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.

The instructions provide a rules of origin definition to determine whether a good qualifies as an “originating good” under the USMCA, such that it is eligible for preferential tariff treatment. Under USMCA a good is “originating” in the United States, Mexico, or Canada when:

a) The good is wholly obtained or produced entirely in the territory of one or more of the Parties, as defined in Article 4.3 of the Agreement;

b) The good is produced entirely in the territory of one or more of the Parties using non-originating materials provided the good satisfies all applicable requirements of product- specific rules of origin;

c) The good is produced entirely in the territory of one or more of the Parties exclusively from originating materials; or

d) Except for a good provided for in Chapter 61 to 63, HTSUS:

the good is produced entirely in the territory of one or more of the Parties, is classified with its materials or satisfies the “unassembled goods” requirement, and meets a regional value content threshold of not less than 60% if the transaction value method is used or not less than 50% if the net cost method is used (not including RVC for autos); and

e) The good satisfies all other applicable origin requirements.

USMCA includes substantial new rules governing the rules of origin for automotive goods. The agreement increase the RVC rule for automotive goods by requiring that 75 percent of auto content be made in North America. At least 70 percent of an auto producer’s use of steel and aluminum must also originate in North America. The interim instructions further explain the alternative staging regime included in USMCA that implements the new auto goods rules. It provides that a passenger vehicle or light truck may be considered originating until the later of January 1, 2025 or five years after entry into force of the agreement. To be eligible for the alternative staging regime, the passenger vehicle or light truck must be numerous requirements, including a RVC that is not lower than 62.5 percent (using the net cost calculation method) and must be 75 percent by the later of January 1, 2025 or five years after entry into force of the agreement. Appendix 1 of the interim instructions includes certification procedures for automotive goods.

The instructions indicate that the U.S. Department of Labor will issue separate regulations regarding certain components of the labor value content requirements.

When the USMCA will enter into force, and officially replace the 1994 North American Free Trade Agreement (NAFTA) between the three countries, remains unclear. The USMCA was signed into law on January 29, 2020, and was ratified on March 13, 2020. Currently, the Administration plans for the agreement enter into force on June 1, 2020. However, a number of parties in all three countries, including a group of U.S. senators, is calling for a delayed entry into force of the agreement in light of the COVID-19 pandemic.

* The interim instructions are advisory only. They are not final, not legally binding, and are subject to further revision.

Targeted single issue audits can be misleading. CBP typically sends an audit questionnaire covering potential issues of non-compliance. The questionnaires are more comprehensive than the CBP cover letter accompanying them. In addition, Importer Self-Assessment (ISA) participants, who are exempt from Focused Assessments, are not exempt from the single issue audits. ISA members and importers considering joining the program should consider whether the increased audit function obviates some of the benefits.

In addition, CBP has announced that in 2018 it will be integrating security and trade compliance and plans on merging ISA and the Customs-Trade Partnership Against Terrorism program by 2019. More on the merging of anti-terrorism initiatives and trade compliance to come.

CBP will permit ocean vessels to divert from their intended port to another port for discharge. CBP requests that ocean manifests be amended and new destination ports be alerted. CBP will not issue penalties for violations arising from port diversions during the hurricane.

The projected path of Hurricane Irma appears that it will cause disruptions to ports in Puerto Rico and Florida initially. Depending on Irma’s path, additional ports in the Southeastern U.S and even the Mid-Atlantic States are preparing for possible severe conditions. CCS will be monitoring the situation and make changes to the process as appropriate to ensure that trade into the U.S. continues to operate during this weather event.

The statute encouraged a wide variety of stakeholders to participate in this new administrative process. For example, the statute defined “interested parties” who may file an allegation of evasion to include foreign exporters and producers, importers, and domestic manufacturers and wholesalers, of products covered by antidumping and countervailing duty orders. Indeed, interested parties on all sides of the trade equation who play by the rules have an incentive to participate in the CBP’s evasion investigations.

In August 2016, however, CBP published in the federal register an interim final rule which some have claimed discourages the broad participation envisioned by the statute. Just last week, Senators Sherrod Brown and Rob Portman expressed this very sentiment in a letter to Kevin McAleenan, the Acting Commission of CBP.

Senators Brown and Portman identified one issue that was also commonly identified in the comments CBP received last winter concerning its interim rule – the lack of an administrative protective order or “APO.” In the context of antidumping and countervailing duty proceedings, the APO allows counsel and consultants who are approved by the Department of Commerce and/or International Trade Commission to view business proprietary information submitted by parties on the record of the proceeding. Without this type of procedure in EAPA investigations, neither counsel to the importers subject of the allegations nor counsel to the party making the allegations will be able to review and vet confidential information placed on the record of the investigation by other parties. The lack of an APO, also limits the ability of counsel to assist CBP in developing the administrative record and conducting its investigations of evasion.

Investigations currently underway are proceeding under the interim final rule. CBP has not yet indicated when it will issue a final rule and, it thus, remains to be seen what types of changes to the interim final rule CBP will make. Encouraging broader participation in the administrative process among the trade community would seem to be an ideal guidepost for any changes the agency does make.

In the first series, over 3,100 petitions were submitted to the ITC through its online Miscellaneous Tariff Bill Petition System (“MTBPS”). Due to petition withdrawals, 2,500 petitions still are under consideration. On June 6, 2017, the Commission issued its preliminary report to the Committees, entitled: American Manufacturing Competitiveness Act of 2016: Preliminary Report, USITC Pub. 4699 (USITC June 2017). In preparing the Preliminary Report, the Commission took into account comments from the public, as well as the information contained in a report submitted by the U.S. Department of Commerce, with input from U.S. Customs and Border Protection (“CBP”). In the Preliminary Report, the Commission broke the petitions down in the following categories: “Category I-IV” (petitions that meet the requirements of the Act with or without modification); Category V (petitions that do not contain the information required by the Act or that were not filed by a likely beneficiary); and “Category VI” (petitions that the Commission does not recommend for inclusion in a MTB). The public may submit additional comments on the “Category VI” petitions cited in its Preliminary Report; see 82 Fed. Reg. 24,142 (USITC May 25, 2017). The closing date for comments is June 21, 2017.

The Commission’s final report is due by mid-August 2017.