By George W. Thompson
Determining a product’s country of origin using the “substantial transformation” standard sometimes appears to be more art than science. Seemingly small details in production process can have a categorically different impact on the outcome. A couple of recent U.S. Customs and Border Protection (CBP) determinations illustrate this point quite well.
The first one covered two pieces of exercise equipment, one for dips and chin-ups and the other for back extensions. While the products were designed in the United States, all of the parts are made in China for assembly in the U.S. The dip/chin-up station consists of approximately 500 parts incorporated in nine subassemblies, and the back extension device of approximately 200 parts in three subassemblies. In both cases, the subassemblies are produced by welding parts together along with ancillary activities, such as cleaning, grinding and painting.
CBP addressed two production scenarios: in the first, the welding and subsequent assembly work for both products all occurred in the United States, while the second involved welding three of the nine dip/pull-up station subassemblies, with the remaining work performed in the U.S.
Some Assembly Activity Is More Equal than Others
CBP identified the issue before it as whether the assembly of foreign-origin components constituted a substantial transformation into a new and different article of commerce in the United States. The agency noted that it takes into account the “extent of operations performed and whether the parts lose their identity and become an integral part of the new article.” It also considers whether the “essence” of the imported components changes as a result of the assembly activity.
In the first scenario, these questions yielded an affirmative outcome. CBP concluded that “the extent of U.S. assembly operations is sufficiently complex and meaningful to result in a substantial transformation”, since the finished articles were not “essentially complete when their component parts are imported” but “will require substantial additional work to create a functional article of commerce.
In the second scenario, by contrast, CBP considered the three already-welded Chinese subassemblies as the most important in the exercise device; together, they imparted the “essence” of the finished article. Consequently, the further U.S. processing was insufficient to constitute a substantial transformation.
U.S. Assembly of Mostly Korean-Origin Components Results in Korean Product
The second recent ruling involved intermodal ocean freight containers that are assembled in the United States using left and right sidewalls and a roof of Korean origin, a floor and two ends from China and U.S.-origin consumables and minor components, such as coatings and sealant. Again citing the dispositive questions as “the extent of operations performed and whether the parts lose their identity and become an integral part of the new article,” CBP concluded the finished product’s origin is Korea.
The rationale was that “the essential character of the container is imparted by the Korean-origin roof, and two side panels, which . . . are already formed in their final shapes prior to importation” into the U.S. The assembly operations taking place in the U.S. “are not sufficient to result in a substantial transformation.” Therefore, CBP determined that South Korea was the country of origin, even though the final product was put together outside that country.
Substantial Transformation Analysis: Better than a Coin Flip?
In my view, there is so much room for subjectivity built into the “substantial transformation” standard that CBP’s conclusions can’t be faulted as erroneous, but neither could the opposite outcome. Does the welding and assembly of entirely foreign-origin parts constitute a change in their character? It’s arguable either way, but if they do, why doesn’t the assembly of container parts – described by the manufacturer as involving a “complex industrial process which takes more than day to complete” in “fourteen manufacturing steps that require the manipulation of large components to form a structurally sound container” do so as well?
Likewise, what is the cut-off for the number of welded subassemblies? If only one or two were welded in China, not three. Or they were “less essential” to the finished product’s function, would the outcome have been different?
Importers and other parties who must determine the origin of their products must keep these seemingly minor differences in mind in conducting their analyses. The two cases discussed above involved origin for government procurement purposes, but similar approaches would apply to such determinations for country of origin marking and Generalized System of Preferences purposes as well. Just because a private party reaches one conclusion on a “substantial transformation” question does not mean that CBP will agree.