CBAM and Country of Origin – Is Origin Becoming a Loophole?

The importance of the country of origin

The EU Carbon Border Adjustment Mechanism imposes a CO₂ price on certain imports if no comparable emissions trading system exists in the country of production. The goal is to avoid competitive distortions and prevent carbon leakage. While this may sound like a purely technical process, it touches on a central element of international trade law in practice: the determination of a product’s country of origin. Because when it comes to deciding whether a product falls under CBAM, it’s not only about the tariff classification - the country of origin also plays a decisive role. And this is precisely where it becomes clear: those who undermine the rules of origin can also circumvent CBAM.

What does “country of origin” mean in international trade?

In international trade, a product’s country of origin is not determined solely by where it was physically manufactured. The determining factor is the concept of “substantial transformation.” This means a product can be considered to originate in another country if it undergoes significant processing there - such as a production step that alters the character of the goods. This principle is essential for the application of trade agreements, customs duties, and regulatory instruments like CBAM. For instance, if a Chinese aluminum product is merely repackaged or minimally processed in Switzerland, the origin remains China. However, if substantial transformation takes place, the product may officially be considered Swiss - and might therefore be exempt from CBAM.

Circumvention strategies: What the US is currently observing

A recent report by the Financial Times shows just how fragile this system can be. After the United States under President Trump imposed massive tariffs of up to 145 percent on imports from China, Chinese exporters have responded with creative strategies. One commonly used approach is to reroute goods through third countries like Malaysia, South Korea, or Vietnam. There, new certificates of origin are issued to make the goods appear as if they originated from these countries in order to benefit from lower tariffs. South Korean customs authorities have already reported a noticeable increase in false declarations of origin. In the first quarter of 2025, goods worth over 20 million US dollars were identified that originated in China but were falsely declared under other countries of origin. On Chinese social media platforms, there are also numerous ads explicitly offering “origin-washing” services. This is not just an American problem. CBAM could also be affected if goods are rerouted with falsified origin information to avoid the CO₂ levy. Especially in cases where default values are used for emission calculations or where country-specific exemptions or reliefs apply, there is a strong incentive to manipulate origin intentionally.

CBAM needs clear origin rules

CBAM includes several mechanisms that make the origin of a product relevant. For example, carbon prices already paid in the country of production can be credited under certain conditions. There are also exemptions for specific countries or regions. Additionally, the application of country-specific default values depends critically on the origin. But all of this only works if the origin is reliably determined and verifiable. And this is where improvement is needed. Unlike traditional customs duties, CBAM currently lacks a clearly defined verification process for origin. The risk is that goods from high-emission countries could be imported through third countries without detection. The European Commission is aware of this issue and is planning an anti-circumvention strategy for the second half of 2025. The determination of origin is likely to play a central role in this strategy. Only by knowing the true origin of a product can a fair and effective carbon price be applied. Given that origin will influence CBAM costs via default values in many cases, it should be treated with the same importance as in preferential trade agreements.

Conclusion

The debate around origin-washing shows that CBAM is not just a technical tool for carbon pricing, but also a complex trade policy instrument. If companies are able to avoid carbon charges by misrepresenting origin, the entire system is undermined. What is needed are clear rules for determining origin, transparent verification processes, and close cooperation with third countries. Companies that import CBAM-covered products should now assess their supply chains for potential risks - and ensure that origin data is cleanly documented and verifiable. Because in case of doubt, the question of origin may determine whether CBAM obligations apply.

Support with implementation

If you want to know how the rules of origin affect your CBAM obligations or whether your supply chains are documented in a legally compliant manner, feel free to contact us directly at helge@kolum.earth.