U.S.-CAFTA-DR Free Trade Agreement
Rules of Origin
In order to receive preferential treatment under the U.S.-Central America - Dominican Republic Free Trade Agreement (CAFTA-DR), U.S. goods exported to the partner countries must qualify as originating as prescribed under the Rules of Origin section of the Agreement. The Rules of Origin for the CAFTA-DR were largely modeled upon the North American Free Trade Agreement (NAFTA) and the U.S.-Chile Free Trade Agreement. There are, however, some important differences, which require the close attention of the U.S. exporter.
Go directly to the product specific rules of origin (Annex 4.1) (PDF) or
see the Harmonized Tariff Schedule of the United States at General Note 29, page 470.
Except as otherwise provided in Chapter 4 of the CAFTA-DR, a good is deemed originating under the Agreement where:
- it is wholly obtained or produced entirely in the United States, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, and/or Nicaragua.
Note: "Obtained" has a unique meaning in the CAFTA-DR context; it does not mean "purchased," but is simply used to acknowledge that production is not the only way goods are created. For a good to qualify under this criterion, it must contain no parts or materials anywhere in the production process that originated from outside the signatory countries. It is generally reserved for basic products such as those harvested, mined or fished in the signatory territories, although can include a manufactured good with no non CAFTA-DR inputs. Very few manufactured goods will qualify under this criterion.
- it is produced entirely in the United States, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, and/or Nicaragua using non-originating material (i.e., materials from outside the countries listed above) that satisfy the rule of origin specified in Annex 4.1 of the Agreement. See the "How To Read the Rules of Origin" section below for more information.
- A good produced entirely in the United States (and/or in one of the signatory countries of the Agreement) exclusively from materials that are already originating (by meeting the qualifications described above).
How To Read the Rules of Origin
Rules of origin are written in terms of the Harmonized System (HS) of Tariff Classification. The HS classification system uses six to ten digit codes to identify goods. The first six digits of an HS number are harmonized among the majority of the world's countries. The last four digits are unique to each country. The vast majority of the product-specific rules of origin under the CAFTA-DR use an HS classification number. The United States uses Schedule B Numbers to classify exported products from the United States and these numbers are based on the international HS system. Therefore, the first step in interpreting the "rules" is to obtain the appropriate code for the good in question. (Note: the first two digits of an HS number are referred to as a "chapter," the first four digits are called a "heading" (e.g., 1905), and the first six digits are called a "subheading" (e.g., 1905.90).)
A rule of origin may consist of:
- A change in tariff classification (also called a tariff shift);
- A regional value-content requirement;
- Both a change in tariff classification and a regional value content requirement.
Note: It is necessary to refer to the rule associated with the product being exported. Regional value content can only be applied when it is allowed under a product-specific rule.
An example of a rule that employs a simple tariff shift is:
- Rule of Origin: "A change to heading 19.05 from any other chapter."
- Products: Breads, pastries, cakes, biscuits (HS 1905.90)
- Non-U.S., Central American, or Dominican input: Flour (classified in HS chapter 11), imported from Europe.
Explanation: For all final goods classified under HS headings 19.05, all non-U.S., Central American, or Dominican inputs must be classified in an HS chapter other than HS chapter 19 in order for the product to obtain preferential duty treatment. In this example, these baked goods would qualify for preferential treatment because the non-originating input is classified outside of HS chapter 19. In other words, the good qualifies as originating because the imported flour (i.e., the non-originating input in this example) classified under chapter 11 (HS #11.01) shifted tariff numbers from 11.01 to 19.05 when incorporated into the finished good. However, if these products were produced with non-originating mixes (i.e., not manufactured in the United States, Central America, or the Dominican Republic), which are classified in HS chapter 19, then these products would not qualify because a tariff shift at the chapter level did not occur as prescribed under this rule of origin.
An example of a rule that employs both the "tariff shift" and "regional value content" is:
- Rule of Origin: “A change to heading 95.03 through 95.08 from any other chapter; or
- A change to subheading 9506.31 from subheading 9506.39, provided there is a regional value content (RVC) of not less than:
1. 35 percent when the build-up method is used
2. 45 percent when the build-down method is used
- Product: Golf Clubs (HS #9506.31)
- Non-U.S., Central American, or Dominican input: Parts of golf clubs (classified in 9506.39), imported from Asia.
Explanation: Golf clubs can qualify for preferential tariff treatment in two different ways - through a tariff shift, or a combination of a tariff shift and regional value content requirement.
For all products classified in HS headings 95.03 through 95.08, all non-U.S., Central American, or Dominican inputs must be classified in an HS chapter other than HS chapter 95 in order for the product to obtain preferential duty treatment under the tariff shift rule alone. In this example, the golf club parts used to manufacture the golf clubs were imported from Asia and are classified within HS chapter 95 (i.e., HS #9506.39); thus the good does not meet the simple “tariff shift” in the first rule. Moving down to the second part of the rule, the good can still qualify as originating as long as it passes the regional value content test.
Regional Value Content
The Regional Value Content test allows the good to qualify using either one of two methods. These are the build-down and build-up methods.
Regional Value Content (RVC) = (( Adjusted Value - Value of Non-Originating Materials)/Adjusted Value)X 100
Regional Value Content (RVC) = (Value of Originating Materials/Adjusted Value) X 100
Using the example above then:
We will assume that the adjusted value for the piece of golf clubs in question is $500.00.
Note: Adjusted value is the invoice value (determined in accordance with Articles 1 through 8, Article 15 and corresponding interpretative notes of the Customs Valuation Agreement), adjusted if necessary to exclude any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation.
For non-originating materials used in the production of a good, the following expenses may be deducted from the value of that material in accordance with Article 4.4:
- the costs of freight, insurance, packing, and all other costs incurred in transporting the material within a Party’s territory or between territories of two or more Parties to the location of the producer;
- duties, taxes, and customs brokerage fees on the material paid in the territory of one or more of the Parties, other than duties and taxes that are waived, refunded, refundable, or otherwise recoverable, including credit against duty or tax paid or payable;
- the cost of waste and spoilage resulting from the use of the material in the production of the good, less the value of renewable scrap or by-product; and
- the cost of originating materials used in the production of the non-originating material in the territory of a Party
We will also assume that the value of non-originating materials in this case is $250.00. Plugging this into the build-down formula:
Regional Value Content (RVC) = ($500 - $250)/$500 X 100 = 50%
Therefore, the good qualifies because the resultant percentage is greater than the 45% required by the rule.
If instead, we use the build-up-formula:
Regional Value Content (RVC) = $250/$500 X 100 = 50%
The RVC is again 50% and is greater than the 35% required by the rule. With either method, the good specified in this example qualifies as originating under the CAFTA-DR.
Note: the percentage of RVC content may vary from 25 percent to 65 percent, so it is important that you review the specific requirements stated in Annex 4.1 for your goods.
A thorough reading of Chapter Four of the CAFTA-DR is necessary for anyone attempting to determine the origin of a product, and thus, whether it is eligible for preferential duty treatment. However, below are some of the factors, beyond the product-specific rules of origin, which may be considered in making a determination of origin.
De Minimis Rule
All non-originating materials used in the production of the finished good that do not undergo a change in tariff classification are considered originating if the value of all those non-originating materials does not exceed ten percent of the adjusted value of the good, i.e., the de minimis amount. This is provided that the good meets all other applicable qualification criteria set forth in Chapter 4. The de minimis rule does not apply when using the “build-down” method to calculate the RVC. The value of all non-originating materials used in the production of a good must be included in the calculation.
For textiles and apparel, please refer to Article 3.25.7 and Annex 4.1 of the CAFTA-DR for the relevant de minimis rule.
There are some cases where the de minimis rule does not apply. To review these exceptions, go to Annex 4.6 of the CAFTA-DR. For textiles and apparel refer to Article 3.25.7.
Originating goods or materials refers from one or more Parties to the CAFTA-DR that are incorporated into a good in the territory of another Party to the Agreement are considered originating materials of the Party where the incorporation takes place.
Reminder: A good is originating when the good is produced in the territory of one or more of the countries participating in CAFTA, provided that the good qualifies under the rules, as discussed above, of the CAFTA-DR.
Fungible Goods and Materials
Fungible goods or materials refers to goods or materials that are interchangeable for commercial purposes and whose properties are essentially identical. The CAFTA-DR allows importers to claim a fungible good or material as originating where the importer, exporter, or producer has either physically segregated each fungible good or material or used any inventory management system that is recognized in the Generally Accepted Accounting Principles or is otherwise accepted by the party where the production is performed. Examples of inventory methods include: averaging, last-in first-out (LIFO), or first-in first-out (FIFO). Please note that physical separation of the goods is not necessary, but may be used for each fungible good or material.
Indirect materials are considered to be originating materials regardless of where they are produced. An indirect material is defined as a good used in the production, testing, or inspection of a good, but not physically incorporated into the good, or a good used in the maintenance of buildings or the operation of equipment associated with the production of a good, including:
- fuel and energy;
- tools, dies, and molds;
- 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;
- gloves, glasses, footwear, clothing, safety equipment, and supplies;
- equipment, devices, and supplies used for testing or inspecting the good;
- catalysts and solvents; and
- any other goods that are not incorporated into the good but whose use in the production of the good can reasonably be demonstrated to be a part of that production.
Prepared by the International Trade Administration
Trade Information Center