Rules of origin are laws, regulations and procedures that identify where an imported product originally came from. The rules vary from country to country, and are often specified in free trade agreements. The rules often refer to a certain quantity of inputs, processing, transformation, etc. that needs to be done in the country.
Identifying a product’s country of origin helps customs agencies know what regulations and fees apply to a given product. Tariffs may be reduced or increased depending on where a product comes from.
More about rules of origin
The following example shows how rules of origin is used between free trade agreement partners.
While Canada has a free trade agreement with the U.S. and with the European Union (EU), the U.S. and EU do not have a similar deal. This means companies exporting from the EU to the U.S. have to pay tariffs. If a European company tried to avoid tariffs by shipping goods to Canada first and then into the U.S., rules of origin would expose where the products originally came from and the proper tariffs would apply.