What are Rules of Origin in international trade and why is it important to be accurate?

Rules of Origin refers to the way customs authorities classify where a product originates in international trade. Where products have been entirely made in one country, such as a cheese made in the UK from UK ingredients, this is obviously very easy to establish. However, through the globalisation of trade and our supply chains which provide access to materials and components from around the world, the true origin of many goods is more complex. The value of those components and the time assembling or manufacturing, as a proportion of the total value of the item, has to be taken into consideration.

Why do we need to determine the origin of goods?

The origin of goods becomes very important in the context of tariffs and Free Trade Agreements (FTAs). If two partners have an FTA, and therefore remove or reduce tariffs on each other's products, the tariff would only apply to goods originating from one of those partners. This is known as Preferential Rules of Origin.

Where a product is not deemed to originate from the country that is exporting it, it should be subject to the tariffs that apply to territories outside the FTA. This is known as Non-Preferential Rules of Origin. It is designed to prevent countries without a trade deal accessing markets by channelling products through another country that is party to an FTA.

How do you determine the origin of goods?

The origin of your product is known as ‘economic nationality’. Determining this involves assessing the product’s value and where the contributions were made in adding value to the final product. This can be complicated to determine when multiple components add value but the origin may be defined by the location of the ‘last substantial transformation’. (Imagine the number of parts in a car!)

There are three main criteria for this and a product can be defined by a combination of these:

• Change of tariff classification: each individual component of a product may have its own classification code, eg car parts, but the finished car would have a different code. The location where the car is assembled is where it is subject to a change of tariff classification and so this could qualify it as its origin.
• Sufficient value added: the components of a product will each contribute a value. Typically, for preferential origin, at least* 50% of the total value of the item has to be added in one location to claim origin.
• Specific processing: where specific processing has to happen at a certain stage of the production process, for example the location where fabric is transformed into a garment

*It is worth noting that there is no one set of criteria for defining origin and the rules are usually negotiated as part of trading agreements.

The point of establishing preferential origin is to allow you to avoid or reduce tariffs on your goods, however some products can be so complex to prove preferential origin that the cost of demonstrating it can outweigh the tariffs that would be imposed.