New proposed regulations aim to standardize non-preferential origin determinations for imports from Canada and Mexico

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On July 6, 2021, US Customs and Border Protection (CBP) published a notice of proposed rulemaking (Proposed Rule) to expand the use of the 19 C.F.R. Part 102 Rules of Origin (Part 102 rules), also commonly known as the North American Free Trade Agreement (NAFTA)  marking rules, to determine the country of origin of imports from Canada and Mexico for non-preferential purposes.[1]  Essentially, the Proposed Rule would amend the CBP regulations by requiring importers of non-textile and apparel products[2] from Canada and Mexico to determine the non-preferential country of origin using only the Part 102 rules.  The complete Proposed Rule can be found here.  Companies have the opportunity to present written comments on all aspects of the Proposed Rule by August 5, 2021.  

Concurrently, on July 6, 2021, CBP published an Interim Final Rule providing that the Part 102 rules remain applicable for country-of-origin marking determinations for goods imported from Canada and Mexico under the United States, Mexico, and Canada Agreement (USMCA) as of July 1, 2021, regardless of whether preferential treatment is claimed.[3]  In the Interim Final Rule, CBP also implemented provisions of the USMCA related to general definitions, confidentiality, import and export requirements, post-importation duty refund claims, drawback and duty deferral programs, general verifications and determinations of origin, commercial samples, goods re-entered after repair or alteration in Canada or Mexico and penalties.  CBP also included amendments to the CBP regulations to add the sugar-containing products subject to a tariff quota and conforming amendments for goods re-entered after repair or alteration in Canada or Mexico, recordkeeping provisions and the modernized drawback provisions.  The complete Interim Final Rule can be found here.  Although the Interim Final Rule is effective as of July 1, 2021, CBP has allowed companies until September 7, 2021 to present written comments.

The proposed rule

Importers of non-textile and apparel products from Canada and Mexico are subject to two different non-preferential origin determinations, ie, one for marking and another for determining country of origin for other non-preferential purposes.[4]

Generally, there are two types of rules of origin: (i) non-preferential rules that determine the application of duty rates under Section 301, marking requirements, quantitative restrictions or tariff quotas, admissibility, government procurement under the Trade Agreements Act, among other purposes; and (ii) preferential rules that determine the eligibility for special treatment under various trade agreements. Within the non-preferential context, CBP uses the substantial transformation standard to make country of origin determinations.[5]  As noted, in the application of non-preferential rules of origin to imports of Canada and Mexico, CBP has employed two methods, as follows:

  • Part 102 rules for country-of-origin marking, which are based on “tariff shifts” or specific changes in the US Harmonized Tariff Schedule (HTSUS) of components resulting from their substantial transformation into the final product;[6] and,
  • The substantial transformation standard on a case-by-case basis, which relies on judicial precedent and past Customs rulings to determine the country of origin for non-preferential purposes other than marking.

Although both methods “are intended to produce the same determinations as to origin[,]” some products imported into the US have ended up with two different non-preferential countries of origin. Proposed Rule, 86 Fed. Reg. at 35,423. In Customs Ruling N306161, for instance, CBP found that a battery pack manufactured in Mexico with Chinese origin components was a product of Mexico for marking purposes and had Chinese origin for Section 301 Tariffs.[7]  CBP also ruled that an electrical motor assembled in Mexico with Chinese-origin components was of Mexican origin for marking purposes and had Chinese origin for Section 301 Tariffs.[8]  Thus, under the current CBP practice, importers are required to use two different methods to determine the non-preferential country of origin, which may result in having to report two different countries of origin for the same product.  In the cases where one of the countries of origin is China, importers must pay Section 301 Tariffs even though the product imported from Canada and Mexico meets the rule of origin and substantial transformation standard as expressed under the Part 102 rules. If the Proposed Rule is adopted, however, importers of goods from Canada and Mexico would only be subject to the Part 102 rules in determining the non-preferential country of origin, including for purposes of Section 301 Tariffs and government procurement under the Trade Agreements Act. This amendment would eliminate applying the case-by-case substantial transformation standard for non-preferential country of origin decisions and the possibility of having two countries of origin for the same product, eg, one for marking and another for Section 301 Tariffs.[9] 

CBP has stated that extending the application of the Part 102 rules “will provide continuity” for importers because these rules have been applied since 1994.  Proposed Rule, 86 Fed. Reg. at 35,423.  CBP is also proposing these changes to “standardize country of origin determinations.” Id. at 35,425. In particular, CBP has stated that the Part 102 rules are “a reliable, simplified, and standardized method for CBP when determining the country of origin for customs purposes.”  Id. at 35,423.  In contrast, CBP indicated that the traditional case-by-case approach is subjective, and its application has led to “varied case-specific interpretations of the basic rule, resulting in a lack of predictability which in turn has engendered a significant degree of uncertainty.”  Id. at 35,424. Thus, with the Proposed Rule, CBP aims to reinstate consistency and certainty regarding non-preferential country of origin decisions, alleviating the burden to both CBP and US importers.

Implications of the adoption of the proposed rule for US importers

As noted above, US importers of goods from Canada and Mexico would only be subject to the Part 102 rules to establish the non-preferential country of origin if the Proposed Rule is adopted.  This amendment would entail that imports from Canada and Mexico would only have one standard for determining country of origin for non-preferential purposes.  Moreover, because Part 102 rules are largely based on tariff shifts within the Harmonized Tariff Schedule of the United States (HTSUS), importers would have to carefully review the classification of the good and its components under the HTSUS to determine the country of origin for non-preferential purposes.

Further, companies pursuing Section 301 mitigation strategies should consider the possible opportunities presented with the Proposed Rule, if adopted. CBP has stated that the Part 102 rules are a more reliable and standardized method of determining country of origin than the case-by-case approach method.  See Proposed Rule, 86 Fed. Reg. at 35,423-35,424. US importers contemplating moving manufacturing operations, eg, from Asia to North or South America, should carefully analyze the tariff shift requirements under the Part 102 rules in evaluating their existing and potential future supply chains to determine whether shifting these operations would result in minimizing their Section 301 Tariffs. 

Conclusion

The proposed rule expands the application of the Part 102 rules broadly to cover all non-preferential origin determinations for products imported into the United States, except as limited by the rules of origin applicable to textile and apparel products set forth in Section 102.21.[10]  US companies that would be affected by the adoption of the Proposed Rule should consider filing comments.  As noted, the deadline to submit comments is August 5, 2021.



[2] The country of origin of textile and apparel products imported from all countries (except from Israel) is determined in accordance with 19 C.F.R. §§ 102.21-102.25. 

[4]  See19 C.F.R. §§ 134.1(b),(d)see also Customs Ruling N320224 (July 9, 2021) (where CBP applied the Part 102 rules to determine the country of origin of a disposable optical sensor imported from Mexico for marking purposes and the case-by-case substantial transformation for the country of origin of the same sensor for Section 301 Tariffs).

[5] See 19 C.F.R. §§ 134.1(b); see also  Anheuser-Busch Brewing Association v. United States, 207 US 556 (1908) (holding that a substantial transformation occurs when assembly or manufacturing operations performed on a given product or product component result in a new and different product with a new name, character and use); US Customs and Border Protection, What Every Member of the Trade Community Should Know About: US Rules of Origin, Preferential and Non-Preferential Rules of Origin (May 2004), https://www.cbp.gov/sites/default/files/assets/documents/2020-Feb/ICP-US-Rules-of-Origin-2014-Final.pdf.

[6] As noted, CBP issued an Interim Final Rule providing that the Part 102 rules remain applicable for country-of-origin marking determinations for goods imported from Canada and Mexico under the USMCA, regardless of whether preferential treatment is claimed.  See Interim Final Rule, 86 Fed. Reg. at 35,569-35,570.

[7] See Customs Ruling N306161 (Oct. 4, 2019) (aff’d, Customs Ruling HQ H306336 (Feb. 11, 2020)).

[8] See Customs Ruling HQ H301619 (Nov. 6, 2018) (aff’d, Customs Ruling HQ H305370 (Oct. 11, 2019)). 

[9] The Proposed Rule does not affect the country of origin determinations of other agencies such as the Department of Commerce’s scope decisions on country of origin to determine the application of antidumping and countervailing duties, decisions of the Agricultural Marketing Service under the Country of Origin Labeling Law “or origin determinations made by other agencies for purposes of government procurement under the Federal Acquisition Regulation.”  Proposed Rule, 86 Fed. Reg. at 35,424.