Exploring Free Trade Agreements

By Margaret McClellan Gatti, Esquire

Following the reenactment of Trade Promotion Authority in August 2002, the United States began an aggressive series of negotiations to enter into free trade agreements with diverse foreign countries.  Trade Promotion Authority was essential to the successful conclusion of free trade agreement negotiations because it empowered the United States Trade Representative to negotiate free trade agreements on behalf of the United States and present them to Congress as negotiated for a “straight up or down vote”.  In permitting the fate of free trade agreements to be decided by means of an up or down vote, Trade Promotion Authority prevented Congress from using the approval process as an excuse to re-draft or amend free trade agreements that the Trade Representative had already negotiated, thereby undoing any agreements that the Trade Representative had achieved.  Since the passage of Trade Promotion Authority in August 2002, the number of free trade agreements in which the United States is a subscribing party has increased from two to nine, whereas the number of countries with which the United States has successfully concluded free trade agreements has increased from three to fifteen.   

Uniqueness of Each Free Trade Agreement

In reviewing the free trade agreements that the United States maintains, it is important to keep in mind that each free trade agreement is individually negotiated.  This means that the United States’ free trade agreements differ from one another in many important aspects.   One aspect of free trade agreements that varies rather significantly on an agreement-by-agreement basis is the method applied by each free trade agreement to insure that only goods produced by the countries, which subscribe to the free trade agreement, receive the preferential duty treatment conveyed by the free trade agreement.  Generally, the method that is used to accomplish this purpose is a set of origin rules prescribed within the free trade agreement.     

Origin Rules

Origin rules under free trade agreements can be broken down into two major categories: (1) origin rules for goods that are wholly the growth, product or manufacture of a free trade agreement country; or (2) origin rules for goods that incorporate components imported from a non-free trade agreement country.  Typically, a free trade agreement encompasses both categories of origin rules.  With respect to goods incorporating imported components, however, the applicable origin rules can be simple, complex or a combination thereof. 

Simple origin rules for goods that incorporate imported components typically apply across the board without regard to the nature of a product, as exemplified by the following origin rule which considers goods to be originating or qualifying when the sum of the cost or value of the materials produced or substantially transformed in a free trade agreement country plus the direct costs of the processing operations performed in a free trade agreement country equal or exceed 35% of the good’s appraised value.  Under this origin rule, goods incorporating components that were imported from a non-free trade agreement country will nonetheless be considered goods of the free trade agreement country, as long as the foreign components were not merely assembled in the free trade agreement country and as long as value added in the free trade agreement country represents at least 35% of the value of the finished good.  The United States applies a simple origin rule as an origin rule in its free trade agreement with Israel and Jordan.

While simple origin rules for goods that incorporate imported components typically apply across the board without regard to the nature of a product, complex origin rules are product-specific origin rules, in that each finished good has its own unique origin rule, which is identified by means of the harmonized tariff number applicable to such good.  Under a complex origin rule for a good incorporating components that were imported from one or more non-free trade agreement countries, the good will nonetheless be considered a good of the free trade agreement country, provided that the foreign components have lost their individual character and assumed the character of the finished good by means of a tariff shift or in some cases where the requisite tariff shift did not occur, the finished good satisfies the regional value content requirement specified by the free trade agreement for the relevant harmonized tariff number.  The United States applies complex origin rules as the applicable origin rules in the following free trade agreements: North American Free Trade Agreement (NAFTA), Australia FTA, Central American Free Trade Agreement (CAFTA), Chile FTA, and Singapore FTA. 

Hybrid origin rules for goods that incorporate imported components typically apply both simple origin rules and complex origin rules.  The United States applies hybrid origin rules as the applicable origin rules in the following free trade agreements: Bahrain FTA and Morocco FTA. 

Binding Rulings

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

Certificates of Origin

U.S. companies who sell products to a country with which the U.S. has a Free Trade Agreement are responsible for executing the requisite Certificate of Origin (COO).  Not every free trade agreement maintained by the United States has its own dedicated origin form.  To the extent that such forms exits, they must be used.  Otherwise, a generic origin form will suffice.  In executing a COO, U.S. exporters must apply the correct origin rules and be capable of substantiating their origin claims. Failure to substantiate an origin claim will subject a U.S. exporter to monetary penalties.

Summary of Free Trade Agreements Maintained by the United States