Determining the country of origin of imported articles has become increasingly important in recent years. There has long been a requirement that imported articles be marked with the name of the country of origin. Country of origin also determines eligibility for special duties or free trade agreements. Now with the number of Antidumping and Countervailing duties dramatically increasing, the imposition of Section 232 and 301 duties on products of certain countries, and new or changed free trade agreements, the definition of country of origin has taken on greater importance.
According to Part 134.1 of the Customs Regulations, “Country of origin” means “the country of manufacture, production, or growth of any article of foreign origin entering the United States. Further work or material added to an article in another country must effect a substantial transformation in order to render such other country the ‘country of origin’ within the meaning of this part.”
The easiest determinations of country of origin are for natural products, such as fruits, vegetables, lumber and grains. This category also includes other products taken from the natural resources of a single country, such as metals and minerals. The country of origin of such products is the country in which they were grown or mined. From this point on, it gets more complicated.
Suppose a product is manufactured in Country C using parts and materials from Country A and Country B. Is Country C the country of origin? Well….maybe.
There have been a couple of court cases that give guidance on the subject of “substantial transformation.” The first is the U.S. Supreme Court case of Anheuser-Busch Brewing Ass’n v. United States, 207 U.S. 556, 562 (1908) in which the court stated that “manufacture implies a change, but every change is not manufactured. There must be transformation; a new and different article must emerge, having a distinctive name, character, or use.”
Another case is United States v. Gibson-Thomsen Co., Inc., 27 C.C.P.A. 267 (C.A.D. 98) (1940). In this case the U.S. Court of Customs & Patent Appeals stated that a product “undergoes a substantial transformation if, as a result of further manufacturing or processing, the product loses its identity and is transformed into a new product having “a new name, character, and use.”
New name, character and use must be read in the conjunctive – the parts and materials making up the end item must be changed into something having a new name and a new character and a new use – not the best one or two out of three.
So – you think this is all clear? Maybe it needs more clarification. Let’s look at some other rulings and court cases.
The U.S. Court of International Trade considered substantial transformation in Uniroyal v. United States (3 CIT 220, 1982). This case involved whether attaching an outsole (resembling a moccasin) to imported shoe uppers was a substantial transformation. The court said it was not; largely because the basic nature of the product – a shoe – was not changed by this attachment.
This ruling added some factors to be considered in determining whether a substantial transformation has taken place, including the time involved in the operation, the cost of performing the operation, and the comparative skilled operations involved in the original manufacture and the additional operations being performed. Simply combining materials and components may not be enough, as these other factors must be considered in a substantial transformation and determination of country of origin.
In Energizer Battery Inc. v. United States (190 F. Supp. 3rd 1308, 2016) the court ruled again on the issue of substantial transformation. In this instance preformed flashlight components were imported into the U.S. and assembled into flashlights. The issue was whether the flashlights would be considered U.S. origin for the purpose of government procurement. The court used the name, character and use test. They noted that when “the post-importation processing consists of assembly, courts have been reluctant to find a change in character, particularly when the imported articles do not undergo a physical change” and also that “when the end-use was pre-determined at the time of importation, courts have generally not found a change in use.” Furthermore, they found that the individual flashlight parts did not undergo a change in character or use by being assembled; especially where the assembly process was simple. There was no substantial transformation in this instance.
A recent CBP ruling that drew some attention was HQ H305370 of Oct. 11, 2019. The ruling involved three electric motor components of Chinese origin imported into Mexico, assembled into complete motors and subsequently imported into the U.S. The ruling cited both the Uniroyal and Energizer decisions in determining that assembling the three components in Mexico did not change the country of origin. CBP noted that the assembly was simple, and the components did not undergo a physical change. The country of origin remained China and the motors took the additional 25% Section 301 duty.
Where does this leave us? Simply moving the final production or assembly of a product from one country to another may not be enough to change the country of origin. To effect a substantial transformation:
- Parts having a predetermined use due to their design and characteristics may not undergo a change in use. To have a change in use it may be necessary to have raw or basic materials, such as raw plastic or sheet metal, that are converted into a new component then assembled into the end product.
- A simple assembly, done quickly by a semi-skilled worker or a robotic machine, may be insufficient for substantial transformation. For substantial transformation to occur it may require a detailed process and/or highly skilled workers.
- Time and cost are important factors. A simple assembly involving 5 or fewer parts may not change the country of origin. Making a television with use of dozens of parts and materials, sophisticated machinery and hours of work will more closely resemble substantial transformation.
Thinking of moving production from China to another country to avoid the Section 301 duties? Better make sure it will change the country of origin or an expensive move may be in vain.