Today, a company that manufactures its products in China contacted Dimerco for help in avoiding future tariffs on its exports to the U.S. The company wants to ship products to the more “tariff-friendly” Vietnam and then, without establishing any kind of manufacturing operation there, simply forward them on to U.S. customers. As companies prepare for the potential of higher tariffs during a Trump administration, this request exemplifies a false interpretation of country of origin that’s, unfortunately, not uncommon.
Country of Origin Definition
When thinking about country of origin, a good starting point is a very literal interpretation of “Made in China.”
For products that originate in China, you can do a lot of things to them in Vietnam, or any other country, en route to the U.S. You can re-package them, re-assemble them, or trans-ship them, but these actions do not constitute being “made in” that country – and U.S. Customs and Border Protection (CBP) knows the difference.
Part 134 of the U.S. Code of Federal Regulations (CFR), defines “country of origin” as the country of manufacture, production, or growth of any article of foreign origin entering the United States. Further work or material added to an article in another country must effect a substantial transformation in order to render such other country the “country of origin.”
OK, you ask, so what constitutes “substantial transformation?”
According to the International Trade Administration, it means that the good underwent a fundamental change in form, appearance, nature, or character. Additionally, this change adds to the good’s value at an amount or percentage that is significant, compared to the value which the good (or its components or materials) had when exported from the country where it was first made or grown.
Still with me?
Sometimes the best way to understand these kinds of terms is through specific examples. Let’s look at a few and see if the “transformation” that occurs is enough to warrant a change in country of origin.
Country of Origin Examples
Let’s start with a couple of hypothetical examples.
A company brings all the components of a bicycle – all made in China – to Mexico for final assembly. The company assembles the bike in Mexico and packages it in a retail box. In this case, the country of origin would be China since CBP is reluctant to find a change in the product’s character when the process is merely assembly.
In another example, sugar from country A, flour from country B, and dairy products from country C are taken to country D to make cookies. In this case, the finished goods would likely be deemed “made in country D” because the inputs were substantially transformed.
Now let’s look at a few actual examples where companies sought a country of origin change based on a product transformation in a new country.
A company imported pans and covers made in China into Vietnam, where handles made in Vietnam were attached. CBP held that the country of origin remained China because the product’s original essential character was not changed. The ruling was appealed to the Court of International Trade and CBP’s decision was upheld.
In the case of Belcrest Linens vs The United States, pillow cases made and embroidered in China were sent to Hong Kong (prior to Hong Kong becoming part of China) to be cut into individual pieces of fabric. One edge of the fabric was cut and scalloped with colored thread on the inked scallop marks. The pieces were then folded in half and two of the sides were sewn together. The merchandise was then moistened with water and a whitener, pressed, folded, packaged, and sent to the United States from Hong Kong. CBP originally ruled that the product should be considered made in China, but after an appeal by Belcrest a higher U.S. Court ruled that the processes performed in Hong Kong caused a change in the “character and identity” of the merchandise and that the pillowcases were articles “different in appearance, identity, and use” from the original cloth from China.
A large number of high-tech components from China were imported into the U.S., where considerable time and skill were used to attach these components to printed circuit boards. CBP ruled that the country of origin, in this case, could shift to the U.S, the processing country.
It’s apparent from these examples that even the professionals don’t always interpret “country of origin” in the same way. But, back to the original inquiry we opened with, it is clear you can’t ship products from China to Vietnam, put a “Made in Vietnam” tag on them, and file paperwork as if the products were wholly made in Vietnam.
Seek Advice from Trade Compliance Experts on Country of Origin Issues
The first step in crafting your own friendshoring strategy to minimize tariffs is to consult with a trade compliance expert, like Dimerco Express Group, as early as possible. This is especially important if you are investing in a strategic sourcing change driven mostly by duty avoidance. Sourcing shifts are time-consuming and expensive, so you want to make sure to get the details right before making promises to management about cost savings from duty reductions.
According to trade compliance consultant Karen Kenney, experts can help sanity check your assumptions and give you a point of reference to defend those assumptions to CBP.
“There are significant opportunities out there to reduce import duties,” she says. “Sometimes, you just need an experienced partner to help you find these opportunities and realize the gains.”
Are you examining potential strategies to mitigate duty increases during a Trump administration? Reach out to Dimerco’s trade compliance experts today to start a discussion.