As the United States continues to enforce tariff escalation measures that substantially affect tariff rates, origin issues have become increasingly vital in supply chain planning and production distribution strategies.
The concept of origin acts as the “economic nationality” of goods. When goods are produced in multiple countries or regions, the origin is attributed to the country or region where the final substantial transformation occurs.
Classification of Origin Rules
Rules of origin can be divided into preferential rules of origin and non-preferential rules of origin.
Preferential rules of origin primarily apply when implementing trade preference measures within international trade agreements. As of 10 January 2025, China has signed 23 free trade agreements with 30 countries and regions. On 6 February 2025, 373 Regional Trade Agreements (RTAs) came into effect worldwide.
Preferential rules of origin ensure that tariff concessions are extended exclusively to goods that have genuinely experienced a “substantial transformation” within a designated region, thereby forestalling any attempts by goods manufactured in a third country to secure preferential status via mere transloading or similar expedients.
Non-preferential rules of origin are typically applied for non-trade-preference purposes. Due to possible differences in non-preferential rules of origin between exporting and importing countries, a non-preferential Certificate of Origin issued by an exporting country may not always be recognized by the importing country’s customs authorities.
Substantial Transformation
The assessment of substantial transformation, the core rule for determining origin, involves the following operational criteria:
Change in Tariff Classification: Whether a substantial transformation has occurred based on the alteration of the Harmonized System (HS) code.
Value-added percentage: Whether the value-added percentage of goods during the processing and manufacturing process in a specific country or region meets prescribed percentage criteria.
Manufacturing process: Whether the product has undergone designated processing and production procedures.
In addition to substantial transformation rules, a comprehensive assessment of the origin may also involve the application of other rules, such as the ”absorption rule,” the ”de minimis rule,” and the ”cumulation/accumulation rule.” The rules of origin for different countries and products may vary significantly, and their specific contents are often complex. In practice, it usually requires product-level analysis combining information such as the specific exporting and importing countries‘ regulations, as well as the actual product specifications, to correctly determine the product‘s origin.
Application of Rules of Origin: Chinese Exports to the U.S.
Current U.S. policies specify that the non-preferential rules of origin should be used to determine if a product originates from China, which in turn decides whether to apply additional tariffs under Section 301 or IEEPA.
As indicated in a report issued by the Office of the United States Trade Representative (USTR), the USTR has noticed that some Chinese enterprises have been relocating their supply chains to circumvent Section 301 or IEEPA tariffs. Therefore, certain stakeholders have proposed some policy adjustments. These include downstream products within the scope of Section 301 tariffs if the product undergoes substantial transformation overseas but contains specific key Chinese-origin components.
Considering the limited number of countries and regions that have entered free trade agreements with the U.S., most companies exporting to the U.S. must apply the non-preferential rules of origin to determine whether the relevant goods originate from China.
The U.S. Customs and Border Protection (CBP) usually relies on court decisions, customs regulations and the relevant interpretation notes to determine the origin of goods. In making a comprehensive assessment of whether a substantial transformation has taken place, CBP generally takes into account a variety of factors, including but not limited to:
- The change in the name of the product after processing
- New character or uses of the processed product
- Complexity of manufacturing operations
- Cost of manufacturing operations
- Degree of value-addition through manufacturing operations
For companies planning to establish overseas factories to manufacture products to meet the local rules of origin, it is imperative to conduct a comprehensive evaluation of the local rules of origin and the viability of process migration before committing to overseas investment. Businesses should also carefully examine their target markets’ FTA network to determine the appropriate locations for their supply chains.
Dolly Zhang, Partner, Indirect Tax, Customs and Global Trade Consulting & Shelly Ma, Director, Global Trade Advisory, Deloitte China