October 16, 2018

October 16, 2018

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October 15, 2018

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CBP Finds NAFTA Marking Rules Inapplicable for Determining Origin of Goods Subject to Section 301 Duties

On September 13, 2018, U.S. Customs and Border Protection (CBP) issued a significant ruling that addresses the interplay between the NAFTA Marking Rules and the Section 301 duties applied to goods from China. We believe it is important to understand this ruling as importers may seek to mitigate the impact of Section 301 duties on Chinese-origin goods by moving production to the NAFTA territory.

In CBP Headquarters Ruling Letter H300226, dated September 13, 2018, CBP asserts that the NAFTA Marking Rules (19 CFR Part 102) are only applicable for country-of-origin marking purposes, and are inapplicable for determining origin for duty liability under the Section 301 tariffs on certain imports from China identified by the Office of the United States Trade Representative (USTR). Specifically, CBP stated that when “considering a product that may be subject to antidumping, countervailing, or other safeguard measures [including Section 301], the substantial transformation analysis is applied to determine the country of origin.”

Elevated Risk

While CBP’s interpretation may be subject to challenge in the future, it is important to understand the agency’s position on this issue and factor it into any contemplated supply chain changes that involve production in a NAFTA country. Although the facts in the ruling are quite narrow (an electric motor assembled in Mexico from three Chinese-origin parts was a product of Mexico for marking purposes, but of China origin for Section 301 duties), this newly announced position presents a substantially elevated risk of review and challenge by CBP for Mexican or Canadian products incorporating Chinese inputs subject to Section 301 retaliatory duties.

Immediate takeaways from this recent ruling for products imported into the United States from Mexico or Canada are:

  • CBP will apply the NAFTA Marking Rules only in connection with the country-of-origin marking of merchandise exported from Mexico and Canada (and other limited purposes identified in the NAFTA Marking Rules).

  • CBP will require the deposit of Section 301 tariffs and entry under Harmonized Tariff Schedule of the United States (HTSUS) subheading 9903.88.01 for Section 301−subject merchandise that is Chinese-origin or contains subject Chinese-origin items unless the inputs have been substantially transformed in Mexico or Canada into a an article with a new name, character, or use.

  • It remains unclear whether CBP considers a NAFTA “originating” good (pursuant to the NAFTA Rules of Origin provided in HTSUS General Note 12) made with Section 301−subject Chinese origin inputs as outside the scope of Section 301 tariffs absent support that subject Chinese-origin inputs were substantially transformed.

In many instances, there is a strong likelihood that merchandise otherwise considered NAFTA “originating” will be able to meet a substantial transformation test. However, merchandise that is not NAFTA “originating,” but otherwise treated as Mexican- or Canadian-origin under the NAFTA Marking Rules should be carefully analyzed to determine whether any Mexican/Canadian processing that may occur rises to the level of a substantial transformation.

Summary

In light of this ruling, we recommend carefully analyzing any current or contemplated production and assembly operations in Mexico or Canada that incorporate Chinese-origin product that is subject to the Section 301 retaliatory duties. Similarly, we recommend a review of finished goods that are classified in a tariff provision subject to the Section 301 tariffs and made from Chinese-origin components that are not substantially transformed. In such circumstances, CBP’s ruling could potentially subject Mexican/Canadian labor and additional non-Chinese-origin inputs to additional Section 301 tariffs.

Given the aggressive position articulated by the agency in H300226, it is likely that CBP will apply an elevated substantial transformation analysis to merchandise entering the United States from Canada or Mexico that includes subject Chinese inputs. Based on this current interpretation, a request for a binding ruling from CBP may be warranted for certainty that a production or assembly operation in Canada or Mexico (or other country) results in a substantial transformation.

©2018 Drinker Biddle & Reath LLP. All Rights Reserved

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About this Author

William Rucker, Drinker Biddle Law Firm, International Trade and Customs Specialist
Partner

William R. “Randy” Rucker assists clients with all aspects of U.S. Customs law, including the classification and valuation of merchandise, country of origin and marking determinations, quantitative import restraints, duty-preference and savings programs, understanding and receiving the benefits of free trade agreements, compliance audits, enforcement actions and other trade-related matters.

In order to assist clients with their compliance efforts and satisfy "reasonable care" requirements, Randy frequently performs reviews of companies' internal...

312-569-1157
James Sawyer, Drinker Biddle Law Firm, Chicago, Trade Law Attorney
Partner

James L. Sawyer counsels clients in all areas of U.S. import laws and regulations, including tariff classification, valuation, origin determination and marking, Free Trade Agreements, and duty preference programs. He chairs the firm’s Customs and International Trade Team and is the Regional Partner in Charge of the firm's Chicago office.

James represents clients in enforcement proceedings and investigations, Focused Assessment audits, and other verification proceedings conducted by U.S. Customs and Border Protection (CBP). He frequently assists clients craft responses to formal CBP Requests for Information and Notices of Action, which are often precursors to more aggressive CBP enforcement proceedings. 

312-569-1156
Nate Bolin, Drinker Biddle Law Firm, Washington DC, Litigation Law Attorney
Partner

Nate Bolin has significant experience advising clients in compliance, transactional, litigation, policy and regulatory matters involving U.S. export controls, U.S. International Traffic in Arms Regulations (ITAR), economic sanctions, and related areas of national security and international trade law.

In corporate transactions and mergers and acquisitions, Nate regularly advises buyers, sellers and investors on the impact of U.S. export controls, customs laws, trade remedy laws, existing bilateral and multilateral trade...

(202) 230-5888
Nicholas Guzman, Drinker Biddle Law Firm, Chicago, Trade Law Attorney
Associate

Nicolas Guzman assists his clients in all aspects of international trade laws and regulations. Nick has experience helping clients with a variety of import issues, including import tariff classification, valuation, country of origin determination and marking issues, and eligibility determinations under various free trade agreements and duty preference programs.

Nick assists clients with establishing import operations, from the development of internal controls through the planning and execution of post-entry audit processes. He...

202-230-5436