In a globalized supply chain, determining where products come from is not straightforward. A single product can have raw materials, parts, and assemblies from multiple countries. I previously introduced the current list of trade agreements Canada has with other countries. In order to take advantage of the reduced duties negotiated in these agreements, the relevant country of origin must be proven to customs authorities. Rules of Origin are typically defined within a trade agreement and vary from agreement to agreement but there are two general ways/criteria origin are determined.
Wholly Produce
This is the simpler of the two categories. Goods under this criterion, as the name suggests, are wholly produced within one trade area/country. They primarily apply to “natural” goods such as agricultural and mineral products.
Substantial Transformation
When a product comprises of inputs from different countries, the final product may or may not be considered originating from the place it is completed. In-progress and source materials from previous locations must undergo a substantial transformation in order for them to “become” originating from their place of completion and applicable trade area. There are three methods that are used to determine transformation:
The Tariff Shift Approach requires an understanding of the Harmonized Commodity Description and Coding System or HS. Throughout the HS, product headings (categories) contain rules where non-originating inputs can be incorporated into a finished product without the finished goods losing their originating status. Inputs are said to have transformed into the heading (category) of the final product.
Ad Valorem Percentage Rules allow a good to be transformed when the preferential trade area increases the value of a product to specified levels expressed by an ad valorem percentage. The percentage used can be minimum domestic value added or maximum foreign content.
The third method of transformation is List of Manufacturing or Processing Operations. This methodology specifies the types of operations that are considered to be transformative. For example, steel that has undergone hot-rolling is considered transformed while repackaging a product may not be considered transformative.
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