Country of Origin for Marking Purposes vs Country

Country of Origin for Marking Purposes vs Country of Origin for Section 301 Duties Aug. 18, 2020 Damon V. Pike BDO USA

Agenda Ø Country of Origin Determination • Substantial Transformation • Gibson-Thomsen v. United States; Energizer Battery Inc. v. United States Ø Country of Origin Marking • Country of Origin Marking Overview • Method of Marking & Marking Exceptions Ø North America Free Trade Agreement (“NAFTA”) Country of Origin: New Method for Section 301 Tariffs • NAFTA Marking Rules: 19 C. F. R. § 102 • Section 301 Tariffs • CBP Ruling N 301484 (Nov. 27, 2018); CBP Ruling H 300226 (Sept. 13, 2018) Ø USMCA • 2 NAFTA vs. USMCA

Country of Origin Determination

Country of Origin: “Substantial Transformation” Ø 19 C. F. R. § 134. 1(b): • “Country of origin” means the country of manufacture, production, or growth of any article of foreign origin entering the U. S. Further work or material added to an article in another country must effect a substantial transformation in order to render the other country the “country of origin” within the meaning of this definition; however, for a good of a NAFTA country, the NAFTA Marking Rules will determine the country of origin. Ø Substantial Transformation: The test for determining whether a substantial transformation has occurred is whether an article emerges from a process with a new name, character or use, different from that possessed by the article prior to processing. Texas Instruments Inc. v. United States, 69 C. C. P. A. 151 (1982) 4

Substantial Transformation 5

Substantial Transformation: United States v. Gibson Thomsen Co. Ø Toothbrush handles and wooden brush blocks were imported from Japan. Ø Assembly processes took place in the U. S. : 6 • Holes were drilled into the handles and blocks. • The bristles were inserted.

United States v. Gibson Thomsen Co. (cont’d) Ø The court found that a substantial transformation had occurred in the U. S. : • 7 “As a result of such manufacturing processes, the imported toothbrush handles and wood brush blocks lose their identity as such, and become new articles having, respectively, a new name, character, and use; that as such new articles are produced in the United States they are products of the United States. ”

Energizer Battery, Inc. v United States Ø Energizer used 50 different components to produce a flashlight. Ø Except for a few components, including a white LED (sourced from the U. S. and processed in China), most of the components were of Chinese origin. Ø The components were assembled into flashlights after importation into the U. S. Ø Assembly testing and boxing took 7 minutes and 10 seconds. 8

Energizer Battery, Inc. v United States (cont. ) Ø CBP determined that the flashlight was of Chinese origin on the basis that: • (1) Foreign-made components did not undergo a substantial transformation when they were assembled together in the U. S. ; and • (2) The white LED imparted the “essential character” of the complete flashlight; thus, the country of origin of the flashlight was determined by the country of origin of the white LED. Ø Energizer appealed CBP’s ruling to the U. S. Court of International Trade (“CIT”), arguing that the substantial transformation occurred in the U. S. for the flashlights to be considered of U. S. origin (for purposes of government procurement) rather than China. 9

Energizer Battery, Inc. v United States (cont. ) Ø However, CIT stated that an “essential character” test applied by CBP was not consistently used in a substantial transformation analysis. • CIT acknowledged that some courts have looked to the “essence” of a finished article to evaluate whethere has been a change in character as a result of post-importation processing. Ø CIT proceeded to apply changes in name, character, or use as the criteria for substantial transformation. 10

Energizer Battery, Inc. v United States (cont. ) Ø CIT stated that courts sometimes considered subsidiary factors in addition to name, character, and use, such as the extent and nature of operations performed, value added during post-importation processing, a change from producer to consumer goods, or a shift in tariff provisions. Ø However, consideration of subsidiary factors has not been consistent among courts, and no uniform list of acceptable factors exists. For example, courts are split on whether to consider value added or costs incurred during the assembly/manufacturing process as a factor: 11 • Some courts considered the fact whether significant value was added or costs were incurred by the process • Some courts rejected value added as a factor because it “could lead to inconsistent marking requirements for importers who perform exactly the same processes on imported merchandise but sell at different prices. ”

Energizer Battery, Inc. v United States (cont. ) Ø The CIT found that no substantial transformation had occurred in the U. S. given that the nature of Energizer’s post-importation assembly process was not sufficiently complex to give rise to a substantial transformation: • No change in name of components after assembly. • • “TIR lens” was still called “TIR lens” after being assembled in flashlight. No change in character of imported components after assembly. • Components retained shape and material composition. • Parts were held together with screws and nuts. • Foreign-origin components had a pre-determined end use for making a flashlight at the time of importation. • The wires were pre-cut for easier assembly into the flashlight. 12

Country of Origin Marking

Country of Origin Marking: 19 C. F. R. § 134. 11 Ø Every article of foreign origin (or its container) imported into the United States shall be marked in a conspicuous place as legibly, indelibly, and permanently, so the purchaser can clearly see it. 14 • Common marking methods are printing, stamping, engraving, and branding. • Containers of articles excepted from marking still must be marked, unless the container itself is also excepted. • Country of Origin Marking are governed by NAFTA Marking Rules set forth in 19 C. F. R. 102 of goods from NAFTA countries

Country of Origin (“COO”) and Marking Overview Ø Articles imported as intermediate materials for further manufacturing by the importer are normally exempt from marking. Ø 10% marking duties apply if rules are not met. Ø Add requirements for marking and HS codes into purchase orders. Ø Ensure that the proper country of origin is listed on the invoice. Ø Receiving personnel should regularly “spot-check” physical marking and report up the chain if items are not marked. 15 UNDERSTANDING THE UNITED STATES–MEXICO–CANADA AGREEMENT

Method of Marking Specific Articles Ø If the country of origin is the same country where the article is produced as a result of an assembly, the article may be marked as the following: 16 • Assembled in (country of final assembly); • Assembled in (country of final assembly) from components of (name of country or countries of origin of all components); or • Made in, or product of, (country of final assembly).

Marking Exceptions Ø Several exceptions to the marking requirements are cited in Section 134, such as: 17 • (c) Articles that cannot be marked prior to shipment to the United States except at an expense economically prohibitive of its importation; • (d) Articles for which the marking of the containers will reasonably indicate the origin of the articles; • (e) Articles which are crude substances; • (j) Articles entered or withdrawn from warehouse for immediate exportation or for transportation and exportation;

Marking Exceptions (cont’d) • (m) Products of the United States exported and returned; • (q) Goods of a [USMCA] country which are provided for in subheading 6904. 10 (building bricks) or heading 8541 (semiconductor devices) or 8542 (electronic integrated circuits) of the HTSUS; • “J-List” Exceptions included in 19 C. F. R. § 134. 33: • • • 18 Art work Bolts, nuts, washers, screws, and springs Nails, spikes, and staples Newsprint Christmas trees

North America Free Trade Agreement (“NAFTA”) Country of Origin: New Method for Section 301 Tariffs

Traditional Method – NAFTA Marking Rules Ø Pursuant to 19 C. F. R. § 134. 1(b), the country of origin for NAFTA goods was determined by NAFTA Marking Rules. • § 134. 1(g): A “good of a NAFTA country” is an article for which the country of origin is Canada, Mexico, or the United States as determined under the NAFTA Marking Rules. Ø NAFTA Marking Rules are different from the “substantial transformation” rule that determines country of origin for all non-NAFTA countries. Ø Traditionally, the substantial transformation rule did not apply to NAFTA goods in determining the country of origin for both duty assessment and marking purposes. However, CBP changed its position in 2018 based on rulings discussed below. 20

NAFTA Marking Rules: 19 C. F. R. § 102 Ø 19 C. F. R. Part 102 sets forth the "NAFTA Marking Rules" which are applied in sequential order: • The good is wholly obtained or produced; • The good is produced exclusively from domestic materials; or • Each foreign material incorporated in that good undergoes a “tariff shift” set out in Section 102 and satisfies any other applicable requirements of that section. • If the good does not meet any of the above categories, and it is a composite good (GRI 3), the country of origin of the good is the country or countries of origin of the single material that imparts the essential character to the good. • If the good does not meet any of the above categories, the country of origin of the good is the last country in which the good underwent production. 21

NAFTA Rules of Origin Ø NAFTA Rules of Origin included in Note 12 of General Notes (“GN”) of the Harmonized Tariff Schedule of the U. S. determined the eligibility of preferential duty treatment for NAFTA goods. Ø Do not confuse these Rules of Origin with the NAFTA Rules of Origin (for marking) found in 19 C. F. R. § 102 et seq. Ø To qualify for the preferential duty treatment, the good must: q q q 22 Be wholly obtained or produced in one or more of the NAFTA countries Satisfy a specific tariff shift and/or RVC requirement Consist of materials that originate in a NAFTA country Be classified in the same Harmonized System number as its parts if unassembled Be an electronic item or part qualifying under the provisions of Annex 308. 1.

Textile and Apparel Products: 19 CFR § 102. 21 Ø The country of origin for textile/apparel products from all countries is not determined by “substantial transformation, but by the following rules (applied in sequential order): • The good was wholly obtained or produced. • Foreign material incorporated in that good underwent an applicable change in tariff classification • Good was knit to shape (which 50 percent or more of the exterior surface area is formed by major parts that have been knitted or crocheted directly to the shape used in the good) • The most important assembly or manufacturing process occurred • The last country where an important assembly or manufacturing process occurred. 23

Section 301 China Tariffs Ø In 2018, the U. S. Trade Representative (“USTR”) launched an investigation and concluded that China engaged in “economic aggression” and “unfair business practices. ” Ø Additional duties were placed on various Chinese goods, which were detailed in lists by USTR: List 1 (25%), List 2 (25%), List 3 (25% - originally 10%), and List 4 A (7. 5%). Ø The proposed 15% duty for items on List 4 B was suspended. 24

Section 301 China Tariffs: Product Exclusion Update Ø Certain products of List 1, 2, 3, and 4 A were granted exemptions from tariffs by USTR: Ø List 1 - Exclusion petition deadline expired on Oct. 9, 2018 (USTR’s review has been completed); Ø List 2 - Exclusion petition deadline expired on Dec. 18, 2018 (USTR’s review has been completed); Ø List 3 - Exclusion petition deadline expired on Sept. 30, 2019 (USTR’s review has been completed); and Ø List 4 A - Exclusion petition deadline expired on Jan. 31, 2020 (USTR is still reviewing petitions). Ø Initially, granted exclusions became effective from the date of imposition (retroactively) to one year after the exclusion was published in the Federal Register. Ø However, USTR changed this policy -- most of the exclusions granted after Sept. 2019 expired on Aug. 7, 2020 or will expire on or before Dec. 31, 2020. 25

Section 301 China Tariffs: Country of Origin Ø Pursuant to CBP’s recent administrative rulings, determining the country of origin for duty assessment purposes (including Section 301 China tariffs) apparently now involves a different analysis than determining the country of origin for marking purposes for goods of NAFTA/USMCA countries: 26 • Country of origin for marking: NAFTA Marking Rules • Country of origin for duty assessment: Substantial Transformation Test

CBP Ruling N 301484 (Nov. 27, 2018) Ø Cable modems with Wi-Fi gateway Ø Chinese components imported into Mexico for assembly, which included a printed circuit board assembly (“PCBA”), rubber, case, screws, labels, etc. Ø Assembly Process: 27 • PCBA programmed • PCBA assembled into case • Case had six plastic components pressed together with six screws • Rubber feet placed on bottom • Labels placed on modem

CBP Ruling N 301484 (Nov. 27, 2018) (cont. ) Ø The foreign components (PCBA, housing/case, rubber feet, labels) all had a pre-determined end -use and did not undergo a change in use due to the assembly process. • Note: In CBP rulings involving PCBAs, the country of origin is where a process called Surface Mount Technology (“SMT”) occurs. SMT is a method of manufacturing PCBAs whereby components are soldered to the surface of the PCBA. Ø The production process performed in Mexico did not result in a substantial transformation of the Chinese components. The modems remained a product of China for tariff assessment purposes. Ø Pursuant to 19 C. F. R. § 134. 1(b), because Mexico is a NAFTA country, the NAFTA Marking Rules must be applied for purposes of determining the country of origin for purposes of marking. Thus, the country of origin for marking was Mexico. 28

CBP Ruling H 300226 (Sept. 13, 2018) Ø Johnson Inc. imported electric motors for door locks (8501. 10. 40) Ø The components of Chinese origin were imported into Mexico, and assembled into a finished product (8503). Ø The product consisted of three components: • the stator or rear housing, • the rotor or armature assembly, and • end cap assembly. 29

CBP Ruling H 300226 (Sept. 13, 2018) (cont. ) Ø The parts had a pre-determined end-use and did not undergo a change in use due to the assembly process in Mexico. Ø Simple assembly and the foreign subassemblies were not substantially transformed. Ø Because the assembly did not result in a substantial transformation of the Chinese parts, CBP found that the motor remained a product of China for purposes of duty assessment. Ø Because Mexico is a NAFTA country, the NAFTA Marking Rules must be applied in this case for purposes of determining the country of origin for purposes of marking. Applying the rules, CBP concluded that the country of origin, for purposes of marking, of the electric motor should be Mexico. 30 UNDERSTANDING THE UNITED STATES–MEXICO–CANADA AGREEMENT

U. S. -Mexico-Canada Agreement (“USMCA”)

USMCA Background Ø On Sep. 30, 2018, the U. S. , Canada and Mexico announced they had reached a trilateral free trade agreement (in principle), concluding more than 13 months of negotiations. Ø The agreement was officially signed by all three parties on Nov. 30, 2018. Ø The agreement entered into force on July 1, 2020. • Mexico became the first country to ratify USMCA when its Senate approved the agreement on June 19, 2019; • The U. S. Congress and Senate ratified the agreement on Dec. 19, 2019 and Jan. 16, 2020, respectively. President Trump signed the agreement into law on Jan. 29, 2020. 32

Summary of Major Changes NAFTA USMCA • Certificate of Origin (“CO”) required • No CO required • Wide range of existing rulings for similar goods • NAFTA rulings will not apply • New USMCA Center of Excellence • De Minimis: 7% • De Minimis: 10% • Exporter/producer responsible for certification • Importer responsible for certification • Sunset clause of 16 years with an option for review every 6 years • Increased Regional Value Content (“RVC”) requirements • LVC requirement and Steel/Aluminum Content requirement for certain automotive products • No “end date” • No Labor Wage Content (“LVC”) requirement 33

USMCA Certification of Origin Ø Certification can be completed by importer, exporter, or producer. Ø Certification of origin need not follow a prescribed format. (We generally recommend that clients use a standard CO form when certifying goods as USMCA-originating). Ø Certifier must have: • Documentation proving that the good is originating. • Reasonable reliance on producer’s written representation. Ø Certification can apply to goods within period specified, but not exceeding 12 months. Ø Certification valid for 4 years after completion date. 34

Country of Origin Determination under USMCA Ø The USMCA does not contain any rules to replace the NAFTA Rules of Origin found at 19 C. F. R. § 102 et seq. In fact, CBP’s Interim Implementing Instructions provide: • NAFTA Marking Rules contained in 19 C. F. R. Part 102 will still be used to determine the country of origin for marking purposes of a good imported from Canada or Mexico in accordance with 19 C. F. R. Part 134. Ø Thus, we expect that CBP will likely continue to apply NAFTA Marking Rules to determine the country of origin of goods from USMCA member countries for both duty assessment and marking purposes. Ø For purposes of the Section 301 China Tariff, CBP will likely continue to use the substantial transformation standard to determine whether a product is Chinese-origin or not. 35

Q&A

Damon V. Pike - Biography DAMON V. PIKE Principal BDO USA, LLP +1 561 207 3205 dpike@bdo. com EXPERIENCE SUMMARY Damon Pike leads the Customs and International Trade Services practice within BDO’s International Tax Services group with over 30 years of experience helping multinational companies navigate the complex rules governing the cross-border movement of goods and services. The practice was formed through the acquisition of Global Trade Strategies, Inc. (GTS), further enhancing the firm’s crossborder global tax advisory services, focusing on the goal of minimizing duty, VAT, and excise tax payments, while maximizing corporate customs and trade compliance. Prior to launching his own firm in 2006, Damon spent 12 years with a Big Four firm as the National Director of the firm’s customs consulting practice. Pike has experience in the legislative and judicial branches of the federal government; he began his customs career as a law clerk to the Hon. R. Kenton Musgrave at the U. S. Court of International Trade and worked for U. S. Congressman (and later Senator) James T. Broyhill of North Carolina. He was also an associate in the Washington, D. C. office of the Atlanta-based law firm of Kilpatrick & Cody (now Kilpatrick Townsend). PROFESSIONAL LICENSES Admitted to the Bars of North Carolina and the District of Columbia Admitted to the Bars of the US Court of International Trade, US Court of Appeals for the Federal Circuit, and the US Supreme Court Licensed US Customhouse Broker (1995 -present) 37 EDUCATION Law Degree, Wake Forest University Postgraduate Fellowship (German Academic Exchange Service), University of Regensburg (Germany) Undergraduate with Honors, Duke University International Business, University of Copenhagen (Denmark) International Trade, Friedrich-Alexander University (Germany)

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