With tariffs dominating trade and economic news, accurately determining the country of origin (COO) of your imports has increased in importance. Why? Because COO is one of the elements—along with Harmonized System code and commodity valuation—used to determine duty/tax rates.
Free trade agreements such as the United States-Mexico-Canada Agreement (USMCA—formerly NAFTA) have specific and complex rules of origin. When not using an FTA, a basic rule of thumb for determining COO is: country in which the commodity is made, mined, grown, manufactured or underwent substantial transformation. The three-way test for substantial transformation is new name, new character, new use.
Here is more formal language from 19 CFR part 134:
Country of origin. “Country of origin” means the country of manufacture, production, or growth of any article of foreign origin entering the United States. Further work or material added to an article in another country must effect a substantial transformation in order to render such other country the “country of origin” within the meaning of this part; however, for a good of a NAFTA or USMCA country, the marking rules set forth in part 102 of this chapter (hereinafter referred to as the part 102 Rules) will determine the country of origin.
What Is Substantial Transformation?
In recent years, supply chains have grown more complex. Parts and components may be sourced from a number of different countries before being transformed into a finished product. Country of origin is not always obvious, which leads to the substantial transformation rule.
When goods are made from parts sourced in multiple countries, Customs and Border Protection (CBP) uses the substantial transformation rule to determine COO. Substantial transformation occurs when a product undergoes a process that results in a new name, new character or new use.
Here are some points to consider when determining if your goods qualify for substantial transformation:
- Change In Name: Do components retain their original name after processing? This is the least compelling of the factors supporting substantial transformation.
- Change In Character: Have the physical characteristics of the article or components changed significantly? Were changes cosmetic? What was the process that resulted in change?
- Change In Use: Is the end use of the article interchangeable with the end use of the components? Is end use of the components predetermined at the time of importation? What was the process that resulted in change of use? Predetermined end use generally precludes substantial transformation but is subject to the specifics of the article/components in question.
- Subsidiary/Additional Factors: CBP also looks at other factors, including extent and nature of operations (complex or simple); value added and/or cost incurred during transformation process; essential character of article (components transformed into finished product); change from producer to consumer good; tariff shift.
examples the International Trade Administration (ITA) gives to help explain substantial transformation:
- Sugar from Country A, flour from Country B, dairy products from Country C, and nuts from Country D are taken to Country E. In Country E, these products are further manufactured into cookies. (The separate ingredients were substantially transformed into a product of Country E, in that a new type of goods resulted from processing).
- Fresh vegetables grown in various countries are taken to another country to be mixed together and frozen. (The vegetables were NOT substantially transformed into products of the country where mixing and freezing occurred, and the mixture must be labeled with the origin of each ingredient).
- Repackaging, dilution with water, and similar minor processes usually do NOT cause a substantial transformation. Assembly or disassembly may result in a substantial transformation, depending on the nature of the products involved and the complexity of the operations.
Country of Origin and Free Trade Agreements (FTAs)
If your goods are coming from a country that has a free trade agreement (FTA) with the United States—such as USMCA, CAFTA-DR or KORUS—the rules for determining country of origin are defined in the rules of origin and must be followed to qualify for preferential treatment, like reduced or zero tariffs.
While FTAs still rely on the concept of substantial transformation, they may define it through more specific methods, including:
- Tariff Classification Change (Tariff Shift): The product must shift from one tariff heading to another after processing. For example, raw materials classified under one heading are transformed into a finished product under a different heading.
- Regional Value Content (RVC): A certain percentage of the product’s value must originate from the FTA countries.
- Specific Processing Requirements: Some products must undergo particular manufacturing or processing operations to qualify.
- Combination Rules: Many FTAs use a blend of the above criteria, and the applicable rule depends on the product’s HS code.
It’s critical to follow the exact origin criteria outlined in the relevant FTA’s rules of origin—even small deviations can disqualify a product from preferential duty rates. If you’re unsure whether your product qualifies under an FTA, your customs broker can help you interpret the rules.
A certificate of origin is a document that verifies a product’s country of origin. It states where the product was produced, manufactured or processed. It’s often required by a country’s customs authority as part of the clearance process when importing, and always when claiming preferential treatment under an FTA.
Normally, the issuing authority can be one of the following institutions:
For more guidance, you can browse our library of FTA certificate of origin templates, which include all required fields under each agreement. And if your shipment requires a certificate of origin certified by a chamber of commerce, you can quickly create an electronic certificate of origin (eCO) here.
For More Help
This would be a good time for importers to meet with their customs broker or trade advisor to confirm that country of origin, HTS codes and valuation are accurate for their transactions. CBP has ramped up enforcement, so it is best to be proactive.
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