Customs and Border Protection Applies Acetris Health in a New Ruling

Customs and Border Protection has issued its first “Trade Agreements Act” origin ruling letter since the Federal Circuit’s Acetris Health decision earlier this year. The ruling is noteworthy because it sets what I expect will be the post-Acetris Health approach that CBP will follow in TAA decisions.

The Acetris Health Decision Summarized

Acetris Health addressed the Federal Acquisition Regulation criteria under which an article that underwent some type of production activity in the United States may qualify as a “U.S.–made end product” eligible for Federal government procurement. The applicable provision, 48 C.F.R. § 25.003, defines that term as “an article that is mined, produced, or manufactured in the United States or that is substantially transformed in the United States into a new and different article of commerce with a name, character, or use distinct from that of the article or articles from which it was transformed.”

Until the Federal Circuit’s decision, procuring agencies considered CBP’s application of the substantial transformation standard to be determinative of whether an item is a U.S.-made end item. The court found that approach effectively read the “article that is mined, produced, or manufactured in the United States” language out of the regulation. Instead, “substantially transformed” and “mined, produced, or manufactured” were separate criteria.

Moreover, CBP’s application of the former standard was limited to determining whether a foreign-made item was an “eligible product” of a country that has been granted nondiscriminatory treatment in Federal procurements. Determining U.S.-made end product status, on the other hand, fell solely within the purview of the procuring agency.

CBP Recognizes Its Limited Role

CBP’s decision implements the Federal Circuit’s missive. It addressed whether a whoop strap device, “which is assembled in China and programmed with software and firmware in the United States, is” the product of a “TAA country” given nondiscriminatory treatment. The answer, not surprisingly, was “no”. China is not such a country, nor is the United States.

The ruling stated that the whoop strap, “at the time of importation, is a product of China. CBP is of the view that programming would not result in a substantial transformation.” It concluded that the article “would not be considered to be the product of a foreign country or instrumentality designated pursuant to 19 U.S.C. 2511(b). As to whether the Whoop Strap processed in the United States may be considered a ‘U.S.-made end product’ is under the jurisdiction of the procuring agency,” citing Acetris Health.

CBP has, therefore, toed the narrow line laid out for it by the Federal Circuit. The degree of deference the procuring agency may give CBP’s finding of no substantial transformation from the U.S. programming is an open question; in the past, it would have been dispositive, but that approach requires reevaluation now. Even if the product fails the substantial transformation test, it gets a second chance to demonstrate that it was produced or manufactured because of the programming in the United States. Making that determination rests solely with the procuring agency, which will have to proceed without any FAR definitions or guidance.

WTO Compliance Issue?

One consequence of Acetris Health is that there is now a two-tier system to determine a product’s eligibility for Federal procurement. To the extent they are not “wholly the growth, product, or manufacture of” a single country (i.e., have third-country content), they must undergo a substantial transformation in a TAA country. An article produced in the United States with foreign content, by contrast, is eligible if it is either produced or manufactured, or undergoes a substantial transformation, here; Acetris Health makes this distinction explicit, and further notes that these are two different standards.

The World Trade Organization’s Government Procurement Code, however, requires that products of signatory countries be given “national treatment”, meaning they cannot be treated less favorably than domestic ones:

Article IV -– General Principles

Non-Discrimination

1. With respect to any measure regarding covered procurement, each Party, including its procuring entities, shall accord immediately and unconditionally to the goods and services of any other Party and to the suppliers of any other Party offering the goods or services of any Party, treatment no less favourable than the treatment the Party, including its procuring entities, accords to:

a. domestic goods, services and suppliers; and

b. goods, services and suppliers of any other Party.

In my view, giving domestic products two alternative grounds on which to qualify, while limiting foreign products to only one, is a clear derogation from this principle. Let’s see whether any WTO Procurement Code countries agree.