Rules of Origin: Simple Question, Convoluted Answer

By Margaret M. Gatti, Esquire
Gatti & Associates
August 2003

All Rights Reserved

Taken at face value and used in relation to products, the phrase “rules of origin” appears to represent a very simple concept, namely the means for determining the place from where products came or the place where products were produced.  A conclusion such as this is misleading, however, and almost certain to result in an inaccurate determination of product origin for origin certification purposes and/or for origin marking purposes.

To accurately assess a product’s origin, it is first necessary to understand and acknowledge six basic facts.   (1) Products today are often the result of production that occurs in several different countries, making the designation of one specific country as “the” country of origin rather complex and somewhat artificial in any event. (2) The phrase “rules of origin” has many different definitions that vary widely among countries, despite numerous internationally sanctioned efforts over the years to achieve for “rules of origin” a definition that is harmonized on a global basis. (3) Individual countries apply within their own borders a wide range of origin rules that typically vary in accord with the reason for which an origin determination is required. (4) Origin rules differ occasionally on a product-specific basis.  For example, the origin of textiles and apparel is often determined in accord with product-specific origin rules. (5) Correct application of origin rules is essential in: (i) assessing the relevant duties or tariffs to be imposed on imported products; (ii) gaining access to various preferential trade agreements that individual countries have negotiated on a bilateral or multilateral basis; (iii) determining the origin marking requirements applicable to specific products; and (iv) complying with any origin-specific product quotas, any origin-specific import boycotts and any origin-specific purchase requirements.  (6) Incorrect application of origin rules exposes importers, exporters, manufacturers, sellers and/or buyers to monetary fines and other penalties, such as entry delays, merchandise seizures and cease and desist orders.

This article examines some of the different meanings currently associated with the phrase “rules of origin” as used in the United States.  It also recommends a methodology that readers can use to determine the relevant origin rule for a specific situation. 

The United States defines the country of origin for products in accord with diverse origin definitions which include: (1) the general (default) rule of origin for products, which are produced outside the U.S. and imported into the U.S.; (2) the rule of origin for products that are produced in the U.S. and sold in the U.S.; (3) the rule of origin for products that are to be purchased or procured by the U.S. Government; (4) various country-specific rules of origin; (5) various region-specific rules of origin; (6) specific rules of origin for textiles, apparel and other designated products; and (7) the general (default) rule of origin for products, which are produced in the U.S. and exported from the U.S..   

GENERAL (DEFAULT) RULE OF ORIGIN FOR IMPORTED PRODUCTS: The general rule of origin for imported products is the default rule of origin that applies to products imported into the U.S., unless the application of another origin rule is mandated or otherwise required in a specific situation or for a specific product.  In accordance with this origin rule, the country of origin for products, which are imported into the U.S., is the country in which the products are manufactured, produced or grown.  Further work or material added to the products in another country must affect a “substantial transformation” of the products in order to change the products’ country of origin.  Generally, substantial transformation means production that results in a new and different product.  In other words, the product that results from production has a name, character and use that are distinct from those of its component materials. 

No statute or regulation specifically defines substantial transformation and for the most part, the occurrence or non-occurrence of substantial transformation is determined on an ad hoc, case-by-case basis.  The case-by-case determination of substantial transformation more often than not produces incongruous and inconsistent results vis a vis the origin of specific products.   As a result, the concept of substantial transformation has received considerable attention from the courts and is currently rather well grounded in case law.   Although numerous attempts have been made over the years to make the concept of substantial transformation more objective and less reliant on case law, little to no progress has been achieved to date.  As a consequence, the general rule of origin for products imported into the U.S. is still based on the seemingly subjective standard of substantial transformation.  

RULE OF ORIGIN FOR PRODUCTS, WHICH ARE PRODUCED IN THE U.S. AND SOLD IN THE U.S:. The rule of origin for products, which are produced in the U.S. and sold in the U.S. is prescribed and enforced by the U.S. Federal Trade Commission (hereafter referred to as the “FTC origin rules”).  The FTC origin rule provides that a product can be marked as “Made in USA” without any qualifying commentary only if: (1) all of the product or virtually all of the product is made in the U.S.; and (2) the final assembly or processing of the product takes place in the U.S.   In an Enforcement Policy Statement it issued, the FTC indicated that a product that is “all or virtually all made in the U.S.” is one that is produced with a de minimis or negligible amount of foreign content and/or foreign processing. 

There is no bright line test that can be applied to establish when a product is “all or virtually all made in the U.S.”, but the FTC makes it clear that in evaluating an unqualified claim of U.S. origin, it will consider: (1) the portion of the product’s total manufacturing costs that are attributable to U.S. parts and processing; and (2) how far removed from the finished product any foreign content is found.  Products that fail to meet the FTC’s rigid standard for an unqualified claim of “made in USA” may nonetheless be eligible to apply a claim of U.S. origin with qualifying criteria, such as “Made in the U.S. from U.S. components and components imported from X country”.  Regardless of whether a claim of U.S. origin is unqualified or qualified, however, such claim is deemed by the FTC to be fully optional (as opposed to mandatory) and may not in any event be deceptive or intentionally misleading.  

RULE OF ORIGIN FOR PRODUCTS, WHICH ARE TO BE PROCURED BY THE U.S.GOVERNMENT:  The origin rule for U.S. government procurement projects is promulgated under the Buy American Act (“BAA”).  The BAA restricts the purchase of products for U.S. government procurement to “domestic end products”, which are defined as (1) unmanufactured end products that are mined or produced in the United States; or (2) end products that are manufactured in the United States, provided that the cost of the end products’ components that are mined, produced, or manufactured in the United States exceeds 50% of the total cost of the end products’ components.  There is an exception carved out of the BAA for U.S. Government acquisitions that are subject to trade agreements enacted by the U.S.  In these acquisitions, the applicable origin rule is substantial transformation which is defined above as the general (default) origin rule for imported products.  

Country specific rules of origin:   These origin rules are prescribed in trade agreements that the U.S. has negotiated with individual countries.  Generally, these trade agreements provide for preferential tariff treatment by the U.S. either on a non-reciprocal basis or on a reciprocal basis. 

Non-reciprocal trade arrangements are those under which preferential tariff treatment is provided only by the  U.S.  The U.S. has entered into preferential tariff arrangements that are non-reciprocal with countries that the U.S. designates as beneficiary developing countries under the Generalized System of Preferences (GSP countries). 

In contrast to trade arrangements that are non-reciprocal in nature, reciprocal trade arrangements provide for preferential tariff treatment both by the U.S. and by the country with which the U.S. has entered into the special trading arrangement (the treaty country).  Among the preferential tariff arrangements that the U.S. has entered into on a reciprocal basis are its trade agreements with Israel, Jordan, Singapore and Chile (and soon to be with Australia and Morocco.)

Non-reciprocal and reciprocal trade agreements provide for duty free entry into the U.S. of “qualifying goods”, which are defined in the agreements’ origin rules.  Unfortunately, however, country-specific origin rules vary considerably.  Under the GSP trade arrangements, the U.S.-Israel Trade Agreement and the U.S.-Jordan Trade Agreement, “qualifying goods” are defined as: (1) goods that are wholly the growth, product or manufacture of the GSP country/Israel/Jordan; or (2) goods in which the sum of the cost or value of the materials produced or substantially transformed in the GSP country/Israel/Jordan plus the direct costs of the processing operations performed in the GSP country/Israel/Jordan equal or exceed 35% of the good’s appraised value.   Contrasted against these rather straight-forward origin rules are the origin rules for the Singapore Trade Agreement and the Chile Free Trade Agreement, which define “qualifying goods” as: (1) goods that are wholly obtained in Singapore/Chile; or (2) goods that are entirely produced in Singapore/Chile; or (3) goods that have satisfied the requirements specified in an annex to the Singapore/Chile trade agreement (a tariff shift, similar to NAFTA’s Rules of Origin and possibly a regional value content requirement); or (4) goods that otherwise qualify as originating goods in the Singapore/Chile trade agreement.

REGION SPECIFIC ORIGIN RULES:   Region-specific origin rules represent origin rules that are prescribed in special trading arrangements that the U.S. has made with groups of countries in specific geographic regions.  Like the country specific rules of origin, the region specific origin rules provide for preferential tariff treatment between and among the participating countries on either a non-reciprocal basis or on a reciprocal basis.  Examples of preferential trading arrangements that the U.S. has made with specific geographic regions include the Caribbean Basin Trade Preference Act (various Caribbean countries), the Andean Trade Preference Act (Bolivia, Columbia, Ecuador and Peru), the African Growth and Opportunity Act   or AGOA (various African countries), the North American Trade Agreement or NAFTA (Canada and Mexico) and soon to be with various countries of the Western Hemisphere (Free Trade Agreement of the Americas or FTAA), various countries of Central America (CAFTA) and various countries of Southern Africa (SACU).

The preferential trade arrangements maintained by the U.S. in accord with the Caribbean Basin Trade Preference Act, the Andean Trade Preference Act and the African Growth and Opportunity Act are non-reciprocal trade arrangements that provide for duty free entry into the U.S. of “qualifying goods”.   The function of origin rules in these trade arrangements is to determine which goods constitute qualifying goods.   The rules of origin for the Caribbean Basin Trade Preference Act, the Andean Trade Preference Act and the African Growth and Opportunity Act are basically the same as the country specific origin rules prescribed in the trade agreements that the U.S. maintains with the GSP countries, Israel and Jordan.   

In contrast to the preferential trade arrangements that the U.S. has prescribed under the Caribbean Basin Trade Preference Act, the Andean Trade Preference Act and the African Growth and Opportunity Act, the preferential trade arrangements that the U.S. made under NAFTA are reciprocal in that they provide for duty free entry (or in some instances merely low duty entry) into a NAFTA member country of another NAFTA member country’s “qualifying goods”.   The function of origin rules in the NAFTA trade arrangement, therefore, is to determine which goods constitute “NAFTA qualifying goods”, i.e., goods that are eligible for NAFTA’s preferential tariff regime.

The NAFTA Rules of Origin define qualifying goods as including: (1) goods that are directly obtained from the air, earth or sea of Canada, the U.S. and/or Mexico or alternatively goods that are wholly produced from materials, which are directly obtained from the air, earth or sea of Canada, the U.S. and/or Mexico (Preference Criteria A); (2) goods that are comprised of foreign (non-NAFTA) materials that undergo the requisite NAFTA-designated change in tariff classification (tariff shift) and additionally meet any other applicable NAFTA requirements related to required regional value content (Preference Criteria B); (3) goods that are comprised of materials, which are NAFTA-originating goods in their own right as well as foreign (non-NAFTA) materials that undergo the requisite NAFTA-designated change in tariff classification and additionally meet any other applicable NAFTA requirements related to required regional value content (Preference Criteria C).

PRODUCT-SPECIFIC ORIGIN RULES:  Product-specific origin rules add further to the complexity of a discussion on origin.  Among those products, which have their own origin rules are textiles and apparel products.  The country of origin rules for textile and apparel products consist of five mutually exclusive rules that are applied sequentially as follows: (1) the country in which the product is wholly obtained or produced; (b) alternatively, the country in which the foreign materials that are incorporated in the product undergo a designated change in tariff classification and/or meet any other applicable tariff classification shifts as prescribed in the Customs Regulations;  (c) alternatively, the country in which the product was knit if the product was knit to shape or the product was wholly assembled if the product was not knit to shape except for products of headings 5609, 5807, 5811, 6213, 6214, 6301 through 6306, and 6308, and subheadings 6209.20.5040, 6307.10, 6307.90, and 9404.90; (d) alternatively, the country in which the most important assembly or manufacturing process occurred;  (e) alternatively, the last country in which an important assembly or manufacturing process occurred.

GENERAL (DEFAULT) RULE OF ORIGIN FOR EXPORTED PRODUCTS: The general rule of origin for exported products is the default rule of origin that applies to products exported from the U.S., unless the application of another origin rule is mandated or otherwise required in a specific situation.  In accord with this general rule, the U.S. will be the country of origin for products composed of a majority (greater than 50%) of U.S. content. 

DETERMINNG THE APPLICABLE RULE OF ORIGIN:  Faced with multiple and diverse definitions of origin,  U.S. importers and exporters must develop a methodology for determining which rule of origin to apply in a specific situation.  Obviously, an importer/exporter should first consider whether or not any product specific origin rules apply.   If the importer/exporter determines that product specific rules are not applicable, the importer/exporter should then look to see whether or not any country specific rules of origin come into play.  If neither product specific rules of origin nor country specific rules of origin apply to a specific transaction, the importer/exporter should consider the applicability of region specific rules of origin.  Only after determining that none of the above-referenced rules of origin have any bearing on a specific import/export transaction should an importer/exporter resort to the application of the general rule of origin for imports (substantial transformation) or alternatively the general rule of origin for exports (majority US content). 

Importers/exporters remaining uncertain as to the applicable origin rules to apply in any given situation have the option of submitting a written request to Customs for a pre-importation or pre-exportation advance ruling.   Advance rulings are binding at all ports of entry and exit in the U.S.