On September 13, 2018, U.S. Customs and Border Protection announced a new ruling that will be pertinent to any company seeking to shift production from China to Mexico (or Canada) in hopes of mitigating the effect of Section 301 duties. The most important take-away is that although the NAFTA Marking Rules (19 C.F.R. Part 102) are used to determine the country of origin of articles imported into the U.S. from Mexico for marking purposes, the traditional substantial transformation test is used to determine the country of origin of articles for Section 301 duty purposes.
CBP illustrated the application of the ruling using the example of parts of a motor imported into Mexico for assembly. The assembly operation in Mexico was sufficient to satisfy the applicable NAFTA Marking Rule and thus for marking purposes, the finished article was deemed to be a "product of Mexico." However, CBP went on to say that the traditional substantial transformation test is used for purposes of "antidumping, countervailing, or other safeguard measures[.]" CBP then applied the traditional substantial transformation test to the facts and reached the conclusion that the Mexican assembly operations were not sufficient to confer origin and, therefore, the finished motor imported into the United States was a "product of China" for Section 301 purposes. So, in short, the product had to be marked to indicate that it was of Mexican origin, but the importer had to pay the Section 301 duty applicable to Chinese-origin articles.
Importers should be aware of what CBP’s analysis indicates: while the traditional substantial transformation test and the NAFTA Marking Rules are intended to rest on the same origin principles, they do not always produce the same result due to the nature of the tests. This is largely because the NAFTA Marking Rules are objective and the substantial transformation test is more subjective. Further, where Section 301 is concerned, the traditional substantial transformation test must be used even if the goods are imported from an FTA-partner country such as Mexico, Canada, Singapore, etc. Thus the NAFTA Marking Rules may be useful to that analysis, but cannot be considered determinative. In some cases, then, a company might find that an article marked as a product of Mexico could still be subject to duties applicable to products of China.