{"id":10784,"date":"2018-10-17T15:14:42","date_gmt":"2018-10-17T22:14:42","guid":{"rendered":"https:\/\/www.qad.com\/blog\/?p=10784"},"modified":"2023-01-17T15:16:36","modified_gmt":"2023-01-17T23:16:36","slug":"rules-of-origin-fta-origin-vs-country-of-origin","status":"publish","type":"post","link":"https:\/\/www.qad.com\/blog\/2018\/10\/rules-of-origin-fta-origin-vs-country-of-origin","title":{"rendered":"Rules of Origin: FTA Origin vs Country of Origin"},"content":{"rendered":"

[vc_row][vc_column][vc_single_image image=”10785″ img_size=”full”][vc_column_text]Understanding the Rules of Origin for free trade agreements is complex. In the latest Precision Report we examine the differences between FTA Origin and Country of Origin.<\/span><\/i><\/p>\n

If the popularity of ancestry DNA kits and television shows like <\/span>Who Do You Think You Are?<\/span><\/i> has taught us anything, it\u2019s this: our origins can be more complicated than we might have expected.<\/span><\/p>\n

Let\u2019s say you were born in Chicago to an Italian-American mother and a Irish-American father, who both came from Illinois. Many Americans have similar ancestry, so that mix would make you an American through and through. But a DNA test could reveal that your family is not all from Ireland and Italy. You might have ancestors from Germany, Spain, Poland, Iceland or India too.<\/span><\/p>\n

Goods also have complicated antecedents. Surprisingly, determining where a product is \u201cfrom\u201d can be more complex than figuring out where a person is from. After all, no matter what mix of heritage your DNA test throws up, you are still a US citizen.<\/span><\/p>\n

So…Where Was This Made?<\/span><\/h2>\n

Raw materials and parts cross the globe every day. A clothing company in the UK might source silk from China, cotton from Egypt, fabric dye from the US and so forth. Likewise a computer manufacturer in Ireland might source motherboards from three suppliers in two different countries. These suppliers, in turn, might source raw materials from a variety of vendors across a number of countries.<\/span><\/p>\n

Most supply chains are global. This is why it can be difficult to pin down exactly where a product is from. Imagine you have purchased a cotton shirt from the UK clothing company. Have you bought British clothes? Maybe, but no necessarily. The company could have outsourced some \u2014 or all \u2014 of the production. By the same token, the clothing company might have sourced the cotton used for your shirt from a supplier in Egypt. However, that in itself does not mean that the shirt is Egyptian cotton. The supplier in Egypt could easily have bought the cotton from China, India or the USA.<\/span><\/p>\n

In order to make sense of this, we use \u201cRules of Origin\u201d.<\/span><\/p>\n

Rules of Origin Explained<\/span><\/h2>\n

As the name implies, Rules of Origin are rules that work out the origin of a product. Here is the World Trade Organization (WTO) definition:<\/span><\/p>\n

\u201cRules of origin are the criteria needed to determine the national source of a product. Their importance is derived from the fact that duties and restrictions in several cases depend upon the source of imports. There is wide variation in the practice of governments with regard to the Rules of Origin.\u201d<\/span><\/p>\n

Let\u2019s break that down a bit. First of all, the <\/span>how <\/span><\/i>\u2014 the \u201ccriteria needed\u201d is the information you need to determine a product\u2019s origin. We will discuss that in more detail later.<\/span><\/p>\n

Next the <\/span>why <\/span><\/i>\u2014 a product\u2019s origin has implications with regards to tariffs and restrictions. Therefore, two cotton shirts might be identical in every particular, except FTA origin. Due to FTA Rules of Origin only one might qualify for reduced or zero tariffs under a particular FTA.<\/span><\/p>\n

As well as gains \u2014 such as zero tariffs \u2014 the origin of a product can mean it is restricted. Crude oil may be crude oil, but an US company cannot import it from Iran.<\/span><\/p>\n

FTA Origin vs Country of Origin<\/span><\/h2>\n

Most people would assume that the country where goods are manufactured is the \u201ccountry of origin\u201d. That\u2019s generally true, but it is not true under every circumstance. In fact, it is entirely possible for an automobile made in Detroit to be simultaneously American and not-American at the same time \u2014 like Schrodinger’s car.<\/span><\/p>\n

Confused? We will explain.<\/span><\/p>\n

The difference has to do with Preferential Rules of Origin and Non-Preferential Rules of Origin.<\/span><\/p>\n

PREFERENTIAL RULES OF ORIGIN<\/h3>\n

Preferential rules of origin are used to determine origin under a free trade agreement (FTA). These Rules of Origin use criteria like tariff shift, Regional Value Content, de minimis and so forth. Manufactures can gain preferential treatment for their goods \u2014 little or no duties \u2014 if they qualify as originating under the FTA. A product that has qualified for low or zero tariffs will receive a Certificates of Origin when it originates under the FTA.<\/span><\/p>\n

NON-PREFERENTIAL RULES OF ORIGIN<\/h3>\n

Non-preferential rules of origin are used to determine the Country of Origin. This is subjective. That means it is typically defined as the country where the last substantial transformation of the good took place.<\/span><\/p>\n

As you can see, FTA Rules of Origin and Country of Origin use very different criteria.<\/span><\/p>\n

As a result, an automobile made in Detroit, using raw materials and parts sourced from around the world, can rightly claim that its Country of Origin is the USA.<\/span><\/p>\n

However, it does not mean that the same car qualifies for preferential duties under any FTAs to which the United States is a party.<\/span><\/p>\n

Consequently, you cannot use the Country of Origin to guarantee FTA Origin of a product.<\/span><\/p>\n

Calculating FTA Origin<\/h2>\n

Government bodies issue Rules of Origin metrics. These set out how to qualify a product under a particular free trade agreement. As you can imagine, there is a wide variety in how governments around the world do this.<\/span><\/p>\n

Having said that, the rules generally include the following criteria:<\/span><\/p>\n