Customs is trying to simplify its procedures for determining country of origin.

Customs and Border Protection has proposed a rule that would change the way importers determine the country of origin for their goods. Customs would use rules created under the North American Free Trade Agreement — commonly called Part 102 rules — that determine country of origin by a shift in the tariff classification. The agency would eliminate the principle of “substantial transformation.”

“Historically, the test has been: Is there a new and different article of commerce, having a new name, character or use?” said trade attorney Michael Roll. “Now they’re going try to define things using tariff classification. You look at the tariff number of the goods, you look at the tariff number of the raw materials, and see if there’s been a specified change. The theory being it’s all numbers and classifications, it will be more objective and transparent.”

It’s a confusing system to an outsider, and too subjective for Customs’ comfort. The agency’s proposal says that by using Part 102 rules, determining country of origin should be more objective and transparent, and it would help importers exercise reasonable care. Customs officials did not respond to an interview request.

While importers using Part 102 will make it easier for Customs to administer country of origin, it has its skeptics. Attorney Susan Kohn Ross said Customs has tried several times to make the NAFTA rules more accurate, but without success.

“On one hand, there is some logic to what they’re saying, but the reality is we’re all still arguing classification. The devil is in the details,” Ross said. “Customs is attempting to do the same thing that’s been a problem with NAFTA and every other free-trade agreement. The minute you start specifically defining origin by determination of tariff shift, you make the process extremely complicated.”

Ross said U.S. importers that could have claimed NAFTA tariff exemptions for goods imported from Canada and Mexico have not done so because the cost of recordkeeping outweighs the duty savings.

“Trying to figure out whether or not your supplier complied with the NAFTA rules of origin is so intense, it was not worth the duty savings,” Ross said. “If you can’t make it apply in a trilateral arrangement, how are you going to make it apply internationally, and not completely gum things up?”

The idea is not new. Roll said Customs proposed making Part 102 rules universal in 1994, but in 1996 decided to shelve the idea. Part 102 governs country of origin in NAFTA, but different origin rules are negotiated separately in every free-trade agreement. The magnitude of the tariff shift can be different for different products. For some imports, a shift at the six-digit level is acceptable. For others, the shift must be from one chapter to another.

“If you're an importer, you need to take a look at your imports and how you determine your origin,” Roll said. “Ask yourself: Under the NAFTA Part 102 rules, do you get the same result as you get using substantial transformation? If you get the same result, this is much ado about nothing. If you don’t, then you’re going to have a change, and that may or may not be important to you.”

Roll said Customs believes that companies will have to change the way they analyze country of origin, but the end result should be the same.

“There will certainly be some products, some industries where you will get different results,” Roll said. “The Notice of Proposed Rulemaking itself illustrates products where they are changing the 102 rules because even Customs realized you'd be getting a different result.” Those listed in the proposal are pipe fittings and flanges, greeting cards, rice preparations and selected textiles made from plastic material.

“Ten years ago, Customs talked about codifying the substantial transformation practice,” Roll said. “For most cases, I would probably agree with Customs. It is a codification of their results. But for some products in some industries, it will matter.”

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