Thursday, May 27, 2021

Recent Customs Guidance Raises Questions about Section 301 Tariff Mitigation

A legal way to avoid China 301 tariff is to source one essential component of an article from someplace other than China. We have assisted clients, with concurrence from Customs, to implement this mitigation strategy. It is a strategy many importers have employed.

For example, Yamaha Motor Corporation, USA, imports motorized bicycles assembled in China from the components made in China, Japan, and Taiwan. The frame is from Taiwan, which makes the entire bike, assembled in the China with significant Chinese components, a product of Taiwan.[1]

This mitigation strategy works due to two CBP practices regarding country of origin determination.

1.         Simple assembly does not confer origin. "Simple assembly means the fitting together of five or fewer parts all of which are foreign (excluding fasteners such as screws, bolts, etc.) by bolting, gluing, soldering, sewing or by other means without more than minor processing."[2]

2.         Substantial transformation confers origin." The substantial transformation criterion is based on a change in name/character/use method (i.e., an article that consists in whole or in part of materials from more than one country is a product of the last country in which it has been substantially transformed into a new and different article of commerce with a name, character, and use distinct from that of the article or articles from which was so transformed)."[3] The test for determining whether a substantial transformation will occur 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.

When determining country of origin of an article that underwent a simple assembly operation in the last countries of processing before importation, Customs looks to the country of origin of the components of the articles. Where the components were made determines the country of origin of the article. When the components come from multiple countries, Customs will try to determine what component imparts the "essential character" of the article. In the case of the bikes assembled in China (simple assembly) of components from China, Japan, and Taiwan, Customs ruled that when steel was substantially transformed into a bike frame in Taiwan, that frame took on the character of a bike. In general, Customs is able to determine the single component that confers origin. Many importers of articles assembled in China have relied on that practice to avoid China 301 tariffs by identifying the single component that determines what the article is and relocating the sourcing of that component out of China.

Recent (May 18, 2021) Customs guidance regarding imported golf clubs[4] raises questions.

Complete golf clubs are made of prefabricated components consisting of a head, shaft, and grip. These components may be manufactured in multiple countries and are subject to Section 301 duties if the country of origin is China.

While the entire golf club has one tariff classification, the country of origin of the components of the golf club may need to be indicated.[5]

Here's where it gets interesting. If either the head or the shaft is of the same origin as the country where the assembly of the golf club occurs, the country of origin of the entire club is the country of its assembly.

But, where the origin of both the head and the shaft is different from the country of assembly of the golf club, the golf club will have multiple countries of origin, including the countries of origin of the head and the shaft.

Where a golf club has multiple countries of origin, importers must report the applicable trade remedies on each golf club component This will allow reporting of the correct country or countries of origin, value and any applicable Section 301 duties. Customs gives the example of a golf club assembled in Mexico of head from Taiwan, shaft from China, and grip from Mexico. The value of the Chinese-origin shaft is subject to 301 tariff.

The lessons?

Legal avoidance of China 301 tariffs may be possible, but Customs is actively seeking ways to maximize tariff revenues under the 301 action. 

Before you assume you can locate that one essential character you need to research whether Customs might determine that there is more than one essential component and potentially more than one country of origin. In the case of golf clubs with components from multiple counties, Customs reached back to old rulings from 1996 through 2005 that addressed the issue. In those rulings, the question was country of origin marking. Multiple countries had to be indicated. It had no effect on the tariff because it was the same for each country. Now that China has a higher tariff, Customs has become very interested in an old question of country of origin. This raises questions about other articles with multiple essential components. Customs has found a way to take some old ruling relating to marking and turn them in tariff revenue. Will they be coming for your imports next?

Customs regulations are complex, and ever changing. Failure to comply, even if not intentional, may result in unexpected tariff charges and potential penalties. Don't try to go it alone, seek professional assistance before you try to reduce or eliminate 301 tariffs

An initial analysis of your businesses' import patterns is offered free of charge.  This preliminary assessment will allow us to determine the best strategy to mitigate 301 tariffs or other import costs. Contact Glenn at glenn@foreigntradezonesolutions.com or David david@agathonassociates.com or by calling David at 617-285-6004 or Glenn at 603-957-8247.



[1] CBP Binding Ruling Letter HQ H312767 of September 24, 2020.

[2] See 19 CFR § 102.1(o)

[3] See Informed Compliance Publication What Every Member of the Trade Community Should Know About: U.S. Rules of Origin Preferential and Non-Preferential Rules of Origin -- https://www.cbp.gov/sites/default/files/assets/documents/2016-Apr/icp026_3.pdf

[4] See CSMS #47830638 - Guidance: Proper Entry/Entry Summary Reporting for Complete Golf Clubs with Components from Multiple Countries of Origin

[5] See HQ H313495, dated December 2, 2020; and HQ H313537, dated October 16, 2020

No comments:

Post a Comment