International Trade and Rules of Origin Explained

Mastering Rules of Origin: Unlocking Trade Benefits, Tariff Reductions & Post-Brexit Strategies

1. Introduction: The Significance of International Trade

• Economic Importance: International trade is fundamental to economic activity, representing a significant portion of most countries’ GDP. It involves the exchange of goods, services, and capital across borders and is a driving force for economic growth.
• As stated in one source, “In most countries, such trade represents a significant share of gross domestic product (GDP).”
• Historical Role: Trade has been a long-standing factor in promoting both economic development and peaceful relations between nations, dating back to historical routes like the Silk Road.
• Global System: The international trade system is primarily governed by the World Trade Organization (WTO), which aims to foster a prosperous, peaceful, and accountable economic environment. The WTO has 164 members, accounting for 98% of global trade, and operates through consensus-based decision-making.

2. The Role of Trade Agreements & Barriers

• Lowering Trade Barriers: Encouraging trade involves reducing trade barriers, such as customs duties (tariffs), import bans, and quotas.
• “Lowering trade barriers is one of the most obvious means of encouraging trade.”
• GATT and WTO: The General Agreement on Tariffs and Trade (GATT) and later the WTO have been instrumental in negotiating lower tariffs and other trade barriers, initially focusing on tariffs and later expanding to non-tariff barriers, services, and intellectual property.
• Most Favored Nation (MFN) Principle: A core principle of the WTO is non-discrimination, meaning that if a country grants a special trade favor to one member, it must extend the same favor to all other members (MFN status). The MFN rate is generally the norm, with preferential trade agreements offering lower tariffs.
• “Most favoured nation” (MFN) is one of the cornerstones of WTO trade law.
• Preferential Trade Agreements: Bilateral and multilateral trade agreements allow for preferential import duties for goods “originating” in partner countries.
• Regional Trade Agreements (RTAs): There has been a rise in regional trade agreements over the years, fostering competition.
• Subsidies: Governments often provide subsidies (payments, tax credits, cheap loans) to local firms to help them compete against imports. While purported to protect jobs, subsidies can lead to anti-dumping measures if they create unfair pricing in export markets.
• “Subsidies generally take the form of Government lump sum payments, tax credits or cheap loans given to local firms that cannot compete well against imports.”
• Tariffs as Protection: Recently, tariffs have been used explicitly to protect domestic economies against foreign competition.

3. Core Concept: Rules of Origin (RoO)

• Economic Nationality: RoO determine a good’s “economic nationality,” defining the conditions under which a product is considered to have originated from a specific country. These rules can be for preferential or non-preferential purposes.
• “Rules of origin are the rules that determine where a good was obtained or manufactured, that is, its economic nationality.”
• Origin Basis: Rules derive from national laws, international and multilateral agreements.
• Certificate of Origin: A certificate of origin provides proof of a good’s origin, which is not always the same as where it was shipped from or last produced.

4. Non-Preferential Rules of Origin

• Purpose: These rules are used for duties, statistics, and “made in…” labelling.
• Wholly Obtained Goods: These are goods entirely produced in a single country without any imported materials, such as natural products and goods made entirely from natural materials obtained in one country.
• Last Substantial Economic Transformation: If goods are processed in multiple countries, they originate from the country where the last substantial and economically justified processing took place, resulting in a new product or important stage of manufacture.
• “If goods are obtained in two or more countries or territories, the goods are to be regarded as originating from the last country or territory in which substantial processing of them has taken place that is economically justified.”
• Determining Substantial Transformation: Three main approaches are:
• Percentage or Value Criterion: Based on the proportion of local versus foreign input values.
• Tariff Classification Criterion: Based on changes in the Harmonized System (HS) tariff classification between the final product and its components.
• Specific Processes Criterion: Based on whether specific manufacturing processes were required.

5. Preferential Rules of Origin

• Free Trade Agreements (FTAs): Preferential RoO are used in FTAs and other preferential agreements, where goods meeting the RoO may qualify for reduced or zero import duties.
• “The rules of origin of each FTA determine preferential treatment eligibility, so each product must be analysed for its conformance to those rules.”
• Bill of Materials (BOM): Analysing components of goods with a “Bill of Materials” (BOM) is often necessary to determine compliance with specific RoO.

6. Navigating Rules of Origin: Key Processes

• Step 1: Tariff Heading: Identify the 4-digit tariff heading for your product using the Harmonized System.
• Step 2: Wholly Obtained or Substantial Transformation?: Determine if the goods are wholly obtained in one country.
• Step 3: Specific Rules: Refer to the specific rules for the product’s tariff heading in relevant trade agreements.
• General Tolerance Rule: Allows a small percentage of non-originating materials to be used while still qualifying for preferential origin (also known as de minimis rule). This general tolerance rule must be tested before specific rules.
• Additional Considerations: Principle of Territoriality: Manufacturing must occur without interruptions in the origin-claiming country.
• Direct Transport Rule: Goods must be shipped directly without significant stops in other countries unless under customs supervision.
• No-Drawback Rule: You cannot claim duty suspension on imported components that are subsequently used to make finished products for export under a preferential claim.
• Cumulation: Allows materials originating in certain partner countries to be treated as if they originated in the exporting country. Types include: Bilateral, Diagonal, Regional, and Full.
• Accounting Segregation: Allows mixing of originating and non-originating materials under specific conditions.
• Accessories, Spare Parts, and Tools: Often considered to have the same origin as the main product if shipped together.
• Anti-circumvention Provisions: Rules to prevent processing solely to bypass RoO.

7. Rules of Origin in Practice

• Import Duties: Rules of origin have a direct impact on the amount of import duties to be paid.
• Trade Statistics: RoO are crucial for compiling national trade statistics.
• Labels: RoO inform “made in…” labels, addressing consumer and health concerns.
• Advance Rulings: Businesses can request advance rulings from authorities like HMRC to determine the RoO that will apply to their imports.

8. Types of Trade Agreements

• Multilateral Agreements: Negotiated among WTO members, applying trade concessions to all members.
• Bilateral Agreements: Negotiated between two countries, these include:
• Regional Trade Agreements: Reciprocal agreements like FTAs and Customs Unions.
• Preferential Trade Agreements: Including GSP, where developed countries grant preferential tariffs to imports from developing countries.

9. Other Key Concepts & Actions

• Import Quotas: Rules of Origin assist in tracking imports and controlling quotas (e.g., for beef in the EU).
• Anti-Dumping: RoO help in levying duties on goods being “dumped” (sold below cost) by specific countries.
• Sanitary Inspections/Embargoes: RoO help in managing imports and restrictions due to health issues.
• Exporter/Importer Responsibilities: Both parties need a solid understanding of origin. Exporters might provide suppliers’ declarations to prove goods meet RoO or have added value.
• Certificates of Origin: Documents like those stamped by Chambers of Commerce.
• EUR1 and EUR-MED: Movement certificates for claiming preferential duties.
• Invoice Declarations: Declarations made by exporters on commercial documents.
• Supplier Declaration: Provides evidence of origin and preferential status.
• Approved Exporter: Status given by customs allowing self-certification.
• HMRC Guidance: HMRC (Her Majesty’s Revenue and Customs) provides detailed guidance on rules of origin, including specific notices and web pages (listed in original sources).

10. The UK’s Post-Brexit Trade Landscape

• Autonomous Trade Policy: The UK now has its own trade policy, separate from the EU.
• Importance of RoO: RoO are critical for UK exports to both the EU and third countries.
• UK-EU Trade Cooperation Agreement (TCA):Provides for full bilateral cumulation, meaning materials and processing from the EU can be considered UK origin in UK goods exported to the EU, and vice versa.
• UK Generalised Scheme of Preferences (GSP): A non-reciprocal scheme for imports from developing countries. The UK GSP provides preferences via three frameworks:
• Least Developed Countries Framework: Quota-free access with nil rates on most goods.
• General Framework: Reduced rates of duty on certain goods for low and lower-middle-income countries.
• Enhanced Framework: Nil rates of duty on certain goods for economically vulnerable countries adhering to 27 human rights, environment, and governance conventions.
• Registered Exporter (REX) Status: Allows exporters in GSP countries to self-certify origin.

11. Future of UK Trade

• Origin Importance: Origin has become increasingly important after Brexit.
• Supporting Evidence: Ensure you have strong supporting evidence from suppliers when declaring origin.
• Cumulation: Take advantage of cumulation to improve opportunities under future Free Trade Agreements.
• Autonomous Trade Policy: The UK has moved to an autonomous trade policy with a greater focus on pure UK interest.
• UK FTAs Post-Transition: The UK has been working to establish its own trade agreements, which may incorporate EU content through cumulation.
• Rules are complex: Rules of origin are complex with criteria such as change of Tariff Heading (CTH), change of Tariff Sub-Heading (CTSH), value added (VA), or “MaxNOM” (the maximum value of non-originating materials expressed as a percentage).

12. Key Takeaways

• Understanding the nuances of RoO is vital for successful international trade, particularly in the post-Brexit landscape.
• Both exporters and importers must meticulously examine their supply chains and production processes to ensure compliance with applicable rules.
• Businesses should leverage available resources, including government guidance and expert advice, to navigate the complexities of rules of origin.

This briefing document aims to provide a comprehensive overview of the key concepts and implications of international trade and rules of origin. It is essential for businesses engaged in global trade to maintain up-to-date knowledge of these rules to avoid potential trade barriers, delays and financial penalties.