Substantial Transformation: When a Product from China is Not a Product of Chinese Origin
Jeff Stapleton | M.E. Dey & Co.
Complex supply chains can make the determination of a product’s country of origin difficult; yet making the correct decision has never been more important. An importer’s compliance responsibilities have always been critically tied to this issue, since it has implications affecting the admissibility of merchandise, proper reporting of anti-dumping and countervailing duties, and eligibility for duty-free treatment under special programs and free trade agreements, to name a few.
Today, the viability and survival of many companies is threatened by the assessment of Section 301 duties that have been imposed by the President on many Chinese-origin products. For many importers, only a resolution of the trade disputes will bring a relief from the additional duties of 25%, but if a product being imported from China contains components or ingredients from other countries, or involves manufacturing costs incurred elsewhere, it is wise to review the entire procurement and manufacturing process to see if the country of origin reported on the customs entry should actually be China, even if China is ultimately the country of export to the U.S. The duty implications can be astounding.
Court cases and country of origin rulings from U.S. Customs and Border Protection (CBP) have long held that the country of origin is the country where the article last underwent a substantial transformation, where the product has been changed in name, character, or use, and transformed into a new and different article of commerce. This can be highly subjective, and each set of circumstances requires careful review.
Surface finishing or polishing operations usually will not be considered a substantial transformation. In customs ruling HQ H303280, CBP considered the case of agglomerated quartz slabs of U.S. origin to be shipped to China where they would be cut to a lesser thickness, and then cut to the length required for each special order. Holes would sometimes be added for sink and faucet installation, and the slabs were then polished before shipment back to the U.S. Because the slabs had a predetermined use when shipped to China, CBP determined that no substantial transformation had taken place. The finished countertops were still considered products of U.S. origin to which Section 301 duties would not apply.
An often-cited court case, Uniroyal, Inc v United States, stated that substantial transformation will not result from manufacturing or combining operations that are minor in nature, and leave the identity of the imported articles intact”. A recent example was described in CBP ruling HQ 561392 involving insulated electric cable and connectors that were made in Taiwan to be exported to China. In China, the cable was to be cut-to-length, and the connectors then attached to create cables used to connect computers with printers and other peripheral devices. Even though this manufacturing process involved a slight shift from the Harmonized Tariff numbers used for cable and connectors to the single tariff number used for the completed article, CBP ruled that a substantial transformation had not taken place, and the origin of the finished cable with connectors was Taiwan. Section 301 duties would therefore not apply.
In cases involving complicated assembly operations, CBP will weigh the importance of individual components, the time and costs involved in the manufacturing or processing operations in each country, and the complexity of those operations. The devil is in the details, and it can be difficult to compare costs incurred in a developed country with costs from an emerging market.
In ruling N301746, CBP reviewed a digital thermometer designed to use a “non-invasive method to sample the heat flowing from the blood vessels to the skin surface.” It consisted of a double sensor probe made in Israel via steps that included the assembly of a sensor plate, a flex circuit, and temperature sensors. The proprietary software was also developed in Israel. These parts were to be shipped to China and assembled with other electronic and electromechanical components and plastic and silicon parts. The products were also to be tested, labelled, inspected, and packaged. CBP determined that the Israeli-produced sensors/probes and the software provided the “essence of the digital thermometer”, and that the country of origin was Israel. It was therefore not subject to Section 301 duties if imported into the U.S.
If you intend to import products from China, and you feel that you are justified in claiming a country other than China as the country of origin, it is still advisable to obtain a country of origin ruling from CBP. Post-entry assessments of Section 301 duties could be devastating if imposed over a short period of time, and CBP could consider penalties for false country of origin claims, or for improper country of origin marking. An importer can apply for their own ruling, or they can rely on the services of a customs attorney or customs broker. Detailed information about the materials and manufacturing or processing operation will need to be provided to CBP as part of the request. Contact our office for details.