Customs Law Advisory - US Customs Issues Guidance on Foreign-Origin Components Assembled in the United States for Government Procurement

A determination last month by US Customs and Border Protection (“CBP”) details the analysis that companies should use to determine whether their finished products are eligible for sale to the US government, including input sourcing changes that can help a product achieve eligibility. CBP explained that for purposes of US government procurement, finished goods assembled in the United States using solely imported inputs and relatively simple assembly operations would not be considered of US origin. However, using the same simple assembly operations, the finished goods could qualify for sale to the US government when at least one major component involved in the assembly was manufactured in the United States.

The Trade Agreements Act (“TAA”) applies to US government purchases over a certain dollar threshold, generally $193,000, depending on the country involved. In such cases, the US government may acquire only “U.S.-made or designated country end products.” Several countries that are significant suppliers of goods to the US market (China, for example) are not “designated countries” under the TAA. Therefore, the US government cannot purchase products from those countries unless no US-origin or designated country end products are available. However, inputs and components from non-qualifying countries can be eligible for US government procurement if they are “substantially transformed” by further processing in the United States or in a designated country. CBP decides on a case-by-case basis whether finished goods meet this requirement by evaluating whether the inputs experience a change in name, character or use as a result of the further processing.

In CBP’s recent decision (72 Fed.Reg. 7,771; Feb. 20, 2007), a US company asked the agency whether bolt container seals and cable seals assembled in the United States would qualify as US-made products under two scenarios: (1) seals assembled in the United States from solely foreign-origin components; and (2) seals assembled in the United States from a mix of US and foreign-origin components. CBP found that the US assembly operation, which consisted of assembly of a small number of parts, welding, and packaging of the product, was not complex enough to result in a substantial transformation of the foreign-origin components. However, CBP ruled that where the primary component in the assembled articles – the lock body – was itself manufactured in the United States, and was assembled in the United States together with non-US components, the finished goods would be considered substantially transformed into US-origin end products for purposes of the TAA. This second type of product would be eligible for US government procurement even though the simple assembly process was exactly the same, only the origin of an important input had changed. In addition, CBP noted that any additional items packaged together with the assembled products, but not connected to or part of the assembled products, would require a separate origin analysis.

This recent determination by CBP highlights the importance of country of origin analyses for companies that seek to secure US government procurement contracts subject to the TAA. If the company is using any imported components, a careful review is required to determine whether the finished items qualify as US or designated country end products, eligible for sale to the US government. Although undertaking a substantial transformation analysis is product-specific and fact-intensive, companies are best served by making that analysis in advance in order to confirm the necessary country of origin and to choose the most advantageous input sourcing. The consequence of incorrect assumptions in this area could be a company that finds itself making a substantial investment of time and resources only to lose an important sale opportunity or, at worst, finds itself under investigation for making false country of origin claims to the US government in connection with a sale.

If you have any questions regarding country of origin issues, please contact Greg McCue at gmccue@steptoe.com and (202) 429-6421 or Meredith Rathbone at mrathbone@steptoe.com and (202) 429-6437.