Many companies overpay in tariffs due to misclassification or misinterpretation of rules of origin.
In international trade, rules of origin determine the “economic nationality” of a product and are required to access tariff benefits under free trade agreements (FTAs). However, many companies pay higher duties than necessary because they either misclassify or misunderstand these rules—especially those that have recently adjusted supply chains due to nearshoring strategies.
In light of the current political climate, Prodensa partnered with leading experts to provide detailed insights into the importance of origin analysis services. We would like to thank Adrián González, President of Global Alliance Solutions, for his valuable participation and collaboration.
Understanding Rules of Origin
Rules of origin in the USMCA (United States-Mexico-Canada Agreement) are the criteria used to determine whether a product qualifies as originating in North America and is therefore eligible for preferential tariff treatment under the agreement.
The purpose of rules of origin is to prevent third countries from benefiting unfairly from tariff preferences. For example, under the USMCA, specific rules apply to various sectors. In the automotive industry, a significant percentage of a vehicle's content must be produced within the region to qualify for reduced tariffs. These provisions aim to foster local production and ensure fair competition among member countries.
Under USMCA, cars and auto parts must meet higher regional content and labor value thresholds than under NAFTA—making origin compliance essential to avoid unnecessary tariffs.
Types of Rules of Origin
There are two main types:
1 Preferential origin: Applies under FTAs (like USMCA, EU-Mexico FTA, or CPTPP), allowing reduced or zero tariffs. Under USMCA, if products meet the agreement’s requirements, they may enter with a 0% tariff.
2 Non-preferential origin: Used for anti-dumping measures, quotas, or trade statistics.
"Many companies mistakenly assume that any added value automatically assigns Mexican origin. Doing so, even in non-preferential contexts, can result in a false country of origin declaration and lead to significant tariff underpayments."
- Adrian González, Global Alliances Solutions
How the Products are Categorized
The USMCA's Rules of Origin are designed to ensure that only goods with significant North American content qualify for preferential tariffs. These rules are categorized into four main criteria:
1. Goods Wholly Obtained or Produced
Products entirely sourced or produced within North America, such as minerals, agricultural products or live animals.2. Goods Produced Exclusively from Originating Materials
Items manufactured entirely from materials that themselves qualify as originating under the USMCA.3. Product-Specific Rules of Origin (PSROs)
The most prevalent category, applicable to goods containing non-originating materials. PSROs may involve criteria like tariff classification changes, regional value content thresholds, or specific production processes.4. Disassembled Goods, Parts, etc.
Pertains to certain goods imported in unassembled or disassembled forms, with specific rules determining their origin status.
Why Verifying Origin Matters Under the USMCA
Verification isn’t just a compliance issue—it’s a strategic element of doing business in Mexico under trade agreements like the USMCA. Proper application can offer major competitive advantages:
- Cost Reduction: products that qualify can enter duty-free or at reduced rates.
- Avoid Penalties: incorrect classification can result in fines and customs delays.
- Competitiveness: companies that leverage FTAs gain a pricing edge over those that don't.
Products from countries like China, Vietnam, Thailand, and India are facing high duties, which incentivizes shipping inputs through Mexico. Companies must correctly apply the substantial transformation criteria under U.S. non-preferential rules to prove that any third-country origin has been removed. U.S. customs will scrutinize this more closely moving forward.
A mistake in determining origin can lead to:
- Overpayment of duties (up to 25% more in some cases).
- Delays at customs due to documentation discrepancies.
- Loss of competitiveness compared to rivals who do leverage FTAs.
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Common Misconceptions about Tariff Classifications
Tariff classification assigns a specific code to each product under the Harmonized System. Incorrect classification can result in inappropriate tariffs, penalties, and customs clearance delays.
Common mistakes:
- Lack of product understanding: Misunderstanding product features or composition leads to errors.
- Subjective interpretation: Without clear criteria, the same product may be classified differently by various brokers.
- Commercial names: Using trade names instead of technical specs causes misclassification.
COMMON MYTHS ABOUT RULES OF ORIGIN
Let's clarify some common misconceptions about how origin is determined under trade agreements.How Incorrect Origin Determination Increases Import Costs
Incorrectly determining a product’s origin can result in the loss of tariff benefits under trade agreements. If a product is ruled non-originating due to misclassification, it will be subject to higher general tariffs.
Real case: Penalties due to misclassification
A German company imported medical microcontrollers using the wrong tariff code. The consequences included:
- Release delays (several days of extra storage costs).
- Higher duties (reclassified under a category with higher tariffs).
- Administrative fines for incorrect declaration.
Financial impact:
- Additional duties: If the FTA doesn’t apply, the company pays general tariffs (which can be up to 25% higher).
- Logistics costs: Detained goods generate storage costs and risk lost contracts due to delays.
Steps to Validate a Product Origin Under Trade Agreements
To ensure your products benefit from preferential tariffs:
Step 1: Know the agreement-specific rules
- Confirm whether your product is covered by a trade agreement (e.g., USMCA for Mexico, the U.S., and Canada).
- Review the Rules of Origin Annex in the agreement.
Step 2: Analyze the product's composition and production process
Assess whether materials and processes meet origin requirements. Origin criteria:
- Tariff shift (Change in Tariff Classification): Final product must have a different HS code than its components.
- Regional Value Content (RVC): Minimum percentage of value must come from the region.
- Specific processing: Some products (e.g., textiles) require specific technical processes.
Step 3: Obtain and verify the certificate of origin
- Ensure it’s correctly signed and matches the commercial invoice.
- Keep detailed records supporting origin claims (invoices, process descriptions, supplier certificates).
- For companies managing turnkey operations, accurate documentation and traceability of inputs is critical to meet origin verification requirements.
Under USMCA, the certificate may be a self-declaration by the exporter.
Step 4: Consult with experts
Seek specialized advice to correctly interpret rules and ensure compliance.
How Expert Review Can Reduce Tariff Liability and Why Staying Informed Matters
Working with international trade professionals can help identify and correct errors in tariff classification and origin determination. These experts can:
Conduct classification audits: Review and correct exi
sting product classifications.
Train staff: Provide training on proper procedures and regulations.
Represent your company: Assist in resolving disputes or clarifications with customs authorities.
An investment in professional consulting translates into significant savings and reduced risk of penalties and delays. For importers and exporters, being well-informed is not just about compliance—it's a strategic advantage for maintaining competitiveness and controlling costs. Even companies operating under shelter services in Mexico must ensure they meet all documentation and regulatory obligations to maintain trade program eligibility.
PRODENSA Key Points:
- Many companies overpay tariffs due to misclassification or misinterpretation of rules of origin.
- Origin determination errors can lead to customs delays, fines, and lost competitive advantages.
- There are two types of origin: preferential (under FTAs like USMCA) and non-preferential (for duties, quotas, statistics).
- Common mistakes include using trade names for classification, assuming assembly equals origin, or relying solely on certificates.
- Validating origin requires understanding specific agreement rules, production process analysis, and accurate documentation.
- Expert consultation can significantly reduce tariff liabilities and help companies stay compliant with evolving trade rules.
- Staying up to date on trade regulations is crucial for identifying cost-saving opportunities and reducing risk.