When two or more countries form a free-trade area (FTA), they agree to eliminate duties on substantially all merchandise trade “originating” in that area but retain complete control of their trade relationships with other countries. FTA agreements are commonly known as free trade agreements. Many are “comprehensive” in the sense that they also cover trade in services, trade-related aspects of intellectual property and other aspects of trade relationships between countries.
“Rules of origin” are required to determine whether an individual product has originated in a free-trade area. They specify the minimum level of processing or manufacture that every merchandise category that would otherwise be subject to tariffs must have undergone to qualify for duty-free trade. The need for rules of origin in free trade agreements was first recognised in 1958 when the UK and other countries which would eventually form the European Free Trade Association (EFTA) were in talks about an FTA with the nascent European Economic Community (now the EU). Carefully negotiated rules of origin lay at the heart of the EFTA agreement when it was finally signed in 1960.