What are Rules of Origin?

Rules of origin are laws setting a rubric for determining the source of goods. 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 may also set their own. Global trade results in situations where goods may have components from a number of nations, sometimes making it difficult to determine where they originate, and rules of origin standardize this process in the interests of fairness.

If a good was wholly manufactured, grown, or produced in one nation, that nation is the product's origin. Corn grown in Mexico, for example, is Mexican in origin under the law. Products often undergo several transformations before they reach the open market, however. Thus, rules of origin usually stipulate that the nation where a last “substantial transformation” occurred, converting the good into an entirely new product, is the good's nation of origin. If the Mexican corn is shipped across the United States border and ground into flour, this is a substantial transformation and the United States is the new country of origin.

Some nations have a different method, looking not at substantial transformations, but added value. In these nations, the history of components as they move across borders is important. Under these rules, repackaging Mexican corn in the United States would shift the corn's nation of origin, even though a substantial transformation does not occur, because the new packaging adds value.

Companies consider rules of origin when they decide where to source products and where to assemble them. In a nation where substantial transformations are the key, a company might have components made overseas, and then assemble them in their home nations, so they can label the products as domestic in nature. This can help companies avoid import taxes and tariffs for finished products. It also prevents companies from running afoul of import quotas and other limits.

The rules of origin in a given nation may change at the discretion of policymakers. 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 feel will be beneficial to their businesses. Governments generally want to promote growth of domestic business while not snubbing trading partners, and they sometimes have to walk a fine line with trading regulations to keep parties with conflicting and diverse interests happy. Tools like concessions and treaties can be useful for appeasing trading partners.