The importance of origin in trade with the United States

By Peter Mitchell CPA, CA, presenter at CPA Alberta’s Peer-to-Peer Forum on Tariffs in Transition: Strategies for a Changing Global Market

Companies that produce goods in Canada for export to the United States (US) are facing customs and trade issues that have been dormant for decades. This is particularly true where their goods contain significant foreign-sourced raw materials. The issues have arisen from two recent initiatives of the Trump administration.

First, effective March 4, 2025, the US imposed a 25% tariff on imports of goods originating in Canada which do not qualify as originating under the USMCA Rules of Origin. Canadian manufacturers whose goods are duty free under the general American tariff schedule have been forced to confront these two different concepts of “origin” for the first time. Some Canadian manufacturers whose goods are subject to low tariffs under the general tariff schedule have also decided to take a closer look at their origin determinations.

Second, in early February, the US began ramping up the tariffs it imposes on goods originating in China. By early May, the blanket tariff on all Chinese goods had increased to 145%, in addition to the general tariff schedule rate and special tariffs imposed on certain goods, such as steel and aluminum products. The Trump administration recently reduced the blanket 145% tariff to 30% for a 90-day “cooling off” period. In response to this initiative and the uncertainty it has created, some American manufacturers that use significant Chinese raw materials have begun looking north to assemble their goods in Canada, which does not impose a blanket tariff on goods of Chinese origin.^[1] Some Chinese manufacturers that rely on access to the American market are looking at assembling a portion of their goods in Canada.

Two different types of origin

What do the words “origin” and “originating” mean? To confuse matters, there are two types—country of origin and preferential origin under a free trade agreement.

The country of origin of a good is generally the nation where it is manufactured, which may be different from the nation from which it is exported. However, not all forms of manufacture confer origin.

Preferential origin confers preferential (often zero) tariff treatment on qualifying goods produced collectively in the countries which are parties to a free agreement such as the USMCA.  A good may qualify as originating under the USMCA if it is produced collectively in the US, Mexico, and/or Canada. For example, many automotive goods undergo production operations in all three countries.

Goods that are “wholly-originating”

If a good is wholly composed of components or materials derived from a single country, that is its country of origin. For example, wheat grown in Canada is of Canadian origin, as is multigrain flour milled in Canada using only grains and other ingredients grown in Canada.

Similarly, if a good is wholly composed of components or materials derived collectively from the countries which are parties to a free trade agreement, the good will qualify for preferential tariff treatment under that agreement.  For example, wheat grown in the United States and exported to Mexico qualifies for tariff-free treatment under the USMCA, as does multigrain flour milled in the US using only grains and other ingredients grown in the US and Canada.

Determining country of origin and preferential origin becomes more complicated where a good contains raw materials originating in foreign countries. In this common situation, the underlying principles for determining the two types of origin are quite different.

Country of origin: The substantial transformation principle

For goods imported into the US, the country of origin is the country where the last “substantial transformation” in production occurs. Substantial transformation involves a common law legal principle first set out in the 1908 decision in Anheuser Busch^[2], where the United States Supreme Court stated that “manufacture implies a change, but every change is not manufacture. There must be transformation; a new and different article must emerge, having a distinctive name, character, or use.” Only a change in one of the parameters—name, character or use—is required.

While the US Customs and Border Protection Agency (CBP) has in some rulings taken the position that an article’s origin is the origin of its “essential” or “key” parts, the courts have said this is not the proper test. An assembly which is “complex and meaningful” can effect a substantial transformation, even if most or all of the component parts come from a single foreign country. However, assembly operations that are “minimal or simple” generally will not result in a substantial transformation.

Preferential origin: Tariff shift and regional value content

Where components or materials originate in countries other than the parties to a free trade agreement, the rules of preferential origin under that agreement are not based on the principle of substantial transformation. Rather, the rules are based on one or more specific tests, of which the most common are “tariff shift” and “regional value content”. The rules are product specific and often several hundred pages long, following the tariff classification of the finished goods to the six-digit subheading level.

The most common rule of origin test under the USMCA is tariff shift, which involves a comparison of the tariff classification of the raw materials to the tariff classification of the finished good. The test is generally set out in the product-specific rules as a range of subheadings or headings. For example, the tariff shift test for subheading 8479.10 (Machinery for public works) reads in the relevant part “A change to subheading 8479.10 …. from any other subheading.” That means that all materials or components that go into its manufacture must be classified elsewhere in the Harmonized System than in subheading 8479.10. However, there is a “de minimis” rule which provides that, if materials or components having a cumulative value that is less than 10% of the net cost or transaction value of the finished good were classified in subheading 8479,10, the finished good would still qualify.

The second most common rule of origin test under the USMCA is regional value content.  In general terms, the regional value content is the ratio of the value of production, including profit, within the free trade area (collectively, the US, Canada, and Mexico) to the transaction value (adjusted selling price) or net cost of the finished good.

Some product-specific rules of origin include only a tariff shift test, while others include only a regional value content test. Some require both.

Common misconceptions

One common misconception is that goods originate in the country from which they are shipped. That is not true. For example, a pair of soccer boots manufactured in Indonesia, shipped to a warehouse in Canada, and subsequently sold to a customer in the US remains of Indonesian country of origin. Further, they do not qualify for tariff-free treatment under the USMCA.

Importers and exporters often confuse the two types of origin. For example, many initially assume that the test for Canadian (or Mexican) country of origin for goods imported into the US is whether the goods qualify under the USMCA Rules of Origin. As discussed above, the actual test for country of origin is substantial transformation. In many cases, exporters must meet both tests to obtain the best US tariff treatment.

Why this matters

Failing to understand or properly apply origin rules can result in unexpected tariffs, delays at the border, or even penalties. Given the sharp increase in US tariffs and trade scrutiny on many Canadian-origin goods, especially those with significant Chinese-origin raw materials, Canadian manufacturers who export to the US should:

• Review where and how their products and raw materials are made,
• Determine whether their products meet the substantial transformation test, and
• Confirm whether their products qualify under USMCA rules.

In today’s volatile trade environment, accurate origin determinations are not just a legal formality—they’re essential to maintaining access to the US market and protecting your bottom line.

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^[1] Canada does impose special tariffs on specific Chinese goods such as steel and aluminum products and electric vehicles.

^[2] Anheuser-Busch Brewing Ass’n v. United States, 207 U.S. 556, 562 (1908)