Rules of Origin and their importance when trading globally
With the UK leaving the EU and now acting as an independent nation signing new trade deals to enable UK exporters and importers to access new markets across the world, it is more important for traders to understand in more depth what rules of origin are and how they can have preferential or non-preferential access in those markets based on the origin of their goods.
Most of the current queries our International Trade team is receiving from traders revolve about whether their goods meet rules of origin and thus claim preferential duty rates.
The reality is that Rules of Origin may vary from Trade Agreement to Trade Agreement, and there is much confusion, especially under the new EU-UK TCA.
So take a look at some of the basics:
What are Rules of Origin?
Origin is essentially the economic nationality of goods. All internationally traded goods are required to have an origin when declared to customs at the point of import. Rules of origin enable to establish the origin of the goods.
There are two types of origin: preferential, when there is a trade agreement, and non-preferential, when there are not trade agreements in place. Both are determined by respective rules of origin.
Preferential origin is linked to FTAs which grant members access to domestic market at preferential tariffs. Thus, preferential rules of origin help to determine whether goods qualify for the preferential tariff. They are a set of criteria that the goods need to comply with to be considered originating in the territory of the trade agreement when exported to an FTA partner. These rules are based on the HS Classification and are in most cases specific to a product.
Rules of origin are negotiated separately for every FTA and are attached to the main agreement in the form of a protocol or an annex on product specific rules of origin. Therefore, rules of origin vary significantly across agreements.
There are two main types of product specific rules of origin, wholly obtained and Substantial transformation
a) Wholly obtained products are goods obtained entirely in the territory of an FTA party without the addition of any non-originating materials. In some agreements, there is also a wholly produced category goods which are produced or manufactured exclusively from wholly obtained inputs and are treated a wholly obtained products.
b) Substantial transformation is a type of rule of origin that requires goods to undergo a certain process in order to be considered originating in a given country. This transformation can be expressed in three different ways.
Change in tariff classification: a rule that requires non-originating materials to have undergone a change in HS Classification in order to obtain originating status.
Value added calculations: a rule that requires a certain percentage of the total value of the final product to be added in the FTA territory.
Specific processing: a rule that requires that a specific processing be undertaken at a particular stage of the production process.
The three types of substantial transformation can be used in combination with one another. Additionally, different types of exceptions and allowances can be used within each of the three types.
In addition to the product specific rules, each agreement also includes general provisions related to the administration of rules of origin and claiming preferential tariffs. These rules cover additional relaxations such as cumulation or de-minimis as well as administrative provisions around the proof of preferential origin.
Non-preferential origin applies to goods traded between countries not linked by any preferential trade agreement. It does not lead to a reduction in tariffs but is used for other purposes such as quotas, anti-dumping and countervailing duties. It is also used for trade statistics and for the purpose of labelling.
Non-preferential rules of origin are decided by each country and are based on two criteria.
a) Wholly obtained – similarly to preferential rules, wholly obtained products are goods obtained entirely in the territory of one country without the addition of any non-originating materials.
b) Last substantial transformation – in a case where more than one country was involved in the production of the goods, the country where the last substantial transformation took place determines the origin of the goods.
Need to understand Rules of Origin in more detail?
Join our next Rules of Origin: Preferential and Non-preferential training course that will be delivered on the 9th of February. We still have places available!
Need Certificates of Origin ( UK / Arab) or UK EUR1s as a way to prove origin? Check our Export docs services here
Need more guidance on Rules of Origin, check our Brexit Hub – UK Gov Section as we compiled a series of useful guidance links including the new EU-UK TCA.
Have more specific questions regarding your business model? Why not used our Bespoke Service?