Avoiding Section 301 Tariffs: When do China-Origin Parts Turn into Mexico-Origin Products?

April 11 2024

In a recent notification, US Customs & Border Protection (CBP) proposed changes to decision on the Section 301 “country of origin” of a vehicle crashbox manufactured in Mexico from China-origin parts. In this article, I highlight key takeaways for importers of goods produced in third countries from China-origin components. ?

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CBP Proposed Revocation of Section 301 Country of Origin Determination

Last month, CBP notified the US import community of its proposed modification to an earlier CBP Ruling, NY N326445 (July 2022), on the Section 301 country of origin of a passenger vehicle crashbox manufactured in Mexico from two key parts imported from China. ?

The initial ruling also included analyses on whether the product qualified for preferential treatment under the US Mexico Canada Agreement (USMCA) and the country of origin for marking purposes (i.e., proper labeling of the product upon import into the US). ?These two determinations were ultimately made based on tariff-shift rules, were not relevant in the proposed revocation, and are not covered in this article.

The determination of whether punitive tariffs on China-origin products are applied to goods imported into the US is generally dependent on whether a substantial transformation occurred in another country prior to import. ?Lessons can be learned from this recent notification of CBP’s decision to overturn an earlier Section 301 origin determination, which may be useful for importers of goods made with China-origin components.

Written comments will be accepted on or before April 26, 2024, before the revocation is finalized.

What are Section 301 Tariffs? How are they determined?

Pursuant to Section 301(b) of the Trade Act of 1974 (Section 301) an additional ad valorem duty of up to 25% is imposed on certain Chinese-origin imports upon importation into the US. ?Where imported products are made from China-origin components and further manufactured in a third country, the Section 301 country of origin is determined pursuant to the Substantial Transformation analysis.

What is the Substantial Transformation Analysis?

The test for determining whether a substantial transformation will occur is whether an article emerges from a process with a new name, character, or use, different from that possessed by the article prior to processing. See Texas Instruments Inc. v. United States, 69 C.C.P.A. 151 (1982).

In general, substantial transformation analyses are guided by a set of core US case law highlighting the following factors and considerations:

• Does the article emerge from a process with a new “name, character, or use”?
• To determine whether there was a change in character, consider whether the article underwent a “physical change.”
• There is typically no change in use where the end-use was pre-determined at the time of importation.
• Nature of the assembly: Was the assembly simple? Or was the assembly more complex, “such that individual parts lose their separate identities and become integral parts of a new article.”
• The determination is based on the “totality of circumstances.”
• Additional legal precedent is reviewed based on the specific processes involved in the manufacturing and/or assembly. ?

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Absorber Crashbox: Was there a Substantial Transformation?

In this instance, a substantial transformation analysis was conducted by CBP to determine the Section 301 “country of origin” of the passenger vehicle Absorber Crashbox manufactured in Mexico from China-origin parts.? CBP relied on the above factors for its Section 301 country of origin determination in the initial ruling as well as in the proposed modification. However, based on new details provided by the importer in its Request for Revocation, closer attention was given to the heat treatment process and legal precedent surrounding such processing.

The Absorber Crashbox

The item at issue is a passenger vehicle Absorber Crashbox, designed to absorb energy in the event of a collision. ?The crashbox prevents the spread of kinetic energy, generating less damage to the vehicle structure. It is located between the bumper and side rails before the chassis points.

As set forth in the initial ruling, CBP determined the Absorber Crashbox should be classified under 8708.10.6050, Harmonized Tariff Schedule of the US (HTSUS), which provides for “Parts and accessories of the motor vehicles of headings 8701 to 8705: Bumpers and parts thereof: Parts of bumpers: Other.”? The general rate of duty was 2.5% ad valorem.

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What Parts Were Imported From China? What Manufacturing Occurred in Mexico?

The Crashboxes were “manufactured and assembled in Mexico with certain imported components from China.” The imported parts were two pieces making up a “profile.” ?Each profile is designed either for the right hand crashbox or the left hand crashbox.

In the initial ruling, the processing in Mexico of the imported China-origin profiles is described as “sawing, stamping, washing and heat treatment.”

However, in its Request for Reconsideration, the importer provided additional details and photographs to CBP (which ultimately contributed to a favorable determination). ?The importer explained that during the manufacturing process, certain heat treatment and aging processes resulted in changes in composition and/or properties. The decision heavily relied on this added detail and clarity of information.

Were the Two China-Origin Parts (i.e., Profiles) Substantially Transformed into a Mexico-Origin Crashbox as a Result of the Processing and Assembly?

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Initial Ruling Section 301 Origin Determination

In the initial ruling, CBP determined that, for the purposes of Section 301 tariffs, the “country of origin” of the import was China, and no change in origin was conferred due to the processing in Mexico. ?This determination was based on a substantial transformation analysis, relying on the key factors highlighted earlier in this article.

Based on the information provided, CBP concluded that “none of the components from China undergo any substantial processing” and “[t]he end-use of all components from China is pre-determined at the time of importation to Mexico.” ?Furthermore, CBP stated that the assembly of the components into the Absorber Crashbox “appears to be a minor one.” ???

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New Presentation of the Facts: Request for Reconsideration Results in a Favorable Outcome

Altering its finding, CBP has now determined that a substantial transformation occurred in Mexico as a result of the processing.? To make this determination, CBP reviewed additional details provided by the importer in its reconsideration request.

New details included photographs of (1) the parts and materials imported into Mexico from China, as well as (2) “what happens to these materials at various stages of production of the Absorber Crashboxes in Mexico.”

Furthermore, the importer was able to explain that “the heat treatment applied to the profiles is more than a minor operation.” ?

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Emphasis on Heat Treatment Process

This time around, the importer effectively explained how the heat treatment process:?

• Subjects the sawed, cut, formed and hole-punched profiles to a specified high temperature for a set amount of time under controlled environmental conditions, using precision measuring and test equipment.
• Changes the properties of the metal in the profiles to permit the crashboxes to meet Federal Motor Vehicle Safety Standards (“FMVSS”) requirements.
• Changes the structural properties of the aluminum used to construct the raw profiles.
• Along with the artificial aging process, transforms the aluminum components from the imported “T4” component into the “T6” component that can be incorporated into the final assembly of the crashboxes. This transformation of the aluminum components into “T6” components improves the material’s mechanical properties, including its strength, hardness, and ductility.

?In addition, a quality control process was explained whereby items that do not meet specific parameters regarding tensile strength, yield strength and elongation are removed from processing and not incorporated into final assembly.

Change in Physical and Structural Properties?

The heat treatment (coupled with the aging process) was determined to change the physical and structural properties of the imported aluminum material in such a way which is required to effectively absorb energy in the event of a collision and to ensure the finished passenger vehicles meet requirements for occupant safety under the FMVSS.

With the new detail regarding the heat treatment process, CBP highlighted additional legal precedent, focusing on whether there was a change in the properties and/or composition of the material.? Specifically, “Customs has generally held that a heat treatment will result in a substantial transformation only if it alters the article’s mechanical properties to a significant extent.” See HQ 083236 (May 1989). ?Further, CBP relied on a case where the “continuous hot-dip galvanizing process” of cold-rolled steel sheet substantially transformed the sheet, in part, because the process changed the character of the steel sheet by altering its mechanical properties and chemical composition. See Ferrostaal Metals Corp. v. US, 664 F.Supp. 535, 11 C.I.T. 470 (1987).? ?

Takeaways for?Importers Looking to Bolster Their Argument for Non-China Origin and Avoid the Additional Tariff

Focus on communication. Substantial transformation analyses have historically been heavily fact-dependent. This proposed revocation highlights the importance of providing clear and detailed information which allows CBP to comprehensively grasp the nature and extent of assembly or manufacturing. ?In this instance, the additional photographs of the product and of the manufacturing processes clearly helped the importers communicate effectively to the CBP team.

Spell out the process in detail. The specifics surrounding the heat treatment process was heavily relied on during the updated analysis. Given that CBP is not as familiar as the importer with the manufacturing processes, as well as the importance of substantiating the complexity of assembly and/or manufacturing, a detailed step-by-step explanation of the manufacturing processes is key in any origin determination governed by substantial transformation.

Shifting Production out of China; Shifting US Policy on China-Owned Entities

As seen in this recent CBP decision, China-origin components can be substantially transformed in a third country to gain a new “country of origin,” resulting in the avoidance of Section 301 punitive tariffs on China-based goods altogether.??Given this, as well as other considerations, a substantial amount of production which would otherwise be conducted in China, will continue to be moved elsewhere.?

Recent examples of this increasingly common trend include the auto factories under construction in Mexico.? Once this proposed revocation is finalized, importers of products made of China-origin components further processed in Mexico, or other third countries, will have a new CBP determination to bolster arguments for a change in Section 301 origin.

Additionally, as highlighted by the initial ruling, goods produced with China-origin parts may nonetheless qualify for preferential treatment under free trade agreements, including the USMCA.?

Given such strategies, growing US policies towards China seek to adjust to our globalized world. In addition to targeting products produced in China, the US is increasingly targeting products produced by China-owned entities. This development is highlighted by the recent complaint filed by China at the WTO, which is a discussion for another day.

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This article was written by Sara Schoenfeld as part of her weekly newsletter, Customs & Trade Analysis. The opinions expressed are those of the author and do not necessarily reflect the views of any organization. Legal disclaimer: Nothing contained in this article constitutes legal advice. Information is provided for general informational purposes only and should not be construed as legal advice from any party.