Dead Rabbit? Recent CIT Ruling Upholds Traditional Customs Rules of Origin

In recent years, United States Customs and Border Protection (CBP) has been adopting increasingly novel interpretations of the rules determining the country of origin of imported goods. Largely in an effort to maximize collection of Section 301 tariffs on Chinese-origin products, Customs has wandered away from the traditional “substantial transformation” test of a change in “name, character or use”. Increasingly, Customs rules that a product originates in the country where its key component(s) come from, rather than the country where the article is made.

On February 24, 2022, an important decision of Court of International Trade called CBP’s practices into sharp question.

In Cyber Power Systems (USA) v. United States, Slip Op. 22-17 (February 24, 2022), the CIT reiterated that the traditional rule “substantial transformation” rule is the appropriate rule of origin for determining where goods originate, for both marking and Section 301 tariff purposes.

In so ruling, the CIT emphatically rejected several theories of origin argued by Customs – for example, that a good originates in the country where most of their component parts come from, or the country where their “essential component” was made – thus calling into question the validity of dozens of rulings CBP has issued to importers in recent years. The CIT also called into question an earlier decision, Energizer Battery Co. v. United States, 190 F. Supp. 3d 1318 (Ct. Int’l Tr. 2016) which suggested that “assembly operations could not result in a substantial transformation if the nature of the finished article was evident from the parts to be assembled.” According to the Cyber Power court, “[t]hat is not, and cannot be, the law.” Customs has weaponized the Energizer decision to disallow even extensive assembly operations from being “substantial transformations”. This leaves the “Energizer Bunny” dead, or on life support with bad prospects.

The Cyber Power decision, authored by Senior Judge Leo Gordon, emphasized that that disclosure of the origin of an article, rather than the article’s parts or components, is the goal of the marking statute, 19 U.S.C. §1304(a). Where Congress wants a company to disclose the origin of materials and components it knows how to do so, the court said, citing the American Automotive Labeling Act and laws requiring disclosure of corporate use of “conflict minerals”.

The CIT noted that, in the face of Federal government guidance urging countries to de-couple from China, Cyber Power did so, moving some of its Chinese production to a newly established Philippines facility. The Court agreed with Cyber Power that “disregarding this investment, the extensive manufacturing operations being conducted in the Philippines and the creation of new articles of commerce in the Philippines, and focusing solely on the source of parts, rather than the place where the finished article is produced, sets the Section 301 policy on its ear, and would produce enormous trade distortions.”

Recipients of CBP rulings or decisions holding that goods originated in countries where their parts or “essential components” originated, rather than the country where the product was assembled, are likely to seek reconsideration of those rulings in light of the Cyber Power decision. Many importers whose products were deemed to be Chinese-origin based on these tests, are likely to start protesting the assessment of Section 301 tariffs, and to seek refunds.

For additional information concerning this subject, please do not hesitate to contact a Neville Peterson professional.