Country of Origin Compliance: Challenges for Government Contractors

In serving private and public sector customers, your company imports components from countries in Asia, North America, and Europe, and then combines them with various U.S. components in a facility in the United States to create a finished product.

• What is the country of origin and how must the finished product be marked for purposes of customs regulations?
• Can you mark the finished product "Made in USA"?
• Can you sell the finished product to both civilian and defense agencies of the U.S. government?

There are no easy answers to these questions, and the correct answers may seem inconsistent.

The confusion among country of origin requirements stems from the overlapping jurisdiction of a number of U.S. government agencies and the interplay among their respective goals and purposes.

• The U.S. Customs Service ("Customs") administers country of origin designations for purposes of marking imported products. Customs marking requirements are designed in part to inform U.S. consumers about the origin of foreign products and to allow the U.S. government to implement international trade programs.
• The U.S. Federal Trade Commission ("FTC") oversees "Made in USA" claims as part of its broad consumer protection authority. FTC rules are designed to protect U.S. consumers against fraudulent and deceptive marketing practices.
• The various civilian and defense agencies apply country of origin requirements under the auspices of the Buy American Act and the Trade Agreements Act. The Buy American Act was passed in the 1930s in order to promote U.S. employment. The Trade Agreements Act was passed in 1979 to implement various U.S. treaties requiring non-discrimination and reciprocity in national government procurement markets.

Simultaneous application of these regulatory regimes is not only confusing but sometimes can have surprising results as well. More significantly, failure to comply with Customs, FTC and public procurement regulations can result in significant penalties. In all cases, Customs, the FTC, and the various public procurement entities are empowered to assess civil fines for non-compliance. Criminal penalties, including incarceration, are even available for the most egregious intentional violations. In addition to civil and criminal liability, non-compliance can cause considerable business disruption. For example, Customs can impound mis-marked products at the port of entry until they are properly marked. In federal procurements, non-compliance can result in contract termination and debarment from future contracts with the U.S. government.

Manufacturers, importers, and distributors selling products in the United States in both the private marketplace and through public procurement contracts must establish monitoring and compliance systems that timely and accurately collect and track country of origin information for components and final products, in order to comply with Customs, FTC and public procurement country of origin regulations.

Most manufacturers, importers and distributors are aware that Customs has jurisdiction over country of origin marking. Under the Tariff Act of 1930 ("Tariff Act"), Customs requires that unless excepted, every article of foreign origin (or its container) imported into the United States must be marked in a conspicuous place as legibly, indelibly and permanently as the nature of the article (or container) will permit, in such a manner as to indicate the English name of the country of origin of the article to the ultimate purchaser in the United States 19 U.S.C. § 1304; 19 C.F.R. § 134.11. By definition, items that are not of "foreign origin," i.e., domestic products, need not be marked with any country of origin. Based on these statutory and regulatory requirements, manufacturers, importers and distributors must consider the country of origin of a product, who the ultimate purchaser is, and how the product is marked.

For many foreign products that are manufactured from a number of components, the country of origin is generally the last country in which the product was "substantially transformed" into the product sold to the ultimate purchaser. 19 C.F.R. § 102.11; 19 C.F.R. § 134.1. Customs has generally found that a product is substantially transformed if the product has undergone a change in name, character, and use. Somewhat complicating matters, goods originating from the countries of the North American Free Trade Act ("NAFTA") (Canada and Mexico), have specialized marking regulations. 19 C.F.R. § 102, et seq. The NAFTA marking rules do not use the general "substantial transformation" test, but rather examine whether a "tariff shift" has occurred such that the product is considered a new item of commerce under the Harmonized Tariff Schedule of the U.S. ("HTSUS").

When non-origin geographical indicators are used on product labels, additional marking regulations apply. If the product or its label refers to "USA," the "United States," or "American," or any foreign country or locality other than the country or locality in which the article was manufactured or produced, Customs requires that the true country of origin appear prominently, in close proximity to the non-origin geographic indicator. 19 C.F.R. § 134.46. Customs is concerned that product labels marked, "A product of XYZ Corp., Chicago, Illinois," or "Manufactured by XYZ Corp., Virginia, USA," or similar non-origin geographic indicators may confuse purchasers as to the true country of origin. Similar marking regulations apply when non-origin geographic indicators are used in a registered trademark. 19 C.F.R. § 134.47.

Customs is generally regarded as the lead federal agency for enforcement of country of origin claims, but other agencies have jurisdiction over these claims as well. The FTC is charged with preventing "unfair or deceptive acts or practices" in the marketplace, 15 U.S.C. § 45, and is authorized to bring law enforcement actions against false or misleading claims that a product is "Made in USA." Therefore, all "Made in USA" claims must be both truthful and substantiated by reliable evidence.

Subject to a de minimus exception, the FTC generally requires that "all or virtually all" of the product advertised as "Made in USA" be made in the United States. As a threshold matter, in determining whether a product is "all or virtually all" made in the United States, the product’s final assembly or processing must in fact take place in the United States itself. The FTC then considers how much of the product’s total manufacturing costs can be attributed to U.S. components, and how far removed any foreign content is from the finished product. "Made in USA" claims are proper only if a negligible amount of foreign content is present.

FTC rules permit qualifications to "Made in USA" claims so long as the qualification is substantiated and not deceptive or otherwise untruthful, misleading or unfair. Typical qualified claims include "75% U.S. Content," or "Made in the USA from German components." The FTC may also allow a claim such as "Assembled in the USA" without additional qualification if the claim is not confusing or misleading to customers. U.S. origin may also be implied by including phrases such as "American quality," or by using U.S. symbols such as the U.S. flag, depictions of U.S. maps or references to U.S. locations. Implied claims are governed by the same rules and regulations on substantiation and non-deception.

It is important to note that even where Customs regulations do not require labeling with a foreign country of origin, the FTC may still prohibit labeling a product as "Made in USA." This may be the case because a product could be substantially transformed into a new item of commerce in the United States, but the components constituting the product may not be "all or substantially all" of U.S. origin. On the other hand, if Customs marking regulations are implicated, the FTC would find it deceptive to mark a product, "Made in USA of U.S. and imported parts." However, considering the interplay between Customs and FTC regulations, qualified claims such as "Made in France and finished in USA" or "Made in France with U.S. components" may be acceptable under both Customs and FTC regulations, if truthful and substantiated.

The Customs marking rules and the FTC deceptive practices rules are both aimed at protecting consumers and are intended to provide U.S. customers with clear information about the origin of products they may buy or wish to buy. Where the ultimate purchaser is the United States Government, there are additional country of origin requirements. These requirements are generally set out in the Buy American Act, a 1930s statute that was enacted to encourage full employment in the United States, and the Trade Agreements Act of 1979, which implements a number of treaties designed to promote reciprocity in various national government procurement markets.

In general, under the Buy American Act, manufacturers and distributors may only supply "domestic end products" to the federal government. "Domestic end products" are those products that are manufactured in the United States if the cost of their components mined, produced, or manufactured in the United States exceeds 50 percent of the cost of all of their components. 48 C.F.R. § 25.003; 48 C.F.R. § 25.100. The Trade Agreements Act waives the application of the Buy American Act for certain purchases and allows the federal government to buy "U.S.- made" end products or products from certain designated, Caribbean basin or NAFTA countries. 48 C.F.R. § 25.403(a) and (c).

Where the Trade Agreements Act applies, manufacturers and distributors selling to the U.S. government may supply products that do not meet the 50 percent component cost test of the Buy American Act so long as they are "U.S.-made end items" or "designated country end items." Designated countries include countries that have signed on to the World Trade Organization’s Government Procurement Agreement, countries that have entered into bilateral Free Trade Agreements with the United States, and certain Caribbean basin countries and least-developed countries. To be a "U.S.-made" end item or an end item from a designated country, the item must have been mined, produced, or manufactured in the United States or in an eligible country, or it must have been "substantially transformed" into a new and different article of commerce with a name, character, or use distinct from that of the article or articles from which it was transformed in the United States or in an eligible country. 48 C.F.R. § 25.003.

Application of these different tests becomes increasingly complex as the number of components sourced from different countries grows. Moreover, some countries that are generally considered to be "friends" of the United States, such as New Zealand and Taiwan, are not on the list of permissible countries under the Trade Agreements Act.

Buy American Act and Trade Agreements Act restrictions are not easily rationalized with the Customs and FTC regulatory regimes discussed above. For example, a product that is not subject to Customs marking because it has been substantially transformed into a new article of commerce in the United States, may not satisfy the Buy American Act’s 50 percent component test and therefore would not be a "domestic end product" under that Act. Likewise, a product that satisfies the Buy American Act’s 50 percent component test may not satisfy the FTC’s "all or substantially all" requirement. A government contractor advertising or labeling a product "Made in USA" in reliance on compliance with the Buy American Act, would likely run afoul of the FTC Act. Finally, a product qualifying for a NAFTA preference may be treated like a U.S. origin product for one regulatory purpose but treated as a non-U.S. origin product for another regulatory purpose. Manipulation or further manufacture of U.S.-origin components and end-products abroad further complicates the application of these regulatory regimes.

In order to comply with the complex set of rules, manufacturers, importers and distributors should establish an overall compliance program addressing these issues, including guidelines on how particular products must be marked under Customs regulations or may be marketed under FTC regulations.

This article is presented for informational purposes only and is not intended to constitute legal advice.