Rules of Origin for FTAs
Understanding the Rules of Origin is one of the most important aspects of the Free Trade Agreement (FTA) (ROOs). Simply defined, a product must originate from an FTA party or include a certain amount of U.S. inputs and components to qualify for the reduced-duty advantage. Because the ROOs are FTA- and product-specific, they must be strictly adhered to.
The many sorts of ROOs are discussed, as well as the various methods in which items may qualify for FTAs. The idea of considerable transformation, as well as product-specific and percentage-based formulae employed in qualifying items for FTAs, are examples of this. The de minimis provision, fungible commodities, and shipping replacement parts and accessories, as well as how the ROOs are applied to particular FTAs, are all studied.
The exported good must meet the following criteria to qualify for preferential treatment under an FTA:
- It must be produced within the FTA's jurisdiction.
- Must comply with the relevant Rule of Origin for individual items and the applicable FTA.
- The origin of the goods must be proven by suitable certificates or information given to the importer or its representative broker.
Steps to Determine whether a Product Qualifies for Duty-Free or Reduced-Duty Treatment.
1. Find the product's HS classification number at uscensus.prod.3ceonline.com and convert it to the HS number using the first six digits of the Schedule B code.
To be eligible for an FTA advantage, the product must be manufactured and supplied directly from an FTA nation.
2. Calculate the duty rate (tariff). Search the Customs Information database at export.customsinfo.com or the FTA Tariff Tool at 1.usa.gov/1wsnrTj to see if there is a tariff differential between the standard (Most-Favored-Nation, or MFN) and preferential rates.
There is no need to qualify the good if there is no duty advantage—that is, if the duty rate is already fixed at "zero," or if the FTA rate is equal to or greater than the MFN rate—unless the importer expressly demands it, in which case the product must "qualify for an FTA preference."
Use ordinary shipping processes (i.e., regular export documentation can be used instead of the NAFTA certificate).
Note: Even if there is no tariff advantage, you may wish to qualify an item for NAFTA for bigger shipments since goods with the NAFTA certificate get a "break" on the merchandise processing cost. (step 3).
3. Make sure your product qualifies for an FTA. If your product qualifies because it comprises all FTA originating inputs, go ahead and certify the origin.
If the product comprises any non-FTA (or unknown origin) inputs, assign HS codes to all of them before moving on to determining the specific ROO (step 4).
4. Consult the USHTS General Notes for the specific ROO for the finished product you're exporting, or go to export.gov/fta and look for a ROOs in the final text of a relevant FTA agreement (the ROOs are identified by HS codes).
5. Determine if the foreign content satisfies the ROO, i.e., whether it satisfies the tariff shift (TS) or regional value content (RVC) criterion. You may also figure out which material doesn't meet the ROO and make modifications to meet the ROO.
Check that all non-FTA inputs make the needed change in HS classification (tariff shift) when they are included into the final product if a TS-based regulation is the only choice for qualifying origin. If not, see if the non-FTA originating inputs account for less than the de minimis requirement . Proceed to verifying the origin if you fulfill the TS-based criteria or the de minimis exemption (step 6).
T If required, use the RVC-based rule. Whether the TS-based rule can't be used because the product doesn't meet the TS or the de minimis exception, examine if the RVC % element of the rule may be used instead (assuming it is allowed). This section of the rule will involve utilizing a specified formula (transaction value, net cost, buildup, or builddown) to calculate a minimum percentage of FTA content. To calculate the RVC, you'll need a costed bill of materials.
Consider modifying the product if it does not fulfill the ROO and so does not eligible for an FTA.
Other rules (e.g., fungible products, sets, chemical reaction rules, etc.) can be used to qualify a product or an FTA preference.
6. Ensure that your product's origin is verified.
The COO must explain how the good qualifies for an FTA preference, either by stating the preference criterion or by include a statement that explains how the good qualifies. These changes depending on the FTA. A COO is not required for low-value shipments. A good's eligibility may be stated on the commercial invoice.
Note: To acquire a sample Certificate of Origin (COO) and instructions on how to fill out a Certificate of Origin or certification information, go to export.gov/fta and choose "FTA nation," contact 800-USA-TRADE (800-872-8723), or email tic@trade.gov.
7. In the event of a customs audit, keep track of how the product was certified. The documentation must be kept for up to 5 years under most FTA agreements.
Rules of Origin and Why They Matter
ROOs are used to assess if a product is eligible for preferential tariff treatment under the FTA. If a product is made and assembled predominantly in one nation, the standards for identifying country of origin might be relatively straightforward. When a final product has components from many nations, however, identifying provenance might be more difficult.
The two types of ROOs are nonpreferential and preferential ROOs.
Nonpreferential (Generic) Rules of Origin
Nonpreferential ROOs are used to establish the provenance of commodities exported to WTO members, who then give each other duties (tariffs) based on the Most-Favored-Nation (MFN) principle. The product must be entirely the farm production, product, or manufacturing of one nation under nonpreferential criteria. Alternatively, a product including components from many countries must undergo significant transformation. These two concepts—wholly obtained and significantly altered items—could be used to determine the provenance of commodities under FTAs.
Preferential Rules of Origin
Preferential rules are FTA ROOs. They are unique to each FTA and, in general, differ from one agreement to the next and from one product to the next. They're used to make that items are eligible for duty-free or reduced-duty treatment under US trade preference programs, even if they contain non-FTA inputs. If products are a "wholly acquired product" of a beneficiary of preference program, or FTA, verifying the origin is typically quite easy, just as it is with a nonpreferential ROO.
Specific ROOs apply if a good was not wholly grown or made in the designated country/region. For example, if paper is created solely in the United States from American trees, it is unmistakably American. However, which nation is considered the country of origin if envelopes are folded and glued in the United States from paper created in Brazil? Such questions are answered precisely by the FTA ROOs.
Originating Goods
U.S. products must qualify or "originate" in order to gain preferential treatment under FTAs.
If a good is entirely obtained in the territory of one of the FTA parties, it is deemed to be originating. If it contains foreign input but meets specific ROOs listed in specific FTA agreements or meets other requirements specified in the agreement, it is also originating.
Locating FTA-Specific Rules of Origin
In FTA agreements, ROOs are listed by their HS product categorization codes. As a result, in order to ascertain whether specific ROO applies, an exporter must first determine the product's HS classification number.
An HS number may be found by searching up its U.S. Schedule B number. To find your product's Schedule B number, go to 1.usa.gov/1vHzesa or call the US Census Bureau at (800) 549-0595 x2.
The most recent ROOs may be found on the United States International Trade Commission's website under "General Regulations of Interpretation," under "General Note 12" of the rules. All of the FTAs' ROOs are contained in a single document.
A large number of ROOs relate to a section of an HS code. Each HS code may be disassembled.
You may find them at 1.usa.gov/1ph6Np9. Another resource is export.gov/fta; pick the "Rules of Origin" link under the FTA nation you're exporting to. Because the HS codes are amended every few years, you may need to examine the most recent guidelines rather than the original ones.
Categories of Rules of Origin
Changes in tariff categorization, RVC, or both are used to create product-specific ROOs. They explain how commodities including non-originating, non-FTA materials or components may nevertheless be eligible for FTA advantages, which is a significant aspect given that many commonly traded items have inputs from countries other than those participating in the FTA.
Tariff Shift-Inspired Product-Specific Origin Rules
A tariff classification change test is used by some product-specific ROOs to evaluate if a major change has happened within the FTA territory, allowing the product to qualify for the FTA benefit.
If a product's final manufacturing process takes place within the FTA territory and results in a major change in components or materials that are not from the FTA nations, it qualifies as originating in the FTA region.
Percentage-Based Rules: Doing the Math
Regional Value Content–Based Rule
RVC-based guidelines mandate a particular amount of FTA content in a product. RVC-based regulations can be calculated in four different methods. Which one you use is determined by the product and the FTA.
RVC-based rules include net cost (NC), transaction value (TV), builddown, and buildup.
Using the net cost rule, the RVC is determined as the net cost of goods less the value of non-originating components represented as a percentage.
Net Cost Method
RVC = (NC − VNM × 100) / NC
• The RVC is calculated using the transaction value rule, which is the value of the products less the value of the nonoriginating material stated as a percentage.
Transaction Value Method
RVC = (TV − VNM × 100) / TV
• RVC (Regional Value Content) is a proportion of regional value content.
• TV = FOB-adjusted transaction value of the good (amount paid or payable)
• NC stands for net cost (amount to produce a good)
• VNM = Value of non-originating materials utilized in the manufacturing of the good by the manufacturer
Buildup Method
RVC = (VOM / AV) × 100
• RVC (Regional Value Content) is the proportion of regional value content.
• VOM = value of originating materials that are obtained or self-produced and employed by the producer in the manufacturing of the good
• AV = The adjusted value (the value for customs purposes)
Builddown Method
RVC = ((AV − VNM) / AV) × 100
• RVC (Regional Value Content) is the proportion of regional value content.
• VNM = The value of nonoriginating materials purchased and employed by the producer in the manufacturing of the good
• AV = The adjusted value (the value for customs purposes) The value of a self-produced material is not included in VNM.
Regional Value Content–Based Rule
The RVC test permits the candidate to qualify in one of two ways. The builddown and buildup procedures are as follows.
Builddown Method
RVC = Adjusted value − Value of nonoriginating materials/Adjusted value × 100
Buildup Method
RVC = (Originating materials / Adjusted value) × 100
Using the example above, we'll suppose that the piece of furniture in issue has an adjusted worth of $1,000.
The value of nonoriginating materials used in the manufacturing of the good excludes:
1. Freight, insurance, packaging, and any other costs involved in conveying the material to the producer's site.
2. Duties, taxation, and ports transaction cost on material paid in the jurisdictions of one or both parties, excluding duties and taxes waived, refunded, refundable, or otherwise recoverable, including credit against duty or tax paid or due.
3. The cost of waste and spoilage caused by the usage of the material in the manufacture of the good, less the value of renewable scrap or by-products
4. The processing costs incurred in a party's territory in the manufacture of nonoriginating materials.
5. In the territory of a party, the cost of originating materials employed in the manufacture of nonoriginating items.
Certificates that are generic
A generic COO may be awarded if a good does not qualify for an FTA.
The exporter should check with the buyer and/or an experienced shipper/freight forwarder or the US Commercial Service to see if a COO is necessary. Note that certain nations (e.g., numerous Middle Eastern countries) need a generic COO to be notarized, validated by a local chamber of commerce, and legalized by the destination country's consulate's commercial division.
The National US–Arab Chamber of Commerce may also be able to assist in some Middle Eastern nations.
An importing nation may demand a COO provided by the manufacturer for textile items. The quantity of copies necessary and the language in which they must be written may differ by nation.
COOs for items that aren't eligible for FTAs can also be obtained via a local chamber of commerce or online at ecertify.com (a private vendor). Some chambers will not issue COOs, or will only grant them to members. Keep in mind that certifications will only be awarded for products manufactured in the United States.
A buyer may also request that you (the exporter) authenticate the product's provenance. Here's an example of what's in a certificate like this (in this case, it's for the US-Korea free trade agreement):
1. Only one shipment
- Give the number of the business invoice.
2. Multiple shipments of the same item
- Provide a blanket period in the format "mm/dd/yyyy to mm/dd/yyyy" (12-month maximum).
3. Authorized signature, company, title, phone, fax, and e-mail, as well as the date of certification
The signee must have legal power to bind the firm and access to the underlying records. Signature, company, title, phone, fax, and e-mail should all be included in this area.
4. Accreditation
I confirm that the information on this page is correct and genuine, and I accept responsibility for verifying such claims. I realize that I am responsible for any false claims or substantial omissions made on or in connection with this document, and I undertake to save and submit any supporting documents upon request.
The commodities meet all of the standards for preferential tariff treatment set out in the US–Korea Free Trade Agreement for those items; and this document entails ___________ , including all attachments.
Signature, Date:
Title:
Phone Number:
E-mail Address:
Conclusion
Business people in the United States have informed us that if they understood more about the mechanics of exporting, they would consider selling their products overseas or, if they have already started, expand their markets.
We've endeavored to explain in great detail the questions we're routinely asked by thousands of individuals who want to sell something internationally or who already have one and are trying to figure out how to get it to the buyer.
While the information in this book can assist you in the exporting process, it is not intended to replace your own judgment or the extensive range of expertise available in your community through what we call your Global Entrepreneurial Ecosystem (GEE), a collection of organizations and institutions that can provide advice, mentoring, and specialized services. The US Commercial Service is the most important of these resources.
These people will gladly introduce you to your region's and state's export community of practice. They'll also connect you with peers who are experts in your specific business, product, or sector, wherever they are. They will then have access to our global resources, which include market and industry specialists from over 75 countries across the world.
We work with colleagues from the Departments of State and Agriculture in practically every other country on the earth. As a result, i appreciate your taking the time to read my blog. We hope you'll use it frequently and feel free to pass it on to a friend. As a country, we're well on our way to blurring the lines between local and foreign commerce, as if the latter is inherently dangerous or strange. The moment has come for all business to be just that: business. But, most importantly, as a society that leads in so many areas, we must also lead in generating more individuals like you—people who are at ease in the world.
It is now easier than ever to sell products and services all over the world. The majority of the world's prospective customers are located outside of the United States, and there is a strong global preference for Made in USA products and services. Many exporters continue to increase their profits and competitiveness by exporting to international markets, and you can too. Small and medium-sized enterprises in the United States—those with less than 500 employees—make up 98 percent of the almost 280,000 exporting companies. Exporting has become increasingly viable for even the tiniest firms because to the internet, increased logistical alternatives, and a variety of federal, state, and municipal export aid. Exports of products and services from the United States totaled $2.5 trillion in 2019. And, as hundreds of exporters will confirm, expanding your client base by exporting may help you weather domestic and global economic shifts.
With huge predicted increase in global commerce, fuelled mostly by more affluent customers in China, India, and other developing nations, the issue for firms of all kinds in the United States is figuring out how to tap into this massive income stream.
Companies that participate in global commerce report a change in income from export sales vs sales in their home markets as global trade expands. According to a survey of US exporters, exports accounted for 20% of yearly revenues for 60% of small businesses and 44% of medium-sized businesses. When asked if export sales will expand at least 5% each year over the next three years, 77 percent of small businesses and 83 percent of larger businesses replied yes.
"That's all well and good," you would fairly answer, "but do I have what a person in another nation will buy?" Exports have helped companies that generate a diverse range of goods and services expand their enterprises. Some of what is sold is distinctive, but the majority isn't, relying instead on other aspects like excellent customer service or marketing to complete the transaction. The companies and individuals behind them excel at business basics and are enthusiastic about developing abroad.
Companies who do not produce their own goods might benefit from exporting by offering wholesale and distribution services.
Another solution to the question "Why bother to export?" is that exporting increases everyone in a company's knowledge and abilities. Doing business in a market that extends beyond one's boundaries has the potential to alter those who participate in it. Forming new friends, getting to know another culture, working out how to satisfy the needs of others, and learning how to deal with new business issues are all individually gratifying experiences. It also leads to better products and services, as well as making businesses stronger in the marketplaces in which they compete.
The World Is Open for Your Business
While the United States exports $2 trillion in products and services to international markets each year, there is significant room to expand both the number of exporters and the markets to which they sell, particularly among small and medium-sized businesses. Here are a few reasons why you should seek export sales:
Demand. Outside of the United States, more than 95 percent of the world's customers live. Your competitors are gaining worldwide market share, and so can you.
Access. It doesn't have to be difficult to export. Exporting has become more accessible because to the Internet, improved logistical routes, free trade agreements, eCommerce, and the variety of available export aid from the US government and its partners.
Profitability. For enterprises of all sizes, exporting may be profitable. Sales rise quicker, more jobs are generated, and employees earn more in exporting companies than in non-exporting companies.
Advantage in the marketplace. The United States is renowned for its high-quality, innovative goods and services, as well as its excellent customer service and ethical corporate methods.
Mitigation of risk. Most exporting businesses have a better time weathering economic downturns in the United States and are more likely to survive.
Resources for export. Companies in the United States can benefit from federal resources as well as state and municipal partners. The US Department of Commerce, for example, operates a global network of US Commercial Service offices in over 100 US cities as well as US embassies and consulates in over 75 countries. Export consulting and a variety of bespoke export solutions are available from trade specialists. They may also connect firms with important resources including export finance through the Export-Import Bank of the United States and the Small Business Administration.
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