On July 25, 2008, U.S. Customs and Border Protection ("CBP") proposed major changes to the rules governing how CBP determines the country of origin of imported merchandise. If adopted, CBP would abandon its longstanding practice of determining country of origin based on a "case-by-case" method, and instead, rely exclusively on the NAFTA country of origin marking rules in 19 CFR §102.20 (the "102 Rules").
CBP's proposal is intended to streamline and simplify country of origin determinations for both traders and CBP officials. This change has far-reaching implications for country of origin determinations related to non-preferential trade, U.S. preference programs and some U.S. free trade agreements. However, the proposal's scope has important limitations as well, most notably for origin-related scope determinations in U.S. trade remedy proceedings, and most U.S. free trade agreements ("FTAs").
Comments on the proposal are due by September 23, 2008.
From Subjectivity to Objectivity? A Shift From the Case-by-Case Method to Tariff Shift Rules
All goods imported into the United States must identify a country of origin, whether for marking purposes, eligibility for preference under U.S. free trade agreements or preference programs, or for statistical purposes.
CBP currently applies two methods to determine the country of origin of imported goods, namely, the "case-by-case" method based on the country of last substantial transformation, or, alternatively, by examining specified changes in tariff classification, commonly referred to as "tariff shift" rules.
The more subjective, case-by-case method, is based on the seminal U.S. Supreme Court case, Anheuser-Busch Brewing Assn. v. United States, 207 U.S. 556 (1908), which established the current standard for substantial transformation, as a process that results "in a new and different article of commerce, having a distinctive name, character or use" (Anheuser-Busch Brewing Assn. v. United States, 207 U.S. 556, 562 (1908)). While the case-by-case method has been used for decades, it has also drawn criticism from the trading community and CBP officials for being too subjective, prone to inaccuracies and, in certain instances, producing inconsistent country of origin determinations.
In 1991, CBP began to address these concerns by adopting a second, more objective method of determining country of origin, expressed through specified changes in tariff classification. Under the tariff shift method, CBP determines the country of origin of imported merchandise based on the country where the imported article underwent the specified change tariff classification. The tariff shift rules, which were first adopted in 1991, evolved and eventually became the NAFTA country of origin marking rules codified in 19 CFR §102.20. CBP's proposal would expand the application of the 102 Rules well beyond NAFTA with several notable exceptions.
The Scope of CBP's Proposal
CBP's proposal would expand the scope of application of the 102 Rules from NAFTA country of origin marking, to all purposes for which a "product of "1 or "country of origin" determination is required, including the following:
- non-preferential importations
- government procurement under the Trade Agreements Act
- imports from U.S. insular possessions
- freely associated states
- imports from the West Bank, Gaza, or Qualifying Industrial Zones ("QIZs")
- U.S. preference programs
- Generalized System of Preferences ("GSP")
- Andean Trade Preference Act ("ATPA")
- Caribbean Basin Economic Recovery Act ("CBERA")
- African Growth and Opportunity Act ("AGOA")
- U.S. - Bahrain Free Trade Agreement; and
- U.S. - Morocco Free Trade Agreement.
CBP also intends to apply the 102 Rules to all future FTAs that use the substantial transformation standard. This would include the Oman FTA (once implemented), the eventual United Arab Emirates FTA, and possibly future FTAs with countries in the Persian Gulf, North Africa, and Sub-Saharan Africa.
It is important to note that the while the 102 Rules would satisfy the "product of" or "country of origin" requirements, applicable value-content requirements must still be met in order for goods to qualify for preferential treatment under all U.S. preference programs, including preference programs for the West Bank, Gaza, the QIZs, and the U.S. - Bahrain and U.S. - Morocco FTAs.
It is also noteworthy that the 102 Rules will not be used to make preference determinations for those FTAs that have comprehensive product-specific rules, including:
- U.S. - Australia FTA
- U.S. - Central American - Dominican Republic FTA (CAFTA-DR)
- U.S. - Chile FTA
- U.S. - Colombia FTA (pending Congressional passage)
- U.S. - Panama FTA (pending Congressional passage)
- U.S. - Peru FTA (pending implementation)
- U.S. - Singapore FTA
- U.S. - South Korea FTA (pending Congressional passage
Other notable exceptions to the use of the 102 Rules include the U.S. - Israel and U.S. - Jordan FTAs (for goods other than textile and apparel goods) where CBP will continue to use the case-by-case method, and for origin-related scope determinations for purposes of U.S. trade remedy proceedings.
1. "The term ‘product of' encompasses any requirement that a good be ‘wholly the growth, product or manufacture' of a country; substantially transformed in a country; a new and different article of commerce as a result of a processing performed in a country; or the growth, product or manufacture of a country." (See 73 FR 43385, 43390; July 25, 2008)
Changes to Certain Tariff Shift Rules
CBP's use of the case-by-case and tariff shift methods for determining country of origin has, in certain cases, produced inconsistent and contradictory country of origin results. In response to this and to prevent such inconsistencies on a prospective basis, CBP proposes to revise the 102 Rules for six products where the two methods have produced inconsistent country of origin determinations, including, pipe fittings and flanges (7301 - 7307), greeting cards (4901 - 4911), glass optical fiber (9001.10), rice preparations (1904.90), plastic laminated fabrics (5903), and knit-to-shape body supporting garments (6912).
Will the Uniform Rules Deliver Uniformity for the Trading Community and CBP Officials?
The stated goal of CBP's proposal is to deliver greater predictability, certainty and uniformity to country of origin determinations for the trading community and CBP officials. But, will the proposal achieve such lofty goals, or only replace one imperfect method (i.e., the case-by-case method) with another imperfect method (i.e., the 102 Rules)
The proposal will make it even more important for importers to properly classify importations because the 102 Rules -- based on tariff classification -- will be the sole factor used to determine the country of origin of imported merchandise. As a result of the heightened importance of proper tariff classification, it is likely that CBP's proposal will lead to an increase in classification ruling requests by prospective importers seeking to avoid erroneous tariff classifications which could lead to improper country of origin determinations. Thus, importers, exporters and brokers should consult with knowledgeable customs counsel prior to the importation of merchandise to ensure that their goods are properly classified and consider seeking a classification ruling, both of which will help to ensure that the importer provides the proper country of origin on its U.S. customs importation forms (e.g., CF-3461: Request for Immediate Entry, and CF-7501: Entry Summary).
CBP's proposal leaves many questions unanswered. It is unclear whether importers will be subject to a different standard of reasonable care under the application of the 102 Rules compared to the former case-by-case method. Even more uncertain is the impact of the proposal on the decades of Court of International Trade case law and CBP rulings on country of origin. Will the 102 Rules effectively overturn contradictory and/or inconsistent customs rulings and case law on country of origin, or will the 102 Rules only apply prospectively, leaving in-place existing precedent and country of origin rulings? Hopefully, CBP will address these questions during the comment period which will help the trading community assess the overall impact of the proposal.
It is also noteworthy that CBP has not yet updated the 102 Rules to reflect the 2007 Harmonized System nomenclature. The fact that the 102 Rules do not reflect the current 2007 HS could make more difficult the trading community's task of assessing the impact of the 102 Rules.
Lastly, importers that regularly import under NAFTA are well-positioned to implement CBP's proposal because they already use the 102 Rules for purposes of NAFTA country of origin marking. However, for importers that are less regular users of NAFTA or for importers that are not familiar with the mechanics of complying with tariff shift rules, these rules will take time to adjust to.
The change from the current case-by-case method to the exclusive use of the 102 Rules raises legitimate policy and technical questions to which CBP should respond during the comment period. In the vast majority of cases, the 102 Rules should not contradict existing customs rulings or case law which applied the case-by-case method to determine country of origin. This is at least in part because CBP has long strived to ensure consistency in country of origin determinations between the case-by-case method and the 102 Rules, and has for some time been informally guided by the 102 Rules in making country of origin determinations under the case-by-case method.
The adoption of the 102 Rules may, on balance, offer trade facilitative benefits to many in the trading community and to CBP officials, including more certain and predicable country of origin determinations. However, as with the adoption of any new import customs regime, the exclusive use of the 102 Rules will also mean a period of change and uncertainty for many other traders, who have long relied on the case-by-case method.
For further information, please contact:
Richard Abbey, email@example.com, 202-626-290