Rules of origin refer to finding the source of a product. For example, if the UK import bananas from Spain, where the bananas originally from Spain or were they imported from Costa Rica. If the bananas come originally from Costa Rica, that has importance for:
- Custom duties
- Trade statistics on imports and exports
- For marketing purposes
- To implement different trade deals, such as Most favoured nations.
Why rules of origin can be important
Anti-dumping. Suppose Africa imposes limits on the dumping of surplus agricultural products from the EU. It means there will be quotas on EU exports. However, if EU farmers export food to Turkey, who then export the same goods to Africa – it is effectively a way to get around the anti-dumping legislation. Knowing the origin of agricultural products is important.
Voluntary export restraint (VER) these are limits on exports from a specific country, e.g. Japanese exports of cars to the US.
Rules of origin and customs union
A customs union is an economic block of different countries who have free trade and a common external tariff.
No matter where an import enters the trading block the external tariff will be the same. The value of this is that within the customs unions, there is no advantage to importing the good into an economy with low tariffs then re-exporting them to another country in the customs unions with higher external tariff.
A customs union complements a free trade area and reduces the need to worry about rules of origin.
For example, when the UK joined the EEC it had to increase external tariffs on food imports from the Commonwealth. Otherwise, UK firms could have circumvented higher agricultural tariffs in other EU countries and taken advantage of free trade within the EU area.
Rules of origin and NAFTA
NAFTA is a free trade area but not a customs union. Therefore, if the US has high tariffs on Japanese cars, the Japanese cars could be imported into Mexico, and then sold across the free trade border between US and Mexico. In this case, the free trade area is a way to circumvent the different external tariffs. It means at the US/Mexico border there may be a need to check the rules of origin of imports.