In the context of trade agreements, “preferential origin” refers to the rules that determine whether a product is eligible for preferential treatment under the agreement, such as reduced tariffs or other trade benefits. To be eligible for preferential treatment, a product must meet the agreed-upon rules of origin criteria, which specify the amount of local content or value-added that must be present in the product for it to be considered as originating from the exporting country.
The rules of origin aim to prevent non-members from benefiting from the preferential trade agreement by simply transshipping goods through a member country, without actually producing or adding any value to the product in that country. The preferential origin criteria also help to ensure that the trade benefits go to the intended beneficiaries, which are typically the countries that are party to the trade agreement.
There is a substantial body of literature on preferential origin in the context of trade agreements, particularly on the impact of rules of origin on trade flows, trade creation and diversion, and the effectiveness of preferential trade agreements in promoting economic integration.
One key issue in the literature is the complexity and stringency of rules of origin, which can create significant compliance costs for exporters and limit the potential benefits of preferential trade agreements. Research has shown that restrictive rules of origin can lead to higher transaction costs, lower utilization rates, and even trade diversion, as firms may choose to source inputs from non-member countries to avoid compliance costs.
Another issue is the potential for rules of origin to affect the pattern of trade flows, particularly for intermediate goods that are subject to multiple processing stages across different countries. Research has shown that strict rules of origin can limit the scope for regional value chains and reduce the potential gains from specialization and trade integration.
Some studies have also examined the impact of preferential trade agreements on trade creation and diversion, with mixed results. While some studies have found evidence of trade creation and increased exports among member countries, others have found that preferential trade agreements may lead to trade diversion, as firms may shift their exports from non-member countries to member countries to take advantage of preferential treatment.
Overall, the literature on preferential origin highlights the importance of designing rules of origin that balance the need to prevent trade deflection and ensure the integrity of the trade agreement, while minimizing compliance costs and promoting regional integration.
The rules of origin explain which goods are covered in preference agreements and how their ‘originating status’ is applied.
This applies to all preference agreements and the Generalised Scheme of Preferences.
You can find out the specific rules of origin available for your goods by checking the:
- preference agreements for the country you’re trading with
- Generalised Scheme of Preferences
Goods have originating status if they are either ‘wholly obtained’ or ‘sufficiently worked or processed’.
Wholly obtained
This applies to mainly natural products, and products manufactured entirely from them that completely originate from the country or territory covered in preference agreements.
Wholly obtained includes products such as:
- mineral products extracted or taken from its soil or from its seabed
- live animals born and raised there
- products obtained by hunting or fishing conducted there
- products produced there exclusively from the products that are wholly obtained.
Sufficiently worked or processed
These are goods that either have been produced using materials or were partially processed in countries outside the originating country or territory.
If 2 or more countries are involved in the production, the goods are deemed to have originated in the country or territory where they were last substantially worked or processed.
Each agreement will set out the rules that goods must comply with to be considered substantially worked or processed. This will include:
- the product classification heading or chapter number
- a detailed description of the goods
- a description of how non-originating materials must be worked or processed to get originating status
There are 3 rules to help you decide if goods are sufficiently worked or processed.
These rules apply to both imports and exports.
You can find more information about these rules and how they apply to your goods in either the:
- preference agreements for the country you’re trading with
- Generalised Scheme of Preferences
The ad-valorem, or ‘value added’ rule
The value added rule sets a limit on the value of non-originating materials which can be used before the finished product is considered as not originating.
This value is typically a defined percentage of the ex-works price of the finished good (the price paid for the good, not including shipping and insurance costs) and will be stated in the relevant agreement.
Some agreements will use the ex-works price as the value of the good, but this is not always the case, and you should check the specific agreement.
If this rule applies to your goods, it will state ‘Manufacture in which the value of all the materials used do not exceed [X]% of the ex-work price of the product’.
You must compare the customs value of all the non-originating materials used in the production of your goods with the ex-works price of your good.
The customs value is the value of the non-originating material declared to the customs authority of the country in which they are used to produce the final goods.
The change of tariff classification rule
Your goods cannot have the same tariff classification as any of the non-originating materials used to make the final goods.
If this rule applies to your goods, it will state ‘Manufacture from materials of any heading except that of the product.’ Other tariff classifications can also be specified.
In this case, you must compare the tariff classification of:
- all non-originating materials used
- your end-product
If the tariff classifications meet the requirements in the agreement, the rule has been met.
Manufacture from certain products or through specific processes rule
This rule defines either which specific:
- non-originating materials may be used in the manufacture of your goods (the originating status for your end-product will be retained)
- processes which need to have taken place in order to get originating status
If this rule applies to your goods, it will state ‘Manufacture from [yarn] [meat], and so on.’
You may also be eligible to import the material in an earlier state of production (such as loose fibres from another country to produce yarn in some cases).
However, you may not import a material in a later state of production (for example, you may not import fabric from another country to produce yarn).
Cumulation of origin
Cumulation is the term used to describe a system that allows originating products of country A to be further processed or added to products originating in country B, just as if they had originated in country B. The resulting product would have the origin of country B. It can only be applied between countries operating with identical origin rules.
With cumulation the working or processing carried out in each partner country on originating products does not have to be ‘sufficient working or processing’ as set out in the list rules although it should be beyond minimal processing.
There are 4 types of cumulation:
- bilateral
- diagonal
- regional
- full
Bilateral cumulation
Bilateral cumulation operates between 2 countries where a preference agreement contains a provision allowing them to cumulate origin. Materials originating in either country in the preference agreement will be considered as materials covered by the rule of origin.
If the value-added rule applies, cumulation allows the value of materials originating in the in the UK or in the other country to be excluded from the percentage maximum threshold.
If the change of tariff classification rule applies, there is no need to verify if there was change of tariff classification of any materials originating in the UK or in the other country.
If the manufacture from certain products rule applies, there is no need to verify if the materials originating in the UK or in the other country meet the stated requirements.
Diagonal cumulation
Diagonal cumulation operates between more than 2 countries. Materials originating in a defined country or countries, may be used as materials originating in the country of export, when used in an export to a country not in the agreement.
Diagonal cumulation will be set out in the trade agreement if it applies.
If the value-added rule applies, cumulation allows the value of materials originating in the in the UK or in the other country to be excluded from the percentage maximum threshold.
If the change of tariff classification rule applies, there is no need to verify if there was change of tariff classification of any materials originating in the UK or in the other country.
If the manufacture from certain products rule applies, there is no need to verify if the materials originating in the UK or in the other country meet the stated requirements.
Regional cumulation is a form of diagonal cumulation, which only exists under the Generalised Scheme of Preferences.
Full cumulation
Full cumulation allows for the working or processing undertaken on non-originating products. Processes carried out in another country or countries may be considered as carried out in the UK. This means that if your goods have been worked or processed in a country not in the agreement you may be able to consider them as originating.
If the value-added rule applies, cumulation means that the value added to non-originating materials in another country does not have to be included in the percentage maximum threshold.
If the manufacture from certain products rule applies, working or processing undertaken on non-originating materials can be counted towards any conditions which must be met.
Minimal operations (insufficient working or processing)
Minimal operations are processes that when carried out either individually or in combination are regarded as being of such minor importance that they do not effect originating status.
Manufacturing and processing operations must be more than simple operations or processes, and must need special skills, machines, apparatus or equipment especially produced or installed to carry out the manufacture or process.
The list of minimal operations can vary by agreement so you should check the relevant agreement.
Interpretation of the term ‘simple’
Some of the listed operations can be clearly identified as insufficient operations, such as the affixing of a label on the product. However, there are also some operations that need to be assessed further as they contain the term ‘simple’, for example ‘simple assembly’.
‘Simple’ usually describes activities which need neither special skills, nor machines, apparatus, or equipment especially produced or installed for carrying out the activity. This term may be further defined to the effect that the skills, machines, apparatus, or tools used must also contribute to the product’s essential characteristics or properties.
General tolerance rule
The general tolerance rule permits manufacturers to use non-originating materials up to a specific weight or percentage value of the ex-works price depending on the classification of the product.
But if the specific list rule already allows the use of non-originating materials, the tolerance cannot be used to exceed the percentage amount specified in the list rule. The maximum tolerance will always be that allowed by the specific list rule.
No drawback rule
The no drawback rule mean you cannot claim back duties applicable to a country not included in the agreement. But some agreements allow for partial drawback for a limited period.
It means that all customs duties and equivalent charges must be paid on any materials, components or parts imported to manufacture a finished product on which preference will be claimed.
Accessories, spare parts and tools
Accessories, spare parts and tools which are supplied with a finished product are treated as being a single product, if they:
- make up the standard equipment usually included in the sale of such items
- are included in the price of the item or are not separately invoiced
- are classified with the item in the tariff of the importing country
Neutral elements
These are elements that are used in the production of a product which do not form part of the finished product so are not considered when determining the origin of a product.
Neutral elements include:
- fuel, energy, catalysts, and solvents
- equipment, plant, devices, and supplies used to test or inspect the product
- gloves, glasses, footwear, clothing, safety equipment, and supplies
- machines, tools, dies, and moulds
- spare parts and materials used in the maintenance of equipment and buildings
- lubricants, greases, compounding materials, and other materials used in production or used to operate equipment and buildings
It can also include any other material that does not enter the final product if both:
- the material is not intended to enter the final product
- you can demonstrate that the material use was only used in the production process
Accounting segregation for fungible materials
Fungible materials mean materials that are of the same kind and commercial quality, with the same technical and physical characteristics, and which cannot be distinguished from one another once they are incorporated into the finished product.
When using both originating and non-originating materials in the production of products, the producer must make sure their physical segregation otherwise all materials stored together would be considered as non-originating.
But you can use accounting segregation to store originating and non-originating fungible materials together if it would be difficult for you to do this because:
- of the cost
- it’s not practicable
Accounting segregation means the originating materials will not lose their originating status.
This method must make sure that the quantity of finished products obtained, which are originating, is no more than that which would have been obtained if there had been a physical segregation of the materials used.
Using accounting segregation the origin of the materials that will be physically used in the production process does not matter. At the date of determining the origin of the product, the producer must hold sufficient quantities of originating materials, as reflected in the stock records, to produce that originating product.
Your records must follow a stock management method using accounting principles. This is so that the customs authorities can make sure that no more final products receive originating status than would have been the case if the materials had been physically segregated.
Principle of territoriality
The principle of territoriality makes sure that a product which has originating status is not subsequently exported to a country not included in the agreement for alteration before being exported again under preference.
If your goods do not meet this condition they’re not entitled to preference.
Returned goods
These are goods with originating status which have been exported to a country not included in the agreement but have been returned to the UK.
Returned goods keep their originating status if you can demonstrate they have not undergone any operation beyond keeping them in good condition.
Goods re-imported after working or processing outside the territory of a partner country
There is limited scope for operations to be carried out in countries not included in the agreement using outward processing but only if all following requirements are met the:
- total added value acquired in the country not in the agreement does not exceed a set percentage of the ex-works price of the product
- total value of the non-originating materials incorporated in a country in the agreement, taken together with the total added value acquired outside that country in the agreement, does not exceed the value allowed in accordance with the annex containing the list rules
- person exporting the goods must give all the documentation needed to verify the total value acquired in the country not in the agreement
‘Total added value’ means all the costs arising, including transport costs and the value of non-originating materials incorporated there.
Non-alteration (non-manipulation or direct transport)
Originating goods must be the same as those which left the country of export. Goods can move through or be stored in countries not in the agreement. If consignments are split or domestic legal requirements (such as labelling) are carried out, the goods must remain under customs supervision.
The importer may be required to submit evidence, for example:
- a single transport document
- a certificate of non-manipulation issued by the customs authorities of the country of transit
- factual or concrete evidence based on marking or numbering of packages
If the goods were transported from a feeder vessel and then consolidated with other consignments in a seaport, then there should be a transport document (for example, a bill of lading) for each leg of the journey.
Proof of origin
You must give evidence to show the origin of your goods.
If you need an origin ruling
If the origin of your goods is not straight forward and you need a ruling, you can apply for an origin ruling. This is a ruling that confirms the origin of specific goods. It is valid for 3 years.