In an earlier post, “Made in the World”: What’s Behind the Label” we discussed the challenges of determining exactly where in the world a product is made. Today’s global supply chains mean that many companies source their inputs from and divide their operations across several countries to maximize efficiency and to minimize costs.  Meanwhile, labeling laws require that products carry a label – “Made in X”. X identifies as the country of origin the last country in which an operation occurred that added transformative value to the product.

This reality was reinforced by the recent Notice of Issuance of Final Determination Concerning Certain Notebook Computer Products by US Customs Border Protection (CBP). Hewlett Packard (HP) sought clarity on the country of origin of certain notebooks assembled from 9 major sets of components sourced from various countries.

HP wanted to know – What country of origin should the label read? The answer to this question determines whether the notebook can be sold to the US Government under its “Buy American” program.

CBP reaffirmed that the country of origin of the notebooks is the country where the last substantial transformation takes place. Substantial transformation is an established rule that is applied to determine the origin of a final product that is either NOT produced entirely in one country and/or which incorporates materials made in more than one country.

CBP has developed the following test to help determine when substantial transformation has occurred: Do the component parts lose their identity and become an integral part of a new article, i.e. of the final product in question?

Rule of Substantial Transformation Applied to the HP Notebook

The HP Notebook contains the following components:

  1. Base Unit assembled in Country A and containing an antennae, printed circuit assembly, BIOS chip, keyboard, cables, connectors, speakers, and central processing unit (CPU) sourced from Country A or G
  2. Hinge-Up assembled in Country A
  3. Hard Disk Drive/Solid State Drive sourced in Country A or B
  4. WLAN Card from Country A
  5. RAM produced in Country A, B, or C
  6. Battery from Country A
  7. BIOS developed and written in Country D then sent electronically to Country E
  8. OS developed in Country D
  9. Other components from a variety of sources comprising less than 2% of the Notebook

CBP focused its analysis on identifying the last country in which substantial transformation occurs, giving the notebook the identity that determines its use. CBP concluded that this occurs in Country A where the Notebook’s Base Unit is assembled. This process, CBP said, is where the major assembly occurs that gives the Notebook its functionality.

CBP rejected HP’s argument that downloading the BIOS in Country E was substantial transformation. The BIOS executes the instructions that start the Notebook and prepares the hardware for use, loading the operating system and passing control of many functions to the operating system. However, downloading, by itself, CBP stated, is insufficient to qualify as substantial transformation. Rather, this would occur through programming, i.e. writing, testing, and implementing the code to make the Notebook function in a certain way.

Application to Your Manufacturing Processes

How much can you outsource? As a company designs its manufacturing processes and determines from where to source inputs, correct analysis and application of this rule helps to ensure that:

  • The correct country of origin is assigned to the final product; and
  • The correct identification of the country of origin does not result in lost markets. Programs that provide preferential or preferred access to a country’s markets depend on accurate identification of country of origin.

HP has the option of appealing the CBP decision to a Court that more often than not defers to CBP determinations. Alternatively, or eventually, it must either re-design its manufacturing processes or lose a lucrative customer – the US Government under the Buy American program.

Contact us for support in applying the rules of origin to your manufacturing processes.

DevelopTradeLaw, LLC provides business-oriented advice to the legal challenges that face companies doing business internationally. Contact us for more information or advice on the topic of this article.