Rules of Origin

Rules of origin are used to make more precise any aspect of trade law or trade policy that treats goods differently depending upon their country of origin. For example, quotas, countervailing duties, and antidumping actions restrict import goods from specific producing nations. The export products of World Trade Organization (WTO) member states generally face lower import barriers than the exports of nations that do not qualify for most-favored nation status. Many bilateral and regional trade agreements exempt the products of member countries from various requirements.

In each of these cases, rules of origin are needed because the identity of the producing country cannot be reliably inferred from the point of entry. Consider the case of the North American Free Trade Agreement (NAFTA), under which many goods produced in Mexico enter the United States duty free, while imports produced in other countries face U.S. tariff barriers. Because NAFTA was designed [Page 848]primarily to benefit firms and workers in North America, it is clear that goods manufactured elsewhere cannot be allowed to circumvent U.S. tariffs simply by being transshipped through Mexico on the way to the United States. Nor should it be possible for free riders to claim those foreign goods as “Mexican” that have received perfunctory labeling, repackaging, or processing in Mexico solely for the purpose of qualifying for preferential treatment under NAFTA. However, in the era of global manufacturing, final products are frequently assembled from components originating in many different countries. At what point should foreign inputs that do not qualify for favorable treatment be deemed to have been transformed into a new product that does qualify? Precise legal standards—specific rules of origin—vary widely across nations, but most use the criterion of an ad valorem percentage of value added, anywhere between thirty-five and sixty percent, computed in a prescribed manner.

Rules of origin have become increasingly controversial as the preferential tariff regions and antidumping arrangements that require them have mushroomed. As a result, most international agreements now contain provisions for nations to negotiate over specific criteria for specific products. For example, NAFTA has recently adopted the rule that any tea that is fermented or packaged in a NAFTA country should be deemed to have satisfied the rule of origin, regardless of where it was originally grown.

The WTO is also expanding its perspective on rules of origin. General Agreement on Tariffs and Trade (GATT) recognized the danger that the misuse of rules of origin could transform their role from that of an administrative support for trade policy into an autonomous policy instrument. Thus, it required that rules of origin be transparent and administered in a consistent, uniform, impartial, and reasonable manner. The WTO is now seeking to render these restrictions more precise and to harmonize rules across nations by building on the Agreement on Rules of Origin adopted in 1994. Rules of origin can also be used to interpret statutes governing labeling requirements, such as “Made in…” stickers, and to assist in compiling bilateral trade statistics.