LegiStorm

Summary:

Rules of origin (ROO) are laws, regulations, and procedures used to determine the country of origin of an imported product. They are a significant part of international trade policy because ROO are needed to properly assess tariffs, enforce trade remedies (such as antidumping and countervailing duties) or quantitative restrictions (tariff quotas), and statistical purposes. Other commercial trade policies are also linked with country of origin determinations, such as labeling and government procurement regulations. Given Congress' authority to regulate foreign commerce, it may consider how rules of origin fit into overall U.S. trade policy as well as future trade negotiations. The methodology used to determine the country of origin, can be straightforward—as long as the parts of a product are manufactured and assembled in one country. However, when a finished product's component parts originate in many countries, as is often the case in today's global trading environment, determining origin can be a more complex process. U.S. Customs and Border Protection (CBP) is the U.S. agency responsible for determining country of origin. CBP uses non-preferential ROO to determine the origin of goods imported from countries with which the United States has most-favored-nation (MFN) status. A key principle used in non-preferential ROO cases is "substantial transformation," which means the country in which the product was last substantially transformed, or made into a "new and distinct" product. Since no U.S. laws specifically govern non-preferential ROO, these determinations are made by CBP primarily on a case-by-case basis using CBP's own rules and precedents. Preferential ROO are used to determine the duty-free eligibility of imports from U.S. free trade agreement (FTA) partners for receiving FTA benefits, and whether goods from eligible developing countries qualify for tariff benefits under U.S. trade preference programs like the Generalized System of Preferences (GSP). Preferential ROO apply specifically to each FTA or preference, meaning that they vary from agreement to agreement and preference to preference. New characteristics in preferential ROO, such as the labor value content requirements in the United States-Mexico-Canada Agreement, could increase compliance costs for importers and raise questions about how ROO commitments in future FTAs may change. CBP has periodically proposed implementing a more uniform system of determining non-preferential ROO. CBP's last proposal was made in July 2008, when it suggested that a system implemented under North American Free Trade Agreement (NAFTA) ROO "has proven to be more objective and transparent and provide greater predictability in determining the country of origin of imported merchandise than the system of case-by-case adjudication they would replace." The NAFTA scheme had already been used for several years to determine the origin of imports under NAFTA. Changes in ROO requirements are opposed by some importers due to the costs involved in transitioning to new rules, or because they assert that some products they import might be at a disadvantage under different ROO methodology. In 2011, CBP implemented a portion of the proposed regulations applicable to specific products, including glass optical fiber, pipe fittings and flanges, and greeting cards. This report deals with ROO in three parts. First, it describes the reasons that country of origin rules are important and describes U.S. laws and methods that provide direction in making ROO determinations. Second, it discusses some of the more controversial issues involving rules of origin, including the apparently subjective nature of some CBP origin determinations, and the effects of the global manufacturing process on ROO. Third, it concludes with some questions raised by the issues that Congress may consider.