Where Is It *Really** From
Non preferential rules of origin, baby
Since the last newsletter, Mexico and Canada have temporarily avoided Trump tariffs, China has been hit with new tariffs, Chinese e-commerce exports have had their US de minimis tariff treatment taken away and then given back, the world has been told new steel and aluminium tariffs are incoming, and the spectre of reciprocal tariffs looms large.
So yeah, nothing much to write about.
In the spirit of not getting sucked into the day-to-day uncertainty, I think that one thing we can assume with a reasonable degree of confidence is that if Trump tariffs are applied to some countries and not others, then the incentives for companies to bypass the tariffs by both legal and less legal means will increase.
This also means that the US will likely increase its scrutiny of where products really come from.
For example, let’s assume that Trump applies a 25 per cent tariff to the EU but not to the UK.
This would mean that exports from Ireland (the EU) to the US are subject to a 25 per cent tariff, but exports from Northern Ireland (the UK) are not.
So, if you’re an entrepreneurial Irish exporter, what might you be tempted to do?
You could send your product to Northern Ireland and then to the US. This would avoid the 25 percent tariff. Genius.
In picture form:
Of course, what I’ve just described is possibly a crime and should, therefore, not be encouraged. But you can see why someone might be tempted.
Of course, this is not a new issue. Past and present US administrations have raised concerns about Chinese firms dodging US tariffs by shipping goods through countries such as Vietnam and Mexico.
But as Trump creates more tariff differentials, incentives to circumvent US tariffs will likely increase.
So, how will this be addressed? Rules of origin, of course!
Now, when people like me talk about rules of origin, we are usually talking about so-called ‘preferential’ rules of origin. These are the product-specific rules that determine whether a product qualifies for the preferential tariff treatment of a given free trade agreement.
For example, for a car to qualify for tariff-free trade under the UK-Japan free trade agreement 55 per cent of its value must have been created in either the UK or Japan.
Outside of a free trade agreement, and in the context of dodging US trade war tariffs, countries rely on ‘non-preferential’ rules of origin.
In general, this means that when a product enters the US, it is considered to be from the country where it was …
“wholly obtained” , e.g. beef from a cow born and bred in Australia would be treated as Australian; or
if the product contains inputs from many countries, “the last country in which it has been substantially transformed into a new and different article of commerce with a name, character, and use distinct from that of the article or articles from which it was so transformed” e.g. if a Japanese company imported lots of bits of metal and bashed them together and in doing so turned them into a computer then the computer would be treated as Japanese
If all of that sounds a bit vague … well, that’s because it is.
Some countries, such as the UK, provide a little more guidance for specific products.
The US, on the other hand, is slightly more vibes-based, with each product being judged on its own merit.
This creates quite a lot of scope for creative enforcement and ambiguity.
For example, following the introduction of 25% Section 301 tariffs on Chinese vehicles during the first Trump presidency, Volvo got into trouble when US customs decided that its cars were Chinese despite being made in Sweden. See this helpful summary of the case.
All of this is a very long-winded way of saying that I expect two things to happen:
Circumvention of US tariff measures will increase
The US will crack down on non-preferential rules of origin determinations, possibly to the point that anything containing even a hint of a high-tariff country (e.g., China) will be questioned.
Best,
Sam