After years of consideration and delay, the U.S. Customs and Border Protection (CBP) on July 25, 2008, published a proposal for sweeping changes to the country of origin rules for imported articles. CBP proposes to replace the existing system of case-by-case “substantial transformation” determinations with a uniform system of “tariff shift” rules based on the NAFTA country of origin marking rules codified in Part 102 of the CBP Regulations (19 C.F.R. 102).1
While the proposed change is intended to simplify the process of country of origin determinations rather than to change outcomes, the importing public should be aware that the tariff shift proposals could, accidentally or by design, change outcomes under the existing substantial transformation rules. Thus, importers and U.S. consumers of imported products should evaluate whether the proposed tariff shift rules would affect them.
Exporters, importers and U.S. end-users should also note that tariff shift rules, while possible easier for CBP to administer, could ultimately be more costly and complex for importers, requiring them to engage in a fact-intensive analysis of the source and tariff classification of multiple parts, components and intermediate products used in the imported articles in order to determine the country of origin.
Comments on the proposal are due on, or before, September 23, 2008.
Background – The “Substantial Transformation” and “Tariff Shift” Rules
All merchandise imported into the United States is subject to a country of origin determination. The origin of imported goods is determined for various purposes, including admissibility into the United States, eligibility for preferential trade programs, country of origin marking requirements, and administration of the U.S. textile import program.
Under current regulations, there are two primary methods that CBP uses to determine the country of origin of imported goods that are processed in, or contain materials from, more than one country. The most prevalent method, “substantial transformation,” employs a case-by-case analysis to determine the country in which the last substantial transformation occurs A substantial transformation occurs when the processing of the article results in a new and different article having a distinct name, character, or use.2
An alternate method for determining origin is to examine specified changes in the tariff classification of the article before and after processing in a particular country. Under this method, if the components or raw materials used to produce an article undergo the specified change in tariff classification for the imported article in a country, the article is deemed to originate in that country. This “tariff shift” method has been applied principally to the marking of goods imported from Canada and Mexico under the NAFTA Marking rules in Part 102 of the CBP regulations. 3 CBP’s proposal will extend the NAFTA Marking tariff shift rules, with certain modifications,4 to virtually all other imported articles and import programs, including:
- All non-preferential imports
- Government Procurement under the Trade Agreements Act
- Imports from U.S. insular possessions
- West Bank, Gaza Strip, or qualifying industrial zones
- Generalized System of Preferences (GSP)
- Caribbean Basin Economic Recovery Act
- Freely Associated States
- Andean Trade Preferences Act
- African Growth and Opportunity Act
- U.S.-Morocco Free Trade Agreement
- U.S.-Bahrain Free Trade Agreement
Notable exceptions to the proposed tariff shift rules are country of origin determinations for purposes of the trade remedies laws (antidumping and countervailing duty cases), and the U.S.- Israel and U.S.-Jordan free trade agreements. Applicable value-added requirements in various free trade agreements would continue to apply.
Importers Beware – Tariff Shift Rules May Upset Existing Origin Determinations
The NAFTA Marking Rules on which this proposal are based were adopted in 1994 with the express intention of codifying origin determinations under the existing substantial transformation system. Therefore, in principle, the proposed extension of the NAFTA Marking Rules is not expected to significantly change outcomes under the previous substantial transformation rule.
However, origin determinations under the substantial transformation rule are highly individual factintensive exercises that often are difficult to translate into generally applicable tariff shift rules. This type of problem was encountered during the adoption of the NAFTA Marking Rules, where several modifications had to be made to conform the tariff shift rules to the outcomes reached under established substantial transformation rulings.
Such problems of consistency are likely to be again encountered as these tariff shift rules are applied more broadly. Importers are therefore strongly urged to work closely with their legal counsel to review the NAFTA Marking Rules to ensure that they accurately reflect established understandings and outcomes under the substantial transformation system.
Importers should also beware that even where the outcomes under the tariff shift rules are not objectionable, the tariff shift system may only replace one complex and uncertain system with another. For example, the tariff shift system imposes potentially higher transactions costs on importers because all components, ingredients, or inputs used in a manufacturing process will now need to have their origin traced, documented, and accurately classified under the tariff nomenclature. Moreover, tariff classification is itself a complex and, at times, highly technical and uncertain endeavor. As a result, these requirements, though in some respects simpler for CBP to administer, may have a major adverse impact on companies importing products with components or inputs originating from different countries.
Opportunity for Comments
Comments are being accepted by CBP through September 23, 2008. Please feel free to contact us if you have any questions concerning the above information, or if you wish to discuss preparing comments regarding this proposed important change in Customs law and policy.