• Proposed Codification of Rules to Determine Country of Origin of Goods Has Wide-Reaching Implications
  • August 29, 2008 | Authors: Frederick L. Ikenson; Peggy A. Clarke
  • Law Firm: Blank Rome LLP - Washington Office
  • U.S. Customs and Border Protection (“CBP”) has proposed an overhaul of the rules used to determine the country of origin of imported and domestic merchandise.  See 73 Fed. Reg. 43,385 (July 25, 2008), http://edocket.access.gpo.gov/2008/E8-17025.htm.  A product’s country of origin is critical to compliance with numerous legal requirements relating to country of origin marking, admissibility into the United State, dutiability, quota administration, and government procurement, among other things.  U.S. importers and exporters, foreign exporters, and bidders for government contracts will be well-advised to study the impact of the proposed changes.  Additionally, interested persons may wish to avail themselves of the opportunity to comment on CBP’s proposal, the deadline for which is September 23, 2008.

    Under current law, when a good is subject to processing in more than one country, origin is mainly determined on a case-by-case basis by application of the so-called “substantial transformation” test.  Simply stated, that test is whether the processing of an article in a country results in its substantial transformation into a new and different article of commerce, having a new name, character, and use.  While the substantial transformation test has been used for decades, and while a not insubstantial body of administrative and judicial law has developed around it, the results have often been viewed as subjective, inconsistent, and difficult to administer.  Consequently, CBP is proposing to replace the case-by-case approach with a rules-based approach, which is currently being used to ascertain the origin of textiles and, for certain purposes, the origin of products of NAFTA partners Canada and Mexico.  At the core of the proposed rules-based system is the notion of tariff shift – i.e., whether processing in a country results in a specified change in tariff classification, subject possibly to additional requirements.  CBP has attempted to codify the existing body of case law into the rules that it has proposed.

    This change will also affect areas beyond the normal import of goods.  Among the other situations affected are the following:

    • HTS 9802:  whether goods sent abroad for assembly are U.S. originating so as to be  entitled to a duty reduction;
    • Government Contracting:  whether items are considered to originate in the United States or a Trade Agreements Act country;
    • Certain Tariff Preference Programs:  whether goods are eligible for preferential duty treatment under such statutory programs as the Generalized System of Preferences; and
    • Maritime – Coastwise Transportation of Merchandise:  whether offshore processing of goods affects Jones Act restrictions.

    It would be prudent for compliance officers and others at affected businesses to understand fully the impact of the proposed rules on their operations.  To the extent that members of the trade and government contracts communities can demonstrate that (1) a specific proposed rule fails to codify existing law or (2) in the absence of a clear statement of current law, a proposed rule will lead to an inappropriate result, such parties will wish to give serious consideration to submitting their views by the administrative deadline.