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Chapter 18: Rules Of Origin For FTAs

IN THIS CHAPTER

- The important role of Rules of Origin for Free Trade Agreements
- Qualifying your goods
- Your assumptions may not be accurate.
- Doing the math

SUMMARY

To take advantage of the reduced-duty benefits under a Free Trade Agreement (FTA), an exported product must originate from an FTA party or must contain a specified percentage of U.S. inputs and components. Each FTA has its own Rules of Origin (ROOs) that describe how exported goods shipped to a country, or a region may qualify for duty-free or reduced-duty benefits. Because the ROOs are FTA- and product-specific, they need to be followed carefully. To receive preferential treatment under an FTA, the exported good:

- Must be made in the FTA territory.
- Must meet the appropriate Rule of Origin pertaining to specific products and the specific FTA.
- Must be documented as originating via appropriate certifications or information provided to the importer or its representative broker.

Each FTA contains a specific chapter on Rules of Origin Procedures and lists all product-specific ROOs according to “Harmonized System” (HS) numbers. Qualifying a product for duty-free or reduced-duty benefits requires:

- Obtaining the product’s HS classification number.
- Determining the duty (tariff) rate.
- Qualifying the product for an FTA.
- Identifying the specific ROO for the final product.
- Determining whether the foreign content meets the ROO.
- Certifying the origin for the product.
- Retaining information about how the product was qualified in case of a customs audit.

Rules of Origin and Why They Matter

ROOs are used to determine whether or not a product qualifies to receive preferential tariff treatment under the FTA. The rules determining country of origin can be very simple if a product is manufactured and assembled primarily in one country. However, when a finished product includes components that originate in many countries, determining origin can be more complex.

There are two types of ROOs: nonpreferential and preferential. Nonpreferential ROOs are used to determine the origin of goods exported to countries that are World Trade Organization (WTO) members and therefore grant one another duties (tariffs) on a Most-Favored-Nation (MFN) basis. FTA ROOs are preferential. They are specific to each FTA, and generally vary from agreement to agreement and product to product. They are used to verify that products are eligible for duty-free or reduced duties under U.S. trade preference programs, even though they may contain nonoriginating (non-FTA) inputs.

Sorting through the ins and outs of ROOs can be complicated. There are percentage-based rules and regional value content-based rules. There are also various methods of calculating content under the different types of rules, including the net-cost, transaction value, buildup, and builddown methods. In addition, while ROOs are generally product- and FTA-specific, some general categories also apply. Several other rules and considerations apply as well, including sector-specific considerations covering industries such as automobiles, chemicals, agricultural products, and textile products. There are also generic Certificates of Origin for products that do not qualify for an FTA. Chapter 18 of A Basic Guide to Exporting sorts through many of the complexities of rules of origin.

Success Story

This chapter’s Success Story is Jet Incorporated, a provider of biological wastewater treatment systems. With the help of the U.S. Commercial Service, Jet has expanded into South America, Southeast Asia, and other areas. Its international business provides about 25 percent of total revenue, which is growing at over 30 percent a year.