substantial transformation” rule that is currently in place. CBP’s last proposal was on July

25, 2008, when it suggested that a system known as the North American Free Trade Agreement

(NAFTA) rules system “has proven to be more objective and transparent and provide greater

predictability in determining the country of origin of imported merchandise than the system of

case-by-case adjudication they would replace.” The NAFTA scheme that would be applied hasd

already been used for several years to determine the origin of imports under the NAFTA, and for

most textile and apparel imports (about 40% of U.S. imports). The CBP proposed to apply the

NAFTA rules to all country of origin determinations made by CBP, unless otherwise specified

(e.g., unless the import enters under a preferential ROO scheme already in place). The proposed

rule changes received so many responses from the public that the deadline for public comment

was extended twice, until December 1, 2008. Such changes in rules of origin requirements are

often opposed by some importers due to costs involved in transitioning to new rules, or because

they believe that certain products they import might be at a disadvantage under a new ROO

methodology. According to CBP officials, CBP decided not to implement the proposed rule.

 

This report deals with ROO in three parts. First, we describe in more detail the reasons that

country of origin rules are important and briefly describe U.S. laws and methods that provide

direction in making these determinations. Second, we discuss briefly some of the more

controversial issues involving rules of origin, including the apparently subjective nature of some

CBP origin determinations, and the effects of the global manufacturing process on ROO. Third,

we conclude with some alternatives and options that Congress could consider that might assist in

simplifying the process.

 

Contents

Introduction...................................................................................................................................... 1

Rules of Origin in U.S. Practice ...................................................................................................... 1

Non-Preferential Rules of Origin .............................................................................................. 2

International Agreements on Non-Preferential ROO .......................................................... 3

Preferential Rules of Origin....................................................................................................... 4

“Tariff Shift”........................................................................................................................ 5

Technical Test...................................................................................................................... 5

Local Content or Regional Value Content Test ................................................................... 6

Pros and Cons of U.S. Rules of Origin Methodology...................................................................... 6

Proliferation of Preferential ROO.............................................................................................. 7

Concerns about Inefficiency................................................................................................ 7

Influence of Domestic Industries ........................................................................................ 8

CBP Country of Origin Determinations .................................................................................... 9

Proposed Changes ............................................................................................................. 10

Subsequent Hearing........................................................................................................... 11

Customs Decision.............................................................................................................. 11

2008 CBP Proposal ........................................................................................................... 11

Global Manufacturing and Rules of Origin............................................................................. 12

The Case of the Apple iPod............................................................................................... 13

Effects on Rules of Origin................................................................................................. 14

Counter to U.S. Policy Objectives? ......................................................................................... 14

Quotas ............................................................................................................................... 15

Trade Embargoes............................................................................................................... 15

“Yarn Forward” Rule......................................................................................................... 16

Food Imports ..................................................................................................................... 17

“Buy American” ................................................................................................................ 17

Conclusion and Options for Congress ........................................................................................... 18

 

 

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