Rules of Origin in Transition: A Changing Environment and Prospects for Reform

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I. THE CHANGING ENVIRONMENT: RULES OF ORIGIN UNDER STRESS

"Rules of origin" are the rules that govern the legal assignation of a national to goods moving in international commerce. Such rules are required by laws that treat goods differently according to their national origin.

Until recently, the origin of goods entering the United States was seldom either legally significant or difficult to determine. Only a few laws required that origin determinations be made. Section 304 of the Tariff Act of 1930 (19 U.S.C. [subsection] 1384) requires that all foreign articles be marked with the English name of their country of origin and goods found to originate in "column 2" countries (1) were, and still are, subject to higher rates of duty, although trade with column 2 countries was limited for many years. Moreover, to a greater extent than today, goods were processed or assembled in only one country, thus their origin was seldom difficult to determine. When difficult origin determination issues did arise, the U.S. Customs Service (Customs) decided them on a case-by-case basis, using nonstatutory criteria provided in judicial opinions by the U.S. Customs Court (2) and the U.S. Court of Customs and Patent Appeals. (3)

This environment has charged. Over the last two decades several laws have been enacted that require different treatment of goods entering the United States on the basis of their origin. The United States has made extensive use of country-specific tariff preference programs as a foreign policy "carrot" to stimulate economic growth and to encourage political stability in developing countries. The Generalized System of Preferences (4) and the Caribbean Basin Economic Recovery Act (5) are examples of such programs. The United States also uses trade regulations as a foreign policy "stick" by imposing country-specific trade sanctions on certain countries. The Trading With the Enemy Act, (6) the International Emergency Economic Powers Act, (7) and the Comprehensive Anti-Apartheid Act (8) illustrate this approach. Other country-specific laws, such as those providing for countervailing duty programs and textile quotas, are used as tools of economic policy to protect U.S.industry from unfair destabilizing competition.

Also within the last twenty years, the structures of major industries have undergone changes that make determination of the origin of goods more difficult than before. Major industries such as automobile manufacturers and producers of high-tech electronic goods have increasingly adopted manufacturing structures in which goods are assembled in stages in more than one country, or in which components to be assembled in stages acquired from several different countries. Nevertheless, the laws of many countries,including the United States, persist in requiring that origin be assigned to a single country.

Additionally, within the last few years, several countries have entered into special arrangements under which they grant to each other preferences that aremore extensive and generous than those available under "most-favored-nation treatment." (9) The creation of the European Economic Community and the U.S. free trade agreements with Israel and Canada, and perhaps soon with Mexico and Central and South American nations, are examples of this trend. All these developments severely strain the U.S. system of making origin determinations in case-by-case administrative ruling and compel policymakers to consider new mechanisms for making such judgments.

It is important to emphasize that the mechanism for making determinations, rather than the basic principles used, is chiefly in need of repair. There is a general agreement that goods should be considered to originate in a country if they are wholly obtained or produced in the country and contain no foreign materials. (10) There is also agreement on the principle that substantial transformation of materials confers a new origin, that is, that goods comprised of foreign materials should be considered the product of the country in which they have been substantially transformed. …