CUSTOMS PROPOSES NEW ORIGIN RULES FOR CANADA, MEXICO AND CERTAIN GOVERNMENT PROCUREMENT PURPOSES

United States Customs and Border Protection has issued a proposed regulation which proposes to retain the "NAFTA Marking Rules" in 19 C.F.R. Part 102, and to  make them applicable to all non-preferential origin determinations for goods imported from Canada or Mexico -- not just marking,  The proposal would use these "tariff shift" -based rules for purposes such as determining the rate of duty for goods for non-preferential purposes, and would preclude the use of the traditional "substantial transformation" test of a change in name, character or use. 

The proposed regulations are available at 2021-14265.pdf (govinfo.gov)

This would mean, for example, that in determining the origin of a good produced in Canada or Mexico with Chinese-origin parts, for purposes of determining the applicability of Section 301 tariffs, Customs would use the tariff-shift rules in 19 CFR Part 102, instead of assigning a good a country of origin for tariff purposes, which is different from the country of origin for marking purposes -- a phenomenon seen in several recent Customs rulings. 

 Customs claims that the tariff shift rules in Part 102 codify the "substantial transformation" rule, but Courts rejected that formulation years ago.  Indeed, since the new United States-Mexico-Canada Free Trade Agreement (USMCA) does not mention marking, or require a set of internationally-agreed marking rules, many have questions whether there is need to retain the NAFTA Marking Rules at all.

Perhaps more controversially, Customs is proposing to use the Part 102 rules to determine the  country of origin purposes, for government procurement reasons under the Trade Agreements Act (TAA), of goods imported from Canada and Mexico.  This proposal is likely to be more problematic. The TAA implementing statute, 19 USC 2518, specifically calls for the use of the "name, character and use" factors. This proposal could place Canadian and Mexican producers on a different footing from companies in other countries for TAA purposes. [Alternatively, CBP might just start applying the Part 102 tariff shift rules to goods from all countries in making procurement rulings and determinations].  We expect some industry resistance to this proposal. 

CBP will be soliciting public comment on the proposed regulatory changes for 60 days. We stand ready to furnish any information or assistance you might require concerning this proposal. If you have questions, please contact a Neville Peterson professional.