	Introduction

Rules of origin (ROO), the methodology used to prove country of origin, are central components of U.S. trade policy. Such rules can be very straightforward when all of the parts of a product are manufactured and assembled primarily in one country. However, when component parts of a finished product originate in many countries—as is often the case in global industries such as autos and electronics—determining origin can be a complex, sometimes subjective, and time-consuming process. The report concludes with some policy options for Congress that proponents assert could improve the ROO process. There are two types of rules of origin (ROO):
Non-preferential ROO are used to determine the origin of goods imported from countries with which the United States has most-favored-nation (MFN) status, and are the principal regulatory tools for accurate assessment of tariffs on imports, addressing country of origin labeling issues, qualifying goods for government procurement, and enforcing trade remedy actions and trade sanctions. Preferential ROO are used to determine the eligibility of imported goods from U.S. free trade agreement (FTA) partners and certain developing countries to receive duty-free benefits under U.S. trade preference programs (e.g., the Generalized System of Preferences and the African Growth and Opportunity Act), and other special import programs (e.g., goods entering from U.S. territories). Preferential ROO schemes vary from agreement to agreement and preference to preference. Instead, U.S. Customs and Border Protection (CBP)—the agency primarily responsible for determining country of origin (as it is for enforcing tariffs and other laws that apply to imported products)—relies on a body of court decisions, CBP regulations, and agency interpretations to confer origin on an imported product if the matter is in doubt. Non-preferential ROO ensure that imports from U.S. MFN trading partners receive the proper tariff treatment. In most cases, the origin of the good is determined to be the last place in which it was substantially transformed into a new and distinct article of commerce based on a change in name, character, or use. When determining origin, CBP takes into account one or more of the following factors:
the character, name, or use of the article; the nature of the article's manufacturing process, as compared to the processes used to make the imported parts, components, or other materials used to make the product; the value added by the manufacturing process, including the cost of production, the amount of capital investment, or labor required, compared to the value imparted by other component parts; and, the essential character is established by the manufacturing process or by the essential character of the imported parts or materials. CBP noted that its experience in implementing NAFTA marking rules had shown that "by virtue of their greater specificity and transparency, codified rules result in determinations that are more objective and predictable than under the case-by-case adjudication method." The comment period was extended twice—first, until October 23, 2008 (73 F.R. Much of the public response opposed the 2008 CBP proposal. In September 2011, CBP issued a final rule making the NAFTA marking rules applicable to some products subject to non-preferential ROO, namely pipe fittings and flanges, greeting cards, glass optical fiber, rice preparations, and some textile and apparel products. Preferential Rules of Origin

Preferential rules of origin are used to verify that products are eligible for duty-free status under U.S. trade preference programs, such as the Generalized System of Preferences (GSP), the African Growth and Opportunity Act (AGOA), or free trade agreements (FTAs), such as the North American Free Trade Agreement (NAFTA) and the U.S- South Korea Free Trade Agreement (KORUS FTA). Other experts maintain that, in a global manufacturing environment, there should be other means of determining country of origin. A major reason for this complexity is that, especially in situations involving non-preferential (MFN) origin rules, officials must often make these determinations on a "case-by-case" basis. Some importers have criticized CBP because they assert that some of these determinations are subjective and inconsistent.
Determining the country of origin of an imported product is important for properly assessing tariffs, enforcing trade remedies (such as antidumping and countervailing duties) or quantitative restrictions (tariff quotas), and statistical purposes. Other commercial trade policies are also linked with country of origin determinations, such as labeling and government procurement regulations.
Rules of origin (ROO),the methodology used to prove country of origin, can be very straightforward—as long as the parts of a product are manufactured and assembled in one country. However, when a finished product's component parts originate in many countries, as is often the case in today's global trading environment—determining origin can be a more complex process.
U.S. Customs and Border Protection (CBP) is the U.S. agency responsible for determining country of origin. CBP uses non-preferential ROO to determine the origin of goods imported from countries with which the United States has most-favored-nation (MFN) status. A key principle used in non-preferential ROO cases is "substantial transformation," which means the country in which the product was last substantially transformed, or made into a "new and distinct" product. Since no U.S. laws specifically govern non-preferential ROO, these determinations are made by CBP primarily on a case-by-case basis using CBP's own rules and precedents.
Preferential ROO are used to determine the eligibility of imports from U.S. free trade agreement (FTA) partners to receive FTA benefits, and whether goods from eligible developing countries qualify for tariff benefits under U.S. trade preference programs like the Generalized System of Preferences (GSP). Preferential ROO apply specifically to each FTA or preference, meaning that they vary from agreement to agreement and preference to preference.
CBP has periodically proposed implementing a more uniform system of determining non-preferential ROO. CBP's last proposal was made in July 2008, when it suggested that a system implemented under North American Free Trade Agreement (NAFTA) ROO "has proven to be more objective and transparent and provide greater predictability in determining the country of origin of imported merchandise than the system of case-by-case adjudication they would replace." The NAFTA scheme had already been used for several years to determine the origin of imports under NAFTA. The proposed ROO modifications received so many responses from the public that the deadline for public comment was extended twice. Changes in ROO requirements are opposed by some importers due to the costs involved in transitioning to new rules, or because they assert that some products they import might be at a disadvantage under different ROO methodology. According to a subsequent Federal Register notice, CBP implemented a portion of the proposed regulations applicable to a few specific products, including glass optical fiber, pipe fittings and flanges, and greeting cards.
This report deals with ROO in three parts. First, it describes the reasons that country of origin rules are important and describes U.S. laws and methods that provide direction in making ROO determinations. Second, it discusses some of the more controversial issues involving rules of origin, including the apparently subjective nature of some CBP origin determinations, and the effects of the global manufacturing process on ROO. Third, it concludes with some alternatives and options that Congress could consider that might assist in simplifying the process.