When You Get a New Hammer, Everything is a Nail

When You Get a New Hammer, Everything is a Nail

With the advent of the Section 301 duties against products from China, country of origin questions have become central to many business decisions. This is true because articles that are not Chinese for country of origin purposes do not pay the additional duties imposed under Section 301. Since these duties are either 25% of the value of the imports or 10% of the value (at the moment), depending on the good, these duties are literally business killers.

Naturally, country of origin questions are not new. Particularly in the United States, which differs from many countries by requiring that all imported goods indicate their country of origin, these questions have been arising for over a century. Over that time, the United States has developed a test called substantial transformation. If the articles in question undergo a “substantial transformation” in a third country, defined as acquiring a new name, character, and use by reason of processing in the third country, they become articles of that country. This test has always had a strong subjective element, but over time a substantial body of law  and rulings have been developed which has helped predict whether an article would be treated as substantially transformed. The same cases and rulings were cited for most decisions, and the trade was able to understand how Customs thought about those cases.

However, in 2016, Customs received a new hammer from the Court of International Trade. That hammer was named Energizer Battery Inc. v. United States and added a pithy element to the substantial transformation analysis that had been missing. The court in Energizer was analyzing substantial transformation for purposes of the government procurement parts of the Trade Agreements Act of 1979. This is not the law the overwhelming majority of substantial transformation are applied to, but it was the case before the court. Nevertheless, the court stated that “when the end-use was pre-determined at the time of importation, courts have generally not found a change in use.” Although this element appears in prior cases, it had never been a primary consideration in earlier substantial classification analyses. As restated in Energizer, it has become a valuable addition to the Customs toolbox.

As happens to all of us, when Customs got a new hammer it began to find nails everywhere. Most recently, in ruling H302821 (July 26, 2019) Customs Headquarters addressed the country of origin of Volvo automobiles exported from Sweden to the United States. The vehicles were assembled in Sweden from subassemblies assembled in China, articles produced in China, and a limited number of articles produced in countries other than China. The ruling sets forth the various places of assembly and production in some detail. However, the engine, gearbox, steering system, rear electric motors, brakes, battery modules, fuel tank, and body panels (among others) were all coming from China. In all cases it appears that Volvo was proposing to ship essentially complete but disassembled vehicles into Sweden from China.

One easy answer for Customs would have been to find that the essentially complete but disassembled vehicles were properly classifiable as finished automobiles as they entered Sweden, using General Rule of Interpretation 2(a).  Arguably no change in name would have taken place, since they would have been an automobile at importation and exportation (albeit at different stages of assembly), and the processing in Sweden was insubstantial such that no substantial transformation took place. This would have been in keeping with precedent regarding the essential character of an automobile, as well as pre-Energizer substantial transformation precedent. In other words, Customs could have used all of its old tools to apply Section 301 tariffs to Volvo’s from Sweden. And, in fairness, Customs did write that “the manufacturing processes of the five subassemblies in Sweden do not rise to the level of complex processes necessary for a substantial transformation to occur.” However, in the very next sentence Customs decided to also use its new Energizer hammer, finding that “the five subassemblies from China have a pre-determined end-use and do not undergo a change in use due to the assembly process in Sweden.”

What do we take from this new ruling? Simply put, every substantial transformation analysis is going to need to account for the Energizer hammer for the foreseeable future. This complicates the analysis for many products that the trade would have been confident were transformed in the past and may call into question analyses (but not rulings) that were done of processing before Energizer. It is very possible that you would get a different answer today, and it makes sense to review substantial transformation determinations made in the past that are not supported by a ruling to the importer.

Barnes Richardson & Colburn attorneys  can assist you with this process. Do not hesitate to contact us if you have any questions.