Worldwide: Changes In The U.S. Non-Preferential Origin Determination Rules – Implications For Companies Importing And Exporting Mexican Goods

On July 6, 2021, the U.S. Government published a notice of proposed rulemaking and request for comments on an amendment to the Code of Federal Regulations ("CFR") regarding the determination of non-preferential origin for imports from Mexico and Canada: Non-Preferential Origin Determinations for Merchandise Imported from Canada or Mexico for Implementation of the Agreement Between the United States of America, the United Mexican States, and Canada.

This article is intended to summarize and report on the implications of these changes for Mexican imports into the United States.

The Context: Non-Preferential and Preferential Origin Determinations

Determining the origin of a good is essential for several reasons, including setting tariffs, identifying free trade agreement-eligibility, establishing quotas, and public procurement, and as the Notice states, the United States has various ways to determine the origin of a good through rules of origin that are known as "preferential" or "non-preferential."

Preferential rules of origin, in essence, offer special tariff treatment, for example, duty-free or deriving from trade agreements or U.S. domestic legislation (e.g., Generalized System of Preferences).

In contrast, "non-preferential" rules of origin apply for other purposes, such as origin marking, anti-dumping, subsidies, safeguards, and other international trade measures adopted by the U.S. Government. Examples include the "national security" tariffs of Section 232 or tariffs adopted under Section 301 of the Trade Act.

The Background: Code of Federal Regulation Marking Rules

The "Country of Origin Marking Rules" are contained in Part 102 of Title 19 of the CFR, and their existence was provided for in Annex 311 of the North American Free Trade Agreement ("NAFTA"). The marking rules are distinct from the preferential rules of origin.

The purpose of the marking rules is to determine whether a product has its origin from any former NAFTA country (United States, Mexico, or Canada) for origin marking purposes, e.g., whether it is "made in Mexico."

The marking rules were not subject to negotiations during the creation of the NAFTA replacement agreement, the United States-Mexico-Canada Agreement ("USMCA"), creating a legal void. The United States decided to continue applying the existing marking rules.

The Problem: Different Rules of Origin for Measures under Section 301

The problem for importers in the United States is that the U.S. Customs and Border Protection ("CBP") does not use or apply origin marking rules to imports from Mexico and Canada for other special situations, such as tariffs or measures imposed under Section 301 of the Trade Act (read more on this). It is worth recalling that the U.S. Government, under the Biden administration, has not revoked the Section 301 measures imposed on Chinese products during the Trump administration.

In determining whether a Section 301 duty or measure applies to imports from Mexico, CBP applies the "substantial transformation" analysis based on a method developed in administrative practice and judicial precedent. Consequently, U.S. importers of products from Mexico and Canada could be subject to two different non-preferential rules of origin, one for marking and one for determining origin for other non-preferential purposes, such as Section 301 tariffs.

As the notice of proposed rulemaking notes, this situation "burdens importers with unnecessary additional requirements, creates inconsistency, and reduces transparency."

The Changes: Proposed Amendments to the Marking Rules

CBP is proposing amendments to the CFR, among other changes (set forth in a parallel publication), that seek to expand the "coverage" of the marking rules to include all non-preferential origin determinations made by CBP, such as admissibility, quotas, public purchases and the application of tariffs imposed under Sections 301 to 307 of the Trade Act:

"With this regulatory change, all non-preferential country of origin determinations by CBP for goods imported from Canada or Mexico would be based on substantial transformation pursuant to the tariff shift rules required by 19 CFR part 102."

The Affected Companies: Exporters in Mexico and Importers in the United States

If the proposed rule is adopted, companies in Mexico should review how this change could impact their exports to the United States. Likewise, U.S. importers and investors in the Mexican manufacturing sector should review both the USMCA rules of origin for U.S. tariff preference purposes and the marking rules to determine whether or not they comply with the non-preferential rules of origin for Section 301 and other non-preferential analyses.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.