Rules of origin, traceability, and the road to tariff relief

The importance of rules of origin has always been central to international trade, and they are now re-emerging at the heart of trade policy debates in the form of traceability.

Rules of origin determine the “economic nationality” of a good, deciding if it qualifies for preferential or non-preferential treatment depending on whether the trade arrangement is unilateral, bilateral, or multilateral.

A recent example comes from the White House’s announcement on reciprocal tariffs: “For articles in which at least 20 percent of the value of the article is US-originating, the US content will not be subject to the reciprocal tariff. The reciprocal tariff will be assessed on the non-US content.” Executive Orders, April 2, 2025

This clause reshapes the tariff regime for all US trade partners, including Pakistan, offering some potential relief to exporters if they can verify the share of US-origin content in their goods. However, such verification is possible only through digital traceability, given Pakistan’s growing reliance on imported cotton and other textile inputs and the multilayered nature of its textile value chain.

As the world’s second-largest importer of US cotton and an exporter of value-added apparel to the US, Pakistan is well-positioned to benefit from this clause, but having a traceability platform in place is essential.

Understanding US rules of origin for Pakistan:

At present, Pakistan trades with the US primarily under non-preferential rules of origin, as there is no trade agreement between the two countries. These rules involve different requirements such as Regional Value Content (RVC), Wholly Obtained (WO), Change of Tariff Classification (CTC), and Special Technical Requirements (STR).

Table 1 highlights Pakistan’s top three tariff lines exported to the US and some of their corresponding rules of origin. All three products require strict compliance: goods can be labeled as ‘originating from Pakistan’ only if they meet a minimum of 35 percent regional value content, with just 7 percent leeway for non-originating materials. Accessories must have proof of origin and temporary outward processing is not allowed.

These requirements alone underscore why a robust digital tracking is essential.

Traceability for input verification:

Imported inputs are embedded deep in the value chain, and many exporting firms struggle to verify the exact content share due to production complexities. Verification is particularly important for Pakistan, as most of its textile exports are cotton-based, using mostly imported cotton along with locally produced fiber.

For context, during FY2025 Pakistan imported USD 838 million worth of cotton from the US, which is not all consumed in a single production cycle. To achieve desirable qualities such as fiber strength, colour, or texture, mills routinely blend US cotton with local cotton, and sometimes with cotton from other regions. From ginning to spinning, weaving to dyeing, and through garment manufacturing, each stage adds layers of complexity.

In the same year, Pakistan also imported USD 380 million worth of cotton yarn from China. Under UFLPA scrutiny of Xinjiang cotton, brands cannot be certain that restricted fibers are absent without robust traceability, even if paperwork appears compliant.

This makes verification of inputs critically important for all the right reasons.

US authorities, meanwhile, enforce compliance rigorously at every stage of trade. In FY2025, the US Customs and Border Protection (CBP) collected USD 166.7 billion in duties, taxes, and fees and issued 1,916 trade penalties before goods reached ports, at the ports, and even after entering the US marketplace.

Robust traceability can safeguard against such penalties, especially those related to circumvention and transshipment, where enforcement is tightening.

Beyond verifying inputs, traceability safeguards reputational credibility. Pakistan has already experienced rejected shipments of mango and rice due to non-compliance, and a similar incident in textiles could be far more damaging.

Towards a national traceability framework:

One can argue that traceability acts as a digital certificate for the rules of origin and having such a system in place is an essential investment. What is urgently required is a mandatory nationwide traceability plan in Pakistan, with cotton at its core. In this regard, APTMA has already secured approval for a cotton DNA testing lab, which will serve as the foundation for broader traceability.

With additional investment in infrastructure, here is how the system could be responsibly implemented:

At import stage, US cotton bales already arrive with electronic certification and bale IDs. Digital tracking must start internally from this point by logging these bales into a national digital traceability system.

Real-time tracking through processes will be required, whereby mills would record mixing ratios (e.g., 40 percent US cotton, 20 percent Brazilian cotton) linked to batch numbers. Yarn counts (e.g., 20s, 40s) would carry these blend ratios forward.

This will help with digital tagging of yarn and fabric, giving each batch an electronic identity showing its composition. As fiber content diminishes during processing, backup traceability allows identification of the actual content used. Final products could then be reported as containing, for example, “35% U.S.-origin cotton.”

With digital labelling, the final product will be verifiable for customs and buyers. US customs have state-of-the-art traceability systems that can instantly validate US content, allowing Pakistani exporters to secure tariff exemptions where applicable while giving buyers confidence in transparency and compliance.

US trade shifts spotlight need for traceability:

One important development in trade with the US was the suspension of the ‘De minimis’ rule in September 2025, which had previously allowed smaller shipments to enter duty-free. This change now affects 3.7 million shipments, including small apparel orders from Pakistan, which would need to either absorb duties or pass them on to buyers, both of which reduce competitiveness and discourage small-scale exporters. Therefore, there is an increasing need for accurate invoicing, harmonized codes, and precise value declarations, as even minor errors could trigger higher tariffs - an issue that a robust traceability system could address.

Alongside these complex rules of origin, the US administration’s September 5, 2025, notification confirmed that reciprocal tariffs will not be narrowed without a trade and security agreement with its partners. The likelihood of tariff reductions therefore remains uncertain. What is certain, however, is that a one-time investment in a credible traceability system can help Pakistani businesses mitigate these risks.

Amid high costs of doing business, some of Pakistan’s largest apparel export houses have already suspended operations, while many others struggle to maintain them. Given the vulnerability of the trade environment, every avenue to boost competitiveness must be pursued.

Going forward, a robust traceability system can streamline trade for Pakistani exporters and enable the government to negotiate preferential rules of origin and tariff treatment beyond the current 20 percent US content requirement, provided the exact share of US inputs in apparel shipments is verified.

Copyright Business Recorder, 2025