Substantial Transformation Continues to Cause Uncertainty

As companies work to move assembly out of China so that the goods they export to the U.S. won't be hit with Section 301 tariffs, they have to grapple with the fact that CBP may still consider a good made in Mexico, Malaysia, Vietnam or elsewhere to be a product of China if enough of its innards were made in China.

Arthur Bodek, a partner in the New York office of GDLSK, moderated a panel called "Is This Product Still Chinese?" at the Georgetown Law International Trade Update. He said a few years ago, a client that made digital thermometers wanted to know if the thermometer is assembled in China, and has a Chinese circuit board, can it still have a different country of origin, since the software and probe were not Chinese. "Much to our pleasant surprise, CBP agreed it was the probe and the software that was really the guts of it and made it work," Bodek said.

This "guts" idea, or what Bodek also called a "heart and soul test," is also about what component or subassembly is the essence of the finished good. "We had some very interesting conversations with CBP where it’s come down to one subassembly; if you move it from Column A to Column B, that will tip the scales," he said, but since that subassembly is Chinese, the good is still a product of China.

Which components represent the essence of the good is subjective, and he said CBP has said something is the essence that lawyers at his firms didn't think qualified. Monika Brenner, chief of CBP's Valuation & Special Programs Branch, acknowledged during the panel that these judgment calls are more subjective than the tariff-shift standard that is used under USMCA. "We have tried to get more uniformity; if you're requesting a ruling from New York, we try to have them looked at at the headquarters level. We don’t want 50 different people making different decisions," she said.

She also acknowledged that with global supply chains, sometimes no one country feels like it deserves the country of origin. She gave the example of vacuum cleaners. If the motor is from China and most of the other inputs are from Vietnam, but there are also another country's inputs, it doesn't feel like it should be China or Vietnam, she said. She said sometimes "none of them really seem to be the right answer" so "we do the best we can."

Brenner said CBP tries to use the 1982 precedent of Data General vs. U.S., which found that programming a foreign chip in the U.S. gave the item a U.S. origin, but added, "it would be nice if we had some newer law out there."

Panelist Elyssa Kutner, a senior managing associate at Sidley, talked about a case could have an impact (see 2202240059). Cyber Power Systems argued that CBP was wrong to seize goods that it said were made in the Phillippines, and continued to mark them that way even though CBP had previously instructed them that the goods should have a Chinese country of origin and be subject to Section 301 duties. Judge Leo Gordon did not rule that the Chinese inputs underwent substantial transformation -- he merely dismissed a request for an injunction -- but Kutner homed in on his criticisms of the essence approach CBP has been using.

She said this test, in recent years, has "kind of taken on a life of its own. Some rulings seem a little bit extreme." She said the printed circuit board drives the origin, even if there are hundreds of components and significant and complex machinery in a country other than the one where the PCB was made. "You could think of it as a pendulum," Kutner said. "Perhaps it will swing back."

She said Gordon said that country of origin rules, with 80 years of application in various applications, including the Generalized System of Preferences benefits program and drawback eligibility, "should be fairly straightforward to apply. It is not.” She said that he said the essence test is leading to seemingly disparate treatment.

Brenner said that Cyber Power did not provide some facts about its products at the time it protested the goods' seizure. "Why are we rewarding the fact that you’re not giving us these facts?" she asked. She said linking country of origin to the PCB is a bright-line test. If a ruling on Cyber Power throws that out, "it’s really going to be a case-by-case analysis."