United States: Many Unhappy With Proposed Changes To Country-Of-Origin

Customs and International Trade Alert

The comment period has just closed on a proposal published last July in which U.S. Customs and Border Protection ("CBP") suggested significant changes to the way in which the country of origin is determined for goods subjected to processing in more than one country (see Blank Rome's http://www.blankrome.com/index.cfm?contentID=37&itemID=1647 Customs and International Trade Alertof August 15, 2008). The proposed changes would affect not only such CBP issues as country of origin marking and duty rates, but also, potentially, government contracting, coastwise trade, and numerous other areas of commerce. Instead of continuing to employ a case-by-case analysis to determine whether a good undergoes a "substantial transformation" in a particular country – a technique dating back approximately a century – CBP has suggested a "tariff-shift"-based codification (currently used for NAFTA country-of-origin-marking purposes) that, according to CBP, would greatly improve the administration of the law by eliminating subjectivity and uncertainty, by promoting transparency and predictability, and by aiding importers' exercise of reasonable care.

Judging from the scores of comments submitted by the twice-extended December 1, 2008 deadline, CBP appears to be quite alone in that view. The criticism leveled at CBP's proposal falls essentially into three broad categories: (1) opposition to extending tariff shift principles to areas of the law where, contrary to CBP's suggestion, doing so would be illegal, would overturn existing law, or both; (2) opposition to applying the tariff shift rules as written where, contrary to CBP's assurance, the new rules will produce a result at odds with the body of law they were expected to codify; and (3) opposition in general to the proposed implementation of new rules on multiple grounds, including substantially increased costs, uncertainty, and burden on members of the trading community; substantially increased complexity; and abysmally poor timing. Each of these categories of criticism is discussed briefly below.

First, substantial opposition was voiced by members of the Customs and International Trade Bar Association ("CITBA"), the trading community at large including the American Association of Exporters and Importers ("AAEI"), and specific industry organizations such as the Independent Terminal Operators Association and the Maritime Cabotage Task Force, to the proposed application of a tariff shift methodology to determining whether a new and different product arises so as to permit an importation or re-importation under the coastwise transportation laws (the Jones Act). The concern expressed is that a tariff shift regime would work a major and apparently unintended reversal of existing law and, in so doing, would have a highly damaging impact on a body of commerce that has relied on the existing law for years. Similarly, the proposed extension of a tariff shift methodology to determine origin for government procurement purposes was opposed by many as being contrary to, if not prohibited by, existing law that explicitly directs that such determinations be based on traditional "substantial transformation" analysis.¹ In particular, CITBA noted that in a recent final determination Customs itself appeared to recognize that, in the absence of express statutory authority, origin determinations for government procurement purposes could not be based on tariff shift rules.²

Second, many commentators pointed to the need for numerous corrections to specific proposed rules. When CBP introduced its proposal, it indicated that "[a]fter over 10 years of concurrently administering the codified [tariff shift] and the case-by-case methods for determining origin," it identified only five specific product areas – pipe fittings and flanges, printed greeting cards, glass optical fiber, rice preparations, and certain textile products – in which the outcomes of the two systems have been inconsistent and for which it believed the codified rules should be altered. While individual commentators took sides on the proposed pipe fittings and flanges rule and two members of the optical fiber industry each found different deficiencies in the proposed rules relevant to that industry, numerous other parties noted complete failures of proposed specific rules to achieve the promised consistency between a tariff shift regime and current law. Included among these commentators were representatives of such diverse sectors as automotive parts, bearings, chemicals, computers and related equipment, foodstuffs and beverages, pharmaceuticals, and watches.

Third, a large group of commentators, representing a broad swath of industries and interests, expressed serious reservations toward, and often intense criticism of, the overall codification proposal.³ Among the various causes of concern are:

• Significantly increased complexity and uncertainty: ascertaining the "correct" classification of both the inputs and the final product in order to determine whether there has been a "tariff shift" can be decidedly more complex than determining whether substantial transformation has occurred under established law;
• Significantly increased cost of compliance, particularly in these perilous economic times;

• Significantly increased burden on importers in their effort to exercise the reasonable care that the law demands of them;

• Failure to await completion of the WTO rules of origin initiative;

• Reliance on certain NAFTA rules which are outdated;

• Fixing what is not broken and substituting an inferior system for a superior system.

The only substantive expression of support for CBP's overhaul of the rules of origin came from John P. Simpson, the former Deputy Assistant Secretary of the Treasury who played the premier role in developing the tariff shift initiative in the early 1990s, and who insists today that the "substantial transformation" system is inadequate for determining origin despite the chorus of traders and industries singing its praises.

All comments submitted in this rulemaking are retrievable at www.regulations.gov (USCBP-2007-0100).) Although the time for submitting formal comments expired on December 1, 2008, interested persons who wish to weigh in on the issues, particularly where the proposed tariff shifts will change the country of origin for a particular good from that found under the current approach, may still have an opportunity to do so. The timing of any final rules is uncertain and interested parties may wish to follow the regulatory process closely.

Footnotes

^{2. See 73 Fed. Reg. 55,860, 55,862 (Sept. 26, 2008)}

^{3. Included among these commentators were spokespersons for the bar (CITBA), for the general trading community (AAEI), for various and sundry industry groups and coalitions (AeA, Alliance of Automobile Manufacturers, American Apparel & Footwear Association, BACM, Emergency Committee for American Trade, Generic Pharmaceutical Association, Grocery Manufacturers Association, ITAA, Joint Industry Group, Juice Products Association, Motor & Equipment Manufacturers Association, National Association of Manufacturers, National Confectioners Association, National Retail Federation, U.S. Chamber of Commerce and Retail Leaders Association, Southern Shrimp Alliance, and USCIB), and for numerous individual companies (Abbott Laboratories, Apple Inc., Brother International Corporation, Clorox Sales Company, Delphi Corporation, Intel Corporation, L. Perrigo Company, Pfizer, Rockwell Automation, Inc., Texas Instruments Incorporated, Waters Corporation, and Xerox Corporation).}

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