U.S. CBP HQ Ruling May Signal New Approach to Country of Origin Determination
U.S. Customs and Border Protection (CBP) issued a ruling on June 16, 2021 (HQ H311606) which indicates that CBP may be changing its approach to determining the country of origin for customs purposes. “Country of origin” typically is relevant for “marking” purposes and for ascertaining whether goods are eligible to claim preferential treatment under a free trade agreement or otherwise are subject to the Normal Trade Relations rate of duty and other special tariffs, such as the Section 301 (of the Trade Act of 1974) “China tariffs.”
With the introduction of the 25% Section 301 China tariffs in 2018, many companies began to re-think their supply chains to try and shift production out of China to other countries, in part to avoid the new tariffs, but also because costs in China had risen dramatically. However, many affected parties were confused by CBP’s rules relating to the country of origin, especially in light of the 2016 decision of the U.S. Court of International Trade (CIT) in Energizer Battery, Inc. v. United States that provided a largely incoherent and unworkable framework for making this critical determination.
The basic CBP rule states that the “[c]ountry of origin means the country of manufacture, production, or growth of any article of foreign origin entering the U.S. Further work or material added to an article in another country must affect a ‘substantial transformation’ in order to render such other country the country of origin.” Over the years and as a result of various court decisions, the substantial transformation needed to confer origin was determined to occur when an article emerges from a manufacturing process with a “name, character, and use” that differs from the original material subject to the processing.
However, in the Energizer case, the CIT for the first time focused on the issue of the “pre-determined end use” of foreign components, i.e., if the end-use of imported merchandise (such as the raw materials needed to assemble a flashlight at issue in this case) was pre-determined at the time of importation, there generally could be no change in use. As a result, the “substantial transformation” standard was not met and the country of origin was determined to be the country of origin of the component that imparted the “essence” of the finished good. This approach and standard had not been applied in previous cases, and many customs professionals found the standard to be erroneous and unworkable.
For instance, in a 2020 decision (Cyber Power Systems (USA) Inc v. United States), the CIT questioned the standard established by Energizer, stating that “[t]he . . . component-by-component approach to the substantial transformation test would seem to make it practically insurmountable for subsequent-country, pre-determined assembly to ever constitute further work/substantial transformation of an article.”
CBP rulings over the past several years have grappled with the “Energizer conundrum” and have not been consistent in their outcomes. While every ruling is fact-specific, the standard applied by CBP should be uniform. The June 16 HQ ruling is welcome in that it indicates that CBP may be aligning its standard to a more workable framework that accounts for the individuality of each import transaction while adhering to the governing statute and regulations.
The ruling involved merchandise consisting of electronic drawing tablets (for animation and industrial design) produced in Taiwan. The drawing tablet was comprised of various Chinese and Taiwanese-origin components/parts, including three printed circuit board assemblies (PCBA) manufactured through the use of surface-mount technology (SMT) in Taiwan. All of the Chinese components/parts were sent to Taiwan for final assembly to manufacture the finished drawing tablet.
CBP was unable to ascertain the “dominant” component imparting the “essence” of the finished drawing tablet because both the Chinese and Taiwanese components played a vital role in the functionality of the tablet; thus, the agency decided to evaluate the nature of the processing operations to gauge where the most significant work involved in making the tablet was performed. CBP evaluated the extent and complexity of the work performed in China and Taiwan, finding that the physical production of components and firmware additions in Taiwan were more significant than the physical production of components in China. As a result, CBP ruled that the country of origin was Taiwan, even though the end use of the components imported into Taiwan from China was pre-determined at the time of importation. Thus, the ruling eliminated the need for the importer to pay the 25% China tariff.
More importantly, CBP HQ may have sent a subtle signal that adherence to the principles outlined in the Energizer decision may be coming to an end. Instead of ruling that the country of origin of the tablet was China because several major components had a pre-determined end use at the time of importation into Taiwan and that one of the Chinese-origin components provided the essence of the finished drawing tablet, CBP took a different approach by looking at the nature and complexity of the processing operations. This approach could serve as new roadmap for future country of origin determinations - and a welcome farewell to the widely criticized Energizer standard.
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