The U.S. Customs and Border Protection (CBP) issued a Notice of Proposed Rulemaking (NPRM) July 25, 2008, concerning a proposed shift in the way country of origin determinations for imported merchandise are determined. See 73 Fed. Reg. 43385.
Simply stated, CBP’s NPRM seeks to withdraw the almost century-old country of origin determination rule of “substantial transformation” in favor of the more objective tariff shift rules found in the current North American Free Trade Agreement (NAFTA) Marking Rules of 19 C.F.R. Part 102. CBP requests comments on the NPRM by September 23, 2008.
CBP believes that the extension of the Part 102 country of origin rules to all import transactions will “result in determinations that are more objective, transparent, and predictable and will therefore facilitate the exercise of reasonable care by importers with respect to their obligations regarding the identifi cation of the proper country of origin of imported merchandise.”
According to CBP, administration of the substantial transformation standard has been problematic due to the subjective nature of the inquiry, requiring a case-by-case, fact-based analysis. For the past decade, CBP has been actively participating in the ongoing effort to harmonize rules of origin at the international level with the World Trade Organization and World Customs Organization. The prevailing international standard tends to focus on more objective tariff classification changes in order to express the substantial transformation, rather than a case-by-case application.
Current Origin Determination Methods
There are currently two primary methods under the regulations for determining the country of origin of goods imported into the United States that are processed in, or contain materials from, more than one country. The first method is based upon a case-bycase analysis of the good to determine whether it has been “substantially transformed” in a particular country by processing or manufacturing operations that result in a product with a new name, character and use. The second method uses rules codifi ed in Part 102 of the CBP regulations applied under the NAFTA to determine whether a good has been “substantially transformed” through defined changes in tariff classification, which CBP refers to as the “codified method.”
The codified method in 19 C.F.R. § 102.20 currently is applied to determine origin for NAFTA transactions (other than textile and apparel products, which are separately covered by 19 C.F.R. § 102.21). CBP estimates that 40 percent of total U.S. imports utilize the codifi ed country of origin method, which represents all NAFTA and textile and apparel imports. The country of origin for the remaining imports is currently determined under the case-by-case or “substantial transformation” method.
Proposed Application of Origin Determination Methods
The proposed breakdown for applying country of origin determinations in the future would encompass all situations in which CBP requires the importer to indicate a “product of” or “country of origin” criterion under the customs and related laws, the navigation laws of the United States and the CBP regulations. An exception to this rule would be the determination whether a good, other than a textile or apparel good, is entitled to preferential treatment under the free trade agreements with Israel or Jordan, or if another rule is otherwise specified or provided for by statute.
According to the proposal, the Part 102 rules would be used to determine whether a good meets the “product of” criterion for receiving duty preference under the Generalized System of Preferences (Harmonized Tariff Schedule of the United States (HTSUS) General Notes (GN) 4(b) and (c)); the Caribbean Basin Economic Recovery Act (HTSUS GN 7(b)); the Andean Trade Preferences Act (HTSUS GN 11(b)); the African Growth and Opportunity Act (HTSUS GN 16(b)); the U.S.-Morocco Free Trade Agreement (HTSUS GN 27(b)(ii)); and the U.S.-Bahrain Free Trade Agreement (HTSUS GN 30(b)(ii)), among others). Any applicable value-content requirements and any other rules under these programs, however, must be satisfi ed for a good to qualify for duty preferences.
CBP notes that origin-related scope determinations made by the Department of Commerce for trade remedy purposes may differ from CBP origin determinations made for customs purposes. If there are differences between the Department of Commerce origin determination and that made by CBP, the origin-related scope determination is to be applied for trade remedy purposes only and does not alter CBP’s origin determination for customs purposes.
Modifications to Tariff Shift Rules for Five Product Areas
Additional changes proposed in the NPRM include modifi cations to the specific tariff shift rules within 19 C.F.R. § 102.20 applicable to five specific product areas, for which the origin determination outcomes of the two systems (case-by-case application and Part 102 rules) have been particularly inconsistent.
These products are printed greeting cards classifi ed in HTSUS heading 4909; fittings and flanges classified in HTSUS heading 7307; glass optical fiber classified in HTSUS subheading 9001.10; rice preparations classified in HTSUS subheading 1904.90; and certain textile products.
With respect to the textile products, the NPRM proposes amendments to the textile regulations in 19 C.F.R. § 102.21 to more closely align the regulations with the language of 19 U.S.C. § 3592 and to remedy an oversight in the drafting of the tariff shift rule for goods of HTSUS heading 6212, as set forth in 19 C.F.R. § 102.21(e).
We encourage importers to review the linked Federal Register notice in detail and submit comments in support of, or in opposition to, CBP’s NPRM by the September 23, 2008, deadline. The uniform application of the codified approach to country of origin for most imports would simplify the process of determining a product’s origin if it is processed in multiple countries, or contains components or materials from more than one country, since the only consideration would be the review of the applicable tariff classifi cation rule.
While this change would provide more objectivity through the tariff shift rules, it would emphasize even more signifi cantly the importance of tariff classifi cation, not just for the fi nished product, but also for the raw material inputs. Importers should ensure their classifi cations are in good order since an incorrect classification of a raw material input could result in an incorrect origin determination, and lead to potential penalties.
If this proposal is adopted, it would require importers to review their imported products to determine if the country of origin previously assessed using the case-by-case basis “substantial transformation” test is the same as the origin that results when applying the Part 102 rules based upon the tariff classifi cation shift.
In addition, importers should review at least a portion of the relevant tariff shift rules for their products and notify CBP if the Part 102 analysis for key product lines or supply-chain scenarios produces unfavorable results. CBP may be amenable to making other changes to the tariff shift rules, which it proposes to do for the products described above.