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 report noted the following facts:

• For bills issued in fiscal years 2001 – 2018, CBP collected over $20 billion in uncollected AD/CV duties.
• For bills issued over the same period, $4.5 billion in AD/CV duties remained uncollected as of May 2019.
• Only 20 importers accounted for $1.93 billion (or 43.3 percent) of the $4.5 billion in AD/CV duties with the remaining $2.52 billion (or 56.7 percent) in uncollected duties accounted for by 1,118 importers.

CBP has also undertaken variety of measures to address uncollected duties. Perhaps most interesting is CBP’s use of new statistical models to identify key risk factors associated with nonpayment. As noted above, with only 20 importers accounting for more than 43 percent of the value of billed but uncollected duties, identifying high risk importers would appear to be a prudent step.

The report also identified the United States’ retrospective system of duty assessment as one factor contributing to complexities in duty collection faced by both agencies. The retrospective system is widely viewed as a net positive, however, which leads to more accurate duty assessment over time. The report concludes that while the two agencies have undertaken measures to address weaknesses in the process for collecting duties, more can be done.

One significant factor that the report failed to identify is that a significant portion of the uncollected duties are the result of prior loopholes in the so-called “new shipper” provisions of the AD/CVD law. Subsequent amendments to the law, including the bonding requirements, have since largely addressed this issue. Additionally, ongoing litigation between CBP and sureties accounts for much of those uncollected duties. Those sureties were left liable for the uncollected duties under bonds written for the importers who defaulted on their duty liability. The sureties have been largely unsuccessful in their attempts to avoid liability under the bonds they issued, and much of this duty liability will likely be collected once that litigation is completed.

A complete copy of the report may be accessed through the GAO’s website or using the following link: https://www.gao.gov/assets/710/702570.pdf.

While it has been known that North Korea sends workers abroad, this report is the first time the supply chain has been documented to show North Korean forced labor products entering the U.S., which is a federal crime. It has been reported that North Korea sends tens of thousands abroad, bringing in revenue estimated at $200-$500 million per year as Kim Jong Un keeps a large percentage of the salaries. According to the AP, the North Korean workers in China remain under constant surveillance and live in forced labor conditions.

In August, 2017 President Trump signed legislation which makes it a crime to import products made by North Korean workers anywhere in the world and authorizes new economic sanctions against North Korea on goods produced by North Korean forced labor. The new U.S. law labels all North Korean workers, both in North Korea and abroad, as forced labor. Customs is reviewing the report and considering enforcement measures including prohibiting goods from entering the U.S. In addition, if Customs finds evidence of forced labor, the matter will be turned over to Immigration and Customs Enforcement (ICE) - Homeland Security for a criminal investigation. Importers are encouraged to review their supply chains to ensure that their goods are not manufactured by slave or forced labor.

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.