Rules of origin determine the country of origin for goods, which is important for taxes, tariffs, and trade agreements. The last substantial transformation or added value determines the origin. Companies consider these rules when sourcing and assembling products to avoid import taxes and quotas. Governments may change rules to promote domestic growth while keeping trading partners happy.
Rules of origin are laws that establish a rubric for determining the origin of goods. The country of origin can be very important for taxes and tariffs, trade agreements and other matters. International laws cover some rules of origin, and nations can also establish their own. Global trade results in situations where goods may have components from a number of nations, making their origin sometimes difficult to determine, and rules of origin standardize this process in the interest of fairness.
If a good was wholly manufactured, grown or produced in one country, that country is the product’s origin. Corn grown in Mexico, for example, is of Mexican origin according to the law. However, the products often undergo several transformations before reaching the open market. Therefore, rules of origin usually state that the country in which a last “substantial transformation” occurred, which transformed the good into a completely new product, is the country of origin of the good. If Mexican corn is shipped across the US border and ground into flour, that’s a substantial transformation and the US is the new country of origin.
Some nations have a different method, looking not at substantial transformations, but at added value. In these nations, the history of the components as they move across borders is important. Under these rules, repackaging Mexican corn in the United States would shift the corn’s country of origin, even if no substantial transformation occurs, because the new packaging adds value.
Companies take rules of origin into consideration when deciding where to source products and where to assemble them. In a nation where substantive transformations are key, a company might have components made overseas and then assemble them in their home nations, so they can label products as domestic in nature. This can help companies avoid import taxes and finished product tariffs. It also prevents companies from conflicting with import quotas and other limits.
The rules of origin in a given country can change at the discretion of policy makers. Companies interested in trading, manufacturing, or investing in a country pay close attention to these rules and proposed changes, and may lobby for policies they deem beneficial to their businesses. Governments typically want to promote domestic business growth without snubbing trading partners and sometimes have to walk a fine line with trade regulations to keep parties with conflicting and differing interests happy. Tools such as concessions and treaties can be useful for placating trading partners.
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