Rules of Origin: Where Is a Product From?

Why trade agreements need rules to decide which country a product comes from, and how these rules prevent goods from dodging tariffs.

Suppose India and Country A sign a free trade agreement that removes tariffs on each other’s goods. What stops Country B from shipping its goods through Country A to avoid Indian tariffs? The answer is rules of origin.

What they are

Rules of origin decide which country a product “comes from” for trade purposes. Only goods that originate in a partner country get the lower tariffs of a trade agreement.

Common tests

Wholly obtained: products entirely grown, mined or made in one country, such as fruit or minerals.
Regional value content: a minimum share of the product’s value must be added in the partner country, for example 35 or 40 percent.
Change in tariff classification: the product must be transformed enough to change its tariff category, such as turning cotton yarn into shirts.
Specific processes: certain manufacturing steps must take place in the partner country.

Transshipment and circumvention

Without strict rules, goods can be transshipped: routed through a partner country with little processing, relabelled and exported at low tariffs. India has raised concerns that goods from non-partners have entered through FTA partners in this way, and it tightened enforcement rules in 2020.

Costs of rules of origin

Paperwork: exporters must prove origin with certificates.
Complex supply chains: modern products use parts from many countries, making origin hard to calculate.
Low utilisation: some firms don’t bother using trade agreements because compliance costs outweigh tariff savings.

Rules of origin and industrial policy

Rules of origin can encourage investment in a region. For example, the USMCA agreement between the United States, Mexico and Canada requires a high share of a car’s value to be made in the region, with some content made by higher-wage workers, to qualify for zero tariffs.

The phone assembly

A phone assembled in an FTA partner country uses components mostly imported from elsewhere. If the value added in the partner country is only 15 percent and the agreement requires 35 percent, the phone does not qualify for lower tariffs when exported to India.

Thinking a "Made in" label settles origin

Trade agreements use specific rules based on value added or transformation. A label alone does not determine tariff treatment.

Key takeaways

Rules of origin decide which country a product comes from under trade agreements.
Tests include value content, tariff classification changes and specific processes.
They prevent transshipment to dodge tariffs.
Compliance costs can lead firms not to use trade agreements.