An overview of "Rules of Origin" and why exporters need to be aware of them. This article is part of "A Basic Guide to Exporting", provided by the U.S. Commercial Service, to assist companies in exporting.
Last Published: 10/20/2016
Example Rules of Origin  Combining Multiple Rule Types, U.S.–Australia FTA

Rule of Origin
“A change to heading 1902 through 1905 from any other chapter.”

Products
Breads, pastries, cakes, biscuits (HS 1905.90)

Non-U.S. or Australian Input
Flour (classified in HS Chapter 11), imported from Europe

Explanation
For all products classified in HS headings 1902 through 1905, all non-U.S. or Australian inputs must be classified in an HS Chapter other than HS Chapter 19 in order for the product to obtain preferential duty treatment. These baked goods would qualify for tariff preference because the nonoriginating goods are classified outside of HS Chapter 19. (The flour is in Chapter 11.) However, if these products were produced with nonoriginating mixes, then these products would not qualify because mixes are classified in HS Chapter 19, the same chapter as baked goods.

Rule of Origin
“A change to subheading 9403.10 through 9403.80 from any other heading; or
A change to subheading 9403.10 through 9403.80 from any other subheading, provided there is a regional value content of not less than
(a) 35 percent based on the buildup method, or
(b) 45 percent based on the builddown method.”

Product
Wooden furniture (HS 9403.50)

Non-U.S. or Australian input
Parts of furniture (classified in 9403.90), imported from Asia

Explanation
Wooden furniture can qualify for preferential tariff treatment in two different ways: through a TS or a combination of a TS and an RVC requirement.

Because the non-U.S. or Australian input is classified in the same heading (9403) as the final product in this case, the good does not meet the simple TS in the first rule. Moving down to the second rule though, the good can meet the TS because the non-originating component is from a different subheading than the final product. For the good to qualify as originating, however, it must also pass the RVC test.

Our assumed value of nonoriginating materials in this case is $500. Plugging this into the builddown formula:

RVC = ($1,000 − $500)/$1,000 × 100 = 50%

We can see that the percentage is greater than the 45 percent required by the rule. Therefore, the good qualifies as originating.
If instead, we use the buildup formula (i.e., (Value of originating materials/Adjusted value) × 100):

Note: Certain expense may be added (since some are able to be deducted from nonoriginating materials covered above) to the value of originating materials. For more information on valuing materials, refer to Article 5.4 and 5.5 of the U.S.– Australia FTA.

RVC = $500/$1,000 × 100 = 50%

The RVC is again 50 percent and is greater than the 35 percent required by the rule. With either method, the good specified in this example qualifies as originating under the U.S.–Australia FTA.

Rules of Origin Are Product- and FTA-Specific, but Some General Categories Apply
For given product nonoriginating inputs to qualify for particular FTA benefits, the product may need to comply with a tariff classification change (TS)–based ROO or an RVC-based rule or both (TS and RVC). Note: These rules apply only to foreign, non-FTA agreement content, and each rule is product-specific, according to the product and the HS number.

NAFTA, Chile, Singapore, Australia, CAFTA-DR, Colombia, Panama, Korea, and Peru FTAs
All apply TS- and/or RVC-based rules of origin. The TS-based rules vary among FTAs, but the principle of the tariff classification change test remains the same. However, the applicable RVC-based rules may be net cost–, transaction value–, builddown-, or buildup-based, depending on a particular FTA and the particular product. For example, to qualify a product for NAFTA, an exporter may need to apply either the net cost–based RVC rule (requires minimum 50 percent FTA-origin content) or transaction value–based ROO (requires minimum of 60 percent FTA-origin content).

Chile, Singapore, Australia, CAFTA-DR, Peru, Colombia, Korea, and  Panama FTAs
Apply the buildup rule (the total value of the originating materials must be greater than 35 percent) or the builddown rule (the subtracted value of the non-originating materials must be greater than 45 percent).

Israel, Jordan, Morocco, Bahrain, and Oman FTAs
Apply TS (substantial transformation) + RVC-based rules. A product that meets FTA ROOs qualifies for FTA tariff treatment if it is produced entirely in the United States using only U.S. materials or if it contains at least 35 percent RVC and undergoes substantial transformation.