Is This the End of Predetermined End Use?

The Court of International Trade today issued a decision in the closely-watched CyberPower country of origin case. I have had high hopes that this case will be the vehicle to clarify the substantial transformation test used by Customs and Border Protection and the Courts to determine country of origin for purposes of marking and of assessing non-preferential duties (including Section 301 duties on goods originating in China). As discussed below, the language in the decision is generally favorable for a simplified and more reasonable approach to origin. But, the Court found open questions of fact and ordered the parties to prepare for a trial.  

The issue is the country of origin for Section 301 purposes of power supplies. The plaintiff had moved assembly from China to the Philippines, but retained many significant parts from China including a populated printed circuit board assembly. U.S. Customs found the item to originate in China and be subject to the 301 duties. Both parties moved for summary judgment.

The context for this dispute flows out of the earlier (and un-appealed) CIT decision in Energizer v. U.S., which we discussed here.

In its motion, the U.S. argued that the purpose of the origin law is to allow consumers to identify the origin of the major components of the item. The Court disagreed, stating that:

The court also does not agree with Defendant that the purpose of the Section 301 tariffs imposed on imports from China would be frustrated by concluding that goods with components made in China that are assembled, connected, tested, and finished in the Philippines are made in the Philippines for country-of-origin marking purposes. To the contrary, Cyber Power’s deliberate de-coupling from China, and its development of Philippine facilities used to make the subject merchandise, appears to be precisely in line with the intended consequences of the Section 301 tariffs.

 The Court then addressed substantial transformation in the context of assembly starting with the premise that “simple assembly does not substantially transform merchandise.” The Government asked the the Court to focus on the critical components that make up "the essence" of the merchandise, in this case the printed circuit board assembly, or PCBA. The Court stated: 

The Government’s suggestion to focus solely on the PCBA components of the subject merchandise may well undermine the objective of the “substantial transformation” test, namely to focus on a change in name, character, or use. Accordingly, the court will consider the totality of the evidence, without a focus on any particular “critical component,” in evaluating whether Plaintiff has substantially transformed the subject merchandise.

 The Court went on to reject the notion that it should engage in a component-by-component analysis. It said: 

As explained above, the court does not agree that a component-by-component analysis assists in the determination of whether the subject merchandise at issue here underwent a substantial transformation in the Philippines for purposes of determining the country of origin under 19 U.S.C. § 1304(a). If, as Defendant argues, components assembled for a pre-determined use may never constitute substantial transformation, then, for all practical purposes, there can never be a substantial transformation because there will always be a pre-determined use. . . . It is one thing to say that the attachment of a handle to a pan, or a sole to a shoe, is too mundane for a substantial transformation; it is another to suggest that all parts (however many) assembled into a “pre-determined” product may never result in a substantial transformation. That is not, and cannot be, the law. 

All of this analysis is good for companies trying to manage supply chains while "decoupling" from China. But, the Court did not reach a final conclusion. Rather, the Court found that there are open questions of fact to be resolved. These go to the nature of the production process in the Philippines and whether it is simple or complex. As a result, the judge denied both motions and ordered a trial. Regardless of the outcome, the matter is almost certainly to be appealed (unless the parties settle). Given that, while this context is important, the current legal landscape has not changed, but we may be inching toward a saner and more legally sound approach to origin determinations.

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