There’s so much going on: Trade wars! NAFTA rewrites! National security investigations of steel imports! So what’s today’s topic? The country of origin of a network tap.
While it seems mundane by comparison with these headline-grabbing events, a recent U.S. Customs and Border Protection ruling may signal a more restrictive approach to government procurement-related country of origin determinations. Since most Federal government procurement is limited to products from relatively few countries, a product’s origin makes a categorical difference in its eligibility. Of particular note, products of Chinese origin are excluded from eligibility.
CIT’s Energizer Battery Decision Just Keeps Going and Going . . .
CBP is charged with issuing origin determinations, particularly those involving questions of “substantial transformation”. The classic scenario involves production processes in Country A using parts or materials from Country B; the issue is whether these processes result in a change of name, character or use to those parts or materials, so that the finished product’s origin is Country A.
The new CBP ruling on network tap devices marks the first time that agency has applied the U.S. Court of International Trade’s Energizer Battery decision. Readers may recall the court had agreed with CBP that individual parts do not change their name, character or use simply because they are assembled into a finished product.
Using that same rationale, CBP has now concluded that assembly of a network tap in the United States does not substantially transform the Chinese and Taiwanese-origin components it incorporates. The product “consists of three optic to LC–LC adapters from Taiwan, two fiber optic splitters from China” and a chassis, foam tube holder, bracket, screws and tamper-proof labels from the United States. These items are assembled and tested in U.S. in a process that takes 15 minutes and involves a modicum of precision.
Components Stay the Same
According to CBP, the imported adapters and splitters did not undergo a name change through the United States assembly process, nor was there any alteration to their characteristics. Likewise, their use was predetermined at the time they were manufactured and there was no alteration through the assembly process. In short, the “process does not alter the material composition of the adapters and splitters”, nor was it “sufficiently complex or meaningful to render a substantial transformation of the imported components.” Therefore, even though the finished network tap performed a function that none of its component parts did on their own, CBP concluded that the assembly process failed to constitute a substantial transformation.
If the network tap assembled in the United States was not a product of this country, then where did it originate? CBP’s answer was China. This is because the essential feature of a network tap is split incoming data into two signals, and it was the Chinese splitter that imparted this capability. The consequence is that the product is excluded from sale to the Federal government.
Good News and Bad News, But Mostly Bad
Neither the CBP ruling nor the Energizer Battery decision on which it relied establish a rule that no assembly operations qualify if the only “change” the components undergo is incorporation into a finished, functional product. They do, however, point to an enhanced focus on the extent and technical sophistication of the assembly process. Thus, whether there is a sufficiently complex level of activity may become the determining factor in these situations. Federal government contractors who have assumed their products qualify simply because their parts were assembled in an eligible country may want to revisit that conclusion in light of the new approach CBP applies with the CIT’s blessing.
“Buy American and Hire American”
In a related development, a new Executive Order has established a “policy of the executive branch to buy American.” The policy will encourage, “consistent with law, through terms and conditions of Federal financial assistance awards and Federal procurements, the use of goods, products, and materials produced in the United States.” The EO also requires assessment of “the impacts of all United States free trade agreements and the World Trade Organization Agreement on Government Procurement on the operation of Buy American Laws, including their impacts on the implementation of domestic procurement preferences.” It also imposes additional prerequisites on Federal agency waivers of Buy American requirements.
Whether the EO is public relations bluster, or instead portends future restrictions on Federal procurement of non-U.S. origin articles and even U.S. origin goods with foreign components, is anyone’s guess. Government contractors should, at least, be aware that something may be brewing. I’ll be sure to keep you advised of developments as and when they occur.