With the start of the London Olympics 2012, much hub-bub has been made about the official uniforms of the U.S. Olympic Team . Specifically, it seems that the “pride of America”–Team U.S.A., proudly wearing the red, white and blue, was not exactly manufactured in America. Rather, news broke that the U.S. uniforms were made in China. Although the fact that the official uniform for the U.S. Olympic Team was not of U.S. origin and may have ruffled some patriotic feathers, the country of origin of imported merchandise is important for other reasons.
The origin of imported merchandise can affect admissibility, rate of duty, eligibility for special programs, quotas, antidumping or countervailing duties, procurement by government agencies, and marking requirements. CBP requires that each imported article produced abroad be marked in a conspicuous place as legibly, indelibly and permanently as the nature of the article permits. The English name of the country of origin should clearly indicate where the article was manufactured or produced to the ultimate purchaser in the U.S. If the article (or the container) is not properly marked at the time of importation, a marking duty equal to 10 percent of the customs value of the article will be assessed unless the article is exported, destroyed or properly marked under CBP’s supervision prior to liquidation of the entry.
CBP’s country of origin marking requirements are separate and distinct from any special marking or labeling requirements of other government agencies. Importers should be aware that they may be subject to more than one set of marking requirements upon entry.
Non-Preferential Rules of Origin
“Non-preferential” rules are those that generally apply to merchandise in the absence of a bilateral or multilateral trade agreement, and are used in the following origin schemes:
- Most-Favored-Nation treatment;
- Country of origin marking;
- Government procurement (“Buy American” restrictions);
- Textiles and textile products.
For goods that are wholly the growth, product, or manufacture of a particular country, the determination of origin under the “wholly obtained” criterion is straightforward under all origin schemes. However, for goods that consist of materials from more than one country, the origin schemes typically require that origin be determined under the “substantial transformation” criterion. Under this criterion, an article which undergoes a “substantial transformation,” such as a change in name, character or use, distinct from that of the basis article or articles, is determined to be a product of the country in which the substantial transformation took place.
Take for example, a Japanese cutlery manufacturer that uses raw steel and wood originating from China. The country of origin will only be Japan if the final cutlery product is considered to be distinct in name, character or use from the Chinese origin raw materials. In our example, the Japanese cutlery is clearly different in name, character and use from the raw materials used in production and thus the transformation will effectively change the country of origin from China to Japan. To illustrate the difference, assume that the Japanese company imported already formed steel blades and processed wood handles from a Chinese source. The Japanese company then assembles the two pieces using small screws to set the blade in the handle. The assembly of the blade and handle into a steel bladed knife with a wooden handle does not constitute a change in name, character or use, and thus, no substantial transformation has taken place and the country of origin for the goods would remain China.
A modified substantial transformation criterion that employs a “tariff shift” method based on Annex 311 to the North American Free Trade Agreement (NAFTA) is used when determining country of origin for marking requirements on products from Canada and Mexico. For goods that consist of materials from more than one country, origin is conferred based solely on NAFTA rules and guidelines that specify a shift in classification of the non-originating materials to another classification for the final merchandise. The tariff-shift method is subject to the following general rules:
- De minimis content threshold: if 7% or less of a good’s value comes from a non-originating source it may still be considered a wholly originating good, except for:
- Goods of chapter 22: the applicable rate is 10% or less of the value;
- Textile and apparel goods: the applicable rate is 7% or less of the total weight;
- Goods of chapters 1-4, 7, 8, 11, 12, 15, 17 and 20: de minimis is inapplicable.
- Chemical reaction origin rule: applicable to goods of chapters 28, 29, 31, 32 and 38.
- Other general rules relating to the treatment of certain packaging materials, accessories, spare parts, tools, indirect materials in determining origin and certain non-qualifying operations (e.g., mere dilution with water).
Country of origin determination for textile and textile products is also based on a modified substantial transformation criterion that employs a “tariff-shift” method and covers the headings and chapters of the tariff relevant to textile and textile products.
Preferential Rules of Origin
Preferential rules of origin allow for special treatment of imported merchandise that has been significantly manufactured in either the U.S. or a beneficiary country with which the U.S. has a special tariff program, such as a Free Trade Agreement (FTA). Preferential rules of origin schemes are used for several special tariff programs, including:
- African Growth and Opportunity Act;
- Andean Trade Preference Act;
- Andean Trade Promotion and Drug Eradication Act;
- Automotive Products Trade Act;
- Caribbean Basin Economic Recovery Act;
- Compact of Free Association Act;
- Generalized System of Preferences;
- Insular Possessions of the United States;
- North American Free Trade Agreement Implementation Act;
- Products of the West Bank, the Gaza Strip or a Qualifying Industrial Zone;
- United States-Caribbean Basin Trade Partnership Act;
- United States-Chile Free Trade Agreement Implementation Act;
- United States-Israel Free-Trade Area Implementation Act;
- United States-Jordan Free Trade Area Implementation Act;
- United States-Singapore Free Trade Agreement Implementation Act.
U.S. preferential rules of origin schemes employ the “wholly obtained” criterion for goods that are wholly the growth, product or manufacture of a particular country. On the other hand, for goods that consist of materials from multiple countries, the majority of U.S. preferential rules of origin schemes are based on a change in name, character, and use (substantial transformation) and/or a required minimum regional value content. However, other preferential rules of origin, such as the NAFTA preferential rules of origin, are based on a tariff-shift method and/or regional value-content method for goods that are not wholly obtained from the applicable region or country.
Tariff shift applies according to the provisions found in the applicable trade agreement. The General Notes to the HTSUS lay out clear guidelines for when the tariff shift method can be used. To clarify how tariff shift works, assume a Singaporean company imports raw coffee beans in order to process them and make packets of instant coffee. The raw coffee beans imported to Singapore would be classified under subheading 0901.11, HTSUS, while the instant coffee packs produced by the company would be properly classified under subheading 2101.11, HTSUS. The General Notes regarding the U.S.-Singapore FTA state that “[A] change to headings 2101 to 2103 from any other chapter,” qualifies a good for tariff shift. Because the Singaporean instant coffee pack is classified under heading 2101 and is made from coffee beans classified in Chapter 9, the tariff shift confers Singaporean origin upon the instant coffee pack.
The HTSUS lists eligible products and preferential rates of duty in column 1 (“Special”) for particular special tariff programs. A list of the symbols used in the “Special” column and the programs they represent can be found in General Note 3(c) to the HTSUS. Goods must meet the requirements for the particular special tariff program in order to be eligible for the applicable preferential rate of duty.
One of the reasons why the country of origin rules are in place is to allow U.S. consumers to make their own decisions as to whether they want to buy a product that has been made in any particular country. As we saw with the outcry over where the uniforms for the U.S. Olympic team were made, people do care about country of origin. Be sure you understand how your product should be marked.
 Unless specified otherwise, the cost of foreign materials may not be included in local value content unless they undergo a double substantial transformation.