One of the issues companies will have to consider as they re-engineer supply chains in response to the coronavirus pandemic is – what’s behind the label?
It can be challenging to determine exactly where in the world a product was 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 Country X”. This label indicates the “country of origin”, defined as the last country in which an operation occurred that added transformative value to the product. The following case demonstrates the challenges and importance of determining “what’s behind the label”.
In March 2015, Hewlett Packard (HP) sought clarity from US Customs Border Protection (CBP) on the country of origin of certain notebooks assembled from nine (9) major sets of components sourced from numerous countries. HP wanted to know – What country of origin should the label read? The answer to this question would determine whether the notebook could be sold to the US Government under its “Buy American” program.
CBP reaffirmed the rule that the country of origin of the notebooks is the country where the last substantial transformation took 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 contained the following components:
- Base Unit assembled in Country A and containing an antenna, printed circuit assembly, BIOS chip, keyboard, cables, connectors, speakers, and central processing unit (CPU) sourced from Country A or G
- Hinge-Up assembled in Country A
- Hard Disk Drive/Solid State Drive sourced in Country A or B
- WLAN Card from Country A
- RAM produced in Country A, B, or C
- Battery from Country A
- BIOS developed and written in Country D then sent electronically to Country E
- OS developed in Country D
- 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 occurred, giving the notebook the identity that would determine its use. CBP concluded that this occurred in Country A where the Notebook’s Base Unit was assembled. This process, CBP said, was where the major assembly occurred that gave 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, was 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
As a company designs its manufacturing processes and determines from where to source inputs, correct analysis and application of the rule of substantial transformation help to ensure that:
- The correct country of origin is assigned to the final product; and
- The correct identification of the country of origin supports improved market access. Programs that provide preferential or preferred access to a country’s markets depend on accurate identification of the country of origin.
HP faced some tough choices as a result of this CBP decision. It could appeal to a Court that more often than not defers to CBP determinations. It could re-design its manufacturing processes. Or it could lose a lucrative customer – the US Government under the Buy American program.
Be proactive. Contact us for help in understanding how the rules impact what’s behind the label on your products.