With the recent surge in tariffs and imposition of differentiated tariffs for different countries of origin (i.e., higher tariffs for goods originating from China than from neighboring countries and potentially other countries subject to "reciprocal tariffs"), businesses are under pressure to find ways to minimize their exposure to these additional costs.
We are being asked whether moving goods through different locations could be an effective strategy to avoid tariffs. This could take several forms, including simply labeling goods as originating in a country with lower tariffs when the goods were actually manufactured elsewhere; routing products through ports in an intermediary country with lower tariffs and declaring that country as the origin (transshipment); or performing minor processing or assembly in a third country and claiming that as the country of origin. While these approaches may seem like clever workarounds, they carry significant legal risks and could result in severe consequences for exporters and other parties engaged in facilitating such circumvention.
Under U.S. customs law, the "country of origin" of a good is not simply the last country from which the good was shipped, nor is it the location indicated on the "Made in X" label. Instead, the origin is typically the country (1) where the product was wholly manufactured, produced, or grown, or (2) where the product last underwent a "substantial transformation," which occurs when the resulting article has a name, character, or use that differs from those of the original materials. The determination of "substantial transformation" is made by the U.S. Customs and Border Protection (CBP) on a case-by-case basis and can depend on factors such as the properties of the article, essential components of the article, complexity of the manufacturing process, and value added to the article. Finally, to the extent that free trade agreements (such as the USMCA) apply, the preferential rules of origin set forth in those agreements, rather than the general tests mentioned above, would be used to determine the country of origin.
The schemes described above–mislabeling the country-of-origin, transshipping, and performing insubstantial process in order to evade tariffs–violate U.S. customs law. CBP scrutinizes such practices and expects importers to accurately declare the true country of origin based on the applicable legal standards. Countries including Vietnam, South Korea, and Mexico are also taking steps to clamp down the use of their ports for illegal transshipments of goods destined for the U.S.
The risks of mis-declaring the origin of goods are significant. At a minimum, importers found to have incorrectly declared origin will be required to pay the correct duties. More serious consequences arise when CBP determines that the misdeclaration was intentional or negligent, which can lead to substantial civil penalties. In egregious cases, CBP has the authority to, and often does, refer duty evasion cases to the Department of Justice (DOJ) for civil and criminal enforcement. Convictions can result in substantial fines and even imprisonment for individuals involved. For instance, in United States v. Akua Mosaics, Inc. and Kenneth Fleming, an importer, its president, and its Chinese resident supplier were convicted of conspiracy to defraud CBP by falsely claiming that goods originated in Malaysia when in fact they originated in China. The charges carried terms of imprisonment and significant penalties based on the value of the goods—penalties that can quickly reach seven figures if not more. Moreover, DOJ has recently shown interest in prosecuting custom frauds under the False Claims Act (FCA), which can be deployed against importers who misrepresent the origin or value of a product in order to evade duties. The FAC is a powerful tool because it permits not only the government to prosecute individuals and entities, but also private individuals (whistleblowers), to bring lawsuits on behalf of the government if they know of a business that dodges custom duties.
Thus, despite the temptation to minimize tariffs by manipulating the declared origin of goods, the legal and financial risks outweigh any potential short-term savings. Exporters and importers should ensure that their practices strictly comply with U.S. customs law and seek expert guidance when in doubt about the proper country of origin for their products.
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