On July 6, 2021, U.S. Customs and Border Protection (CBP) published a notice of proposed rulemaking (NPRM) that would change to the agency's approach in determining the country of origin for goods imported from Canada and Mexico into the United States.
Currently, a product imported into the United States from Canada or Mexico can have two "countries of origin" for customs purposes. Goods imported from Canada and Mexico have to be marked as a Product of Canada or Product of Mexico, pursuant to the application of the so-called NAFTA marking rules. However, those same goods may be treated as a product of a different country for purposes of the application of supplemental tariffs (e.g., Section 301 tariffs on goods from China) or government procurement. This can lead to some strange results-for example, in one case, goods imported from Mexico were marked "Product of Mexico" but subject to the Section 301 tariffs imposed on products of China. See, e.g., Headquarters Ruling Letter HQ H301619 (Nov. 6, 2018).
Under CBP's proposed amendment, the current NAFTA marking rules would apply for all non-preferential purposes for goods from Canada and Mexico (e.g., admissibility determinations, administering quotas, government procurement contracts, and Section 301 duty assessment). This change would, in theory, reduce burdens on importers who previously were required to comply with two different sets of rules on the same merchandise, and would avoid the strange result of two different countries of origin applicable to the same goods. The actual commercial impact on any given company or product may vary and will be highly fact dependent. Companies reliant on imports from Canada and Mexico should carefully consider the impact of the proposed rule change on their import activity, and may wish to comment on the NPRM before the Thursday, August 5, 2021 deadline.
CBP's Country of Origin Determinations
For U.S. imports from all jurisdictions other than Canada and Mexico, CBP uses the "substantial transformation" test to determine the country of origin for all non-preferential purposes (including marking the product and completing the customs declaration). The substantial transformation test involves a fact-specific examination, influenced by judicial and administrative precedent, of where the imported article was last transformed into a new and different article of commerce with a different name, character and use distinct from its constituent components.
For goods from Canada and Mexico, the NAFTA marking rules prescribe an objective set of rules for determining country of origin by comparing the tariff classification of imported components used to produce the finished goods and the tariff classification of the finished goods. When the final manufacturing operation accomplishes the specified "shift" in tariff classification, the marking rules are satisfied.
While the substantial transformation test is somewhat subjective, it has been historically favored by the trade. The importing community strongly resisted a proposal by CBP in 2008 to replace the substantial transformation test with tariff-shift rules for all non-preferential purposes. Importers expressed a preference for the subjective test that is flexible in its application.
CBP seems to be reasoning that, in the wake of the "strange result" rulings treating goods marked as a Product of Mexico as subject to the Section 301 tariffs on goods from China, the importing community's appetite for the objective rules may have evolved.
Considerations for Companies Importing from Canada and Mexico
Unifying the country of origin test for all non-preferential purposes in North America could reduce administrative burdens, but the actual financial impact will vary depending on the facts. Companies affected by the rule change should consider submitting comments. The deadline is Thursday, August 5, 2021.
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