Chapter 5. The Country of Origin of Imported Merchandise and Marking Requirements

• Author: David Grace Melanie Reed
• Pages: 85-103

CHAPTER 5

The Country of Origin

of Imported Merchandise

and Marking Requirements

DAVID GRACE

MELANIE REED

All goods imported into the United States come from somewhere. CBP requires

that the “somewhere,” known as the “country of origin,” be determined and

marked for all imported goods. This requirement serves a number of purposes.

The most important is so that, as marked, “[t]he ultimate purchaser may, by

knowing where goods were produced, be able to buy or refuse to buy if such

marking should influence his will.”2 The origin of a good also can affect, for

example, whether the good is admissible to be imported into the United States

or whether it is eligible for sale to government agencies.

In addition, country of origin determinations are necessary for according

preferential tariff treatment to goods imported from countries () with whom

the United States has entered into free trade agreements or (2) who, pursuant

to unilateral U.S. trade programs, are so-called beneficiary countries. Generally,

although not always, these preferential rules of origin are different from the non-

preferential rules of origin. The rules of origin for tariff preference purposes are

explained and discussed in detail in Chapter 6, “Duty Savings Opportunities:

Introduction to Trade Agreements, Unilateral Preference Programs, and Other

Duty Savings Mechanisms.” The current chapter focuses on the nonpreferential

rules of origin, or what are generally known as the marking rules.

It may be self-evident, but products that are “wholly the growth, product,

or manufacture” of a particular country are considered products of that country.

Difficulties arise, however, when a product consists in whole or in part of mate-

rials from more than one country. In the latter situation, the country of origin

of the imported product is generally the last country in which the product has

been “substantially transformed” into a new and different article of commerce.

The substantial transformation test is a complex, fact-specific standard that is

approached by CBP and the courts on an ad hoc basis. Because very few bright

lines apply, the test is inherently subjective in nature. Many importers find it dif-

ficult and frustrating to apply.

Because of these concerns, the North American Free Trade Agreement

(NAFTA), relating to trade among the countries of Canada, Mexico, and the

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United States, developed a new approach for determining country of origin for

nonpreferential purposes3 in an attempt to make the process more objective.

While still relying on the substantial transformation principle, the NAFTA cre-

ated a set of hierarchical codified rules, the focal point of which is the use of speci-

fied and objective changes in tariff classifications (tariff shifts) of the nonoriginat-

ing materials used to produce the finished good and of the finished good itself. If

the requisite tariff shifts occur, the finished good is deemed to have undergone

substantial transformation without the need for further analysis. If the requisite

tariff shifts do not occur, other express rules apply to determine the country of

origin. To be sure, these additional rules are not devoid of subjective elements in

their application, but the intent is to minimize subjectivity to the extent possible.

Significantly, in the summer of 2008, CBP proposed to use the NAFTA rules of

origin for all nonpreferential country of origin determinations.4

This chapter will address the traditional substantial transformation test for

determining country of origin. It will then discuss the NAFTA rules of origin for

nonpreferential purposes. The chapter also explains the interplay of the Federal

Trade Commission (FTC or Commission) “Made in USA” marking standard with

CBP’s marking requirements. The last sections explain government procurement

in the context of country of origin and the special rules of origin that apply to

textile and apparel products.

SUBSTANTIAL TRANSFORMATION H

Introduction and Overview

Under the substantial transformation analysis, the country of origin of a good

is deemed to be the last country in which the product has been substantially

transformed into a new and different article of commerce.5 If a good consists

of materials from more than one country, CBP seeks to determine whether the

activities in the last country were sufficient to effect a substantial transformation

of the materials,6 resulting in the emergence of a new article that has acquired “a

new name, character, or use” compared to its component materials.7 “To deter-

mine whether a substantial transformation of an article has occurred . . . each

case must be decided on its own particular facts.”8

As a rule of thumb, if a product has been “manufactured” in a country, then

its origin is considered to be that country. However, as the Supreme Court made

clear as far back as 907, “[m]anufacture implies change, but every change is not

manufacture.”9 For example, a substantial transformation does not result from

manufacturing or combining processes that are minor in nature and leave the

identity of the imported article intact.0 To determine whether combining parts

or materials constitutes a substantial transformation, CBP and the federal courts

consider “the extent of operations performed and whether the parts lose their

identity and become an integral part of the new article.”

In a 984 memorandum, the U.S. Customs Service (Customs) discussed the

three-part test it used (and CBP now uses) to determine whether an item has

been substantially transformed:

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