Country of origin: Why it matters & how to determine it

Importing and exporting goods is a smart move for growing your business. 

However, navigating the world of international trade requires more than finding the perfect product.

One crucial factor that often gets overlooked is the country of origin (CO).

This seemingly simple detail, indicating where a product was made, grown, or substantially transformed, has far-reaching implications for businesses, consumers, and governments.

But why should you care?

It touches upon several aspects of international trade, impacting your bottom line in more ways than one. Import duties and trade regulations are directly linked, affecting your overall costs. 

Additionally, it can influence consumer choices and ultimately shape the success of your international trade strategy.

In this blog post, we'll peel back the layers and closely examine what the country of origin really means. 

We'll also explore how it affects your costs, why it matters, and how you can easily determine it.

What does country of origin mean?

At its core, the country of origin (CO) is where a product was made, produced, or grown. 

If you see "Made in China" on a label, China is the country of origin. 

Pretty straightforward, right?

But here's where it gets interesting – it's not always that simple in today's global economy. Products often have components sourced from various countries, assembled elsewhere, and potentially packaged in a different location entirely.

That's where the concept of substantial transformation comes in. 

This principle, adopted by many countries, including the United States, defines the country of origin as the place where a product underwent its last significant change in form, function, or commercial value.

An example of country of origin

To better understand this concept, let's consider an example: Imagine you're importing sunglasses to sell in your country.

The plastic lenses for these sunglasses might be manufactured in Japan, the metal frames in Italy, and they're finally assembled and finished in Vietnam.

In this scenario, Vietnam will be the country of origin because that's where the final assembly – the last substantial transformation – happened. 

So, if your US-based business is importing these sunglasses of Vietnamese origin, you'd need to comply with all relevant regulations and pay the import duties and tariffs based on Vietnam being the CO, even though the components came from elsewhere.

Rules of origin

There are two main types of rules of origin that businesses need to be aware of:

Preferential rules of origin

These rules are established through trade agreements between countries or regions. They define the criteria a product must meet to qualify for preferential import duties or other benefits.  

For example, a trade agreement between the US and Canada might state that for a car to be considered "made in the US/Canada" for preferential tariff purposes, it needs to have a certain percentage of its components manufactured in either country.

Non-preferential rules of origin

These are the general rules a country applies to all imported goods, regardless of trade agreements. They determine the CO for customs purposes and affect factors like import duties, quotas, and labeling requirements.  

These rules rely on substantial transformation but might consider factors like minimum value addition or specific production processes.

Why does country of origin matter?

Country of origin is crucial because it plays a significant role in international trade. It influences costs, compliance, brand reputation, consumer choices, and even government policies – most of which will ultimately impact your business's bottom line.

Tariffs and duties

Depending on the CO of your imported goods, you could face drastically different tariff rates and import duties. Complex trade agreements and country-specific regulations determine these fees.

Let's say you're importing those Vietnamese sunglasses from our earlier example. 

If the tariff rate for sunglasses from Vietnam is 5%, but it's 10% for sunglasses from China, that's a significant difference in your costs. 

Multiply that by a large shipment, and it could mean thousands of dollars.

Consumer perspective

Country of origin also matters from a marketing perspective. Consumers often associate certain countries with quality or prestige. 

"Made in Italy" or "Made in the USA" can be a selling point for some products, commanding higher prices and customer loyalty.

Conversely, products from countries with negative reputations or perceived quality issues may face consumer backlash or lower sales. 

Think about the "Made in China" stereotype – while not always accurate, it can impact consumer choices.

Compliance and regulations

Different countries have varying trade regulations and labeling requirements. 

Incorrect country-of-origin labeling can lead to serious penalties and legal issues. Customs agencies enforce these regulations strictly, and violations can result in fines, seized goods, or even criminal charges in extreme cases.

Beyond that, some countries have specific regulations regarding country of origin. 

For example, the US requires CO labeling on all imported goods and has detailed rules regarding how and where the marking should be displayed.

Ethical considerations

Consumers increasingly prioritize ethical production and labor practices in today's socially conscious market. 

Country of origin can be an indicator of these factors. 

Goods from countries with known labor abuses or poor working conditions may face consumer boycotts or negative publicity.

It's crucial for businesses to be aware of these implications. 

Whether they're importing or exporting, a solid grasp of country-of-origin principles will help them make informed decisions, minimize risks, and maximize opportunities in the global economy.

Are cashflow issues taking a toll on your business? Fix it with our guide: What can business owners do to prevent cashflow problems?

How to determine the country of origin?

The most common way to determine a product's country of origin is by checking the label itself. 

Most products clearly state the CO with phrases like "Made in USA" or "Product of Italy."

While this is more than enough for basic identification, things start getting a bit murky when you add the concept of "substantial transformation" into the picture. 

This is exactly why it's critical to familiarize yourself with the regulations of your country and target markets. 

Additionally, be aware of any free trade agreements or duty preference programs that may apply to your imported shipment, as they often require detailed country of origin information.

But what if the label isn't clear, or you're dealing with a product that has components from multiple countries? 

In such cases, you'll need to try a few alternative methods to determine the country of origin:

Check if the product is wholly obtained or produced

Determine if your product is entirely produced using materials and labor from a single country. 

For example, a product can only be labeled 'Made in US' if it is completely manufactured in the US using US-origin materials. 

If any significant imported materials or foreign labor are used, the 'Made in US' claim cannot be made without stating specific conditions. 

The Federal Trade Commission (FTC) may allow conditional claims, such as 'Made in US from Chinese materials,' to convey the origin accurately.

Consider the De Minimis rule

The De Minimis rule allows the import of qualifying goods without applying export administration regulations if the value of non-originating materials does not exceed a specified threshold (usually 10% or 15%). 

If your product meets this criterion, it may still be considered as satisfying the applicable rule of origin.

Apply the substantial transformation rule

If your product doesn't qualify for the wholly obtained or De Minimis criteria, determine the country where it underwent its last substantial transformation. 

This is where the product took on its final form, appearance, nature, or function, adding value to the original item.

To apply any of these methods, you'll need to:

• Trace your supply chain: map out your product's journey from raw materials to final assembly. Identify the sources of components, manufacturing locations, and any processing steps
  

• Keep detailed records: document your supply chain and make sure to manage each and every document (shipping labels, insurance, etc.). This information is essential for customs declarations and can help protect you in case of disputes or audits
  

• Consult with experts: if you need clarification on your product's country of origin, consult with customs brokers, trade lawyers, or industry associations. They can provide guidance and help you navigate the complexities of international trade regulations

Remember, all classifications are subjective, and customs officers make the final determination based on their interpretation. 

By understanding the various methods, keeping detailed records, and familiarizing yourself with the rules of origin, you can make informed decisions in the global marketplace.

Are you still wondering if taking your business global is the right call? Make an informed decision with our resource: Why SMEs in emerging markets should try International trade.

Take control of your imports with Stenn's financing solutions

The complexities of international trade can be daunting, especially when it comes to the country of origin. Fluctuating tariffs, duties, and fees based on your products' origin can significantly impact your import costs. 

These rising overheads often burden small and medium-sized businesses, hindering cashflow and growth potential.

That's where Stenn comes in. Our innovative financing solutions, including revenue-based and invoice financing, are designed for small and medium businesses engaged in international trade. 

We can help you access the capital to cover import and export costs upfront, even before your products are sold. 

Don't let the costs and complexities of international trade slow you down. Apply for Stenn financing today. 

With our fast, flexible, and digital financing solutions, you can seize opportunities in the global economy and take your business to the next level.