Before you read this post, take a moment to look at the back of your computer monitor or handheld device. Do you see a tag that states “Made in China?” My computer monitor does; my iPhone states it a little differently as Assembled in China. For products imported into and sold in the United States, this product information is not a customer courtesy – it is legally required.
Claims about products’ countries of origin are regulated by U.S. Customs and Border Protection (“CBP”). U.S. law generally requires that all foreign products imported into the United States have some sort of marking indicating the country of origin from which the product was sourced or in which it was manufactured.
Depending on the type of product imported into the United States, country of origin determinations can be easy. One such example is raw agricultural products. If a company harvests rice grown in China, the rice is a product of China. Its packaging would state Made in China.
However, for many products, determining the correct country of origin requires analyzing CBP regulations and prior CBP country of origin rulings. This may be the case for companies wishing to export from China products manufactured or assembled in China with components sourced from various countries. For such products, the first and principal issue to consider is whether one input gives the product its essential character and, if so, whether the essential input is “substantially transformed” when combined with other inputs.
The country in which a “substantial transformation” occurs is the product’s country of origin for CBP purposes. The substantial transformation test considers whether an input emerges from a manufacturing process with a new name, character or use.
Recent CBP Ruling – Prepopik from China
To gain a better understanding of how CBP determines products’ countries of origin, let’s review CBP’s decision last week about the country of origin for Prepopik manufactured in China. Prepopik is an oral solution used to cleanse the colon in preparation for colonoscopies. Prepopik is manufactured in China with ingredients sourced from different countries.
The U.S. importer of Prepopik argued that the only active pharmaceutical ingredient (“API”) in Prepopik was sodium picosulfate and that this API’s chemical and physical properties did not change during the manufacturing process in China. CBP determined otherwise. CBP found that the API sodium picosulfate’s combination with another ingredient, magnesium oxide, contributed to Prepopik’s essential purpose. In CBP’s view, the two ingredients were “substantially transformed” when combined in China and, consequently, that China was the country of origin for Prepopik.
The Importance of Correctly Determining Country of Origin
For companies in China exporting goods to the United States and their U.S. importers, country of origin determinations are important for several reasons. First, an imported product’s country of origin must be included on CBP Form 7501 Entry Summary and, in conjunction with a product’s U.S. Harmonized Tariff Schedule classification, determines a product’s U.S. import tariff rate. See Exporting From China By The Numbers: HTS(US). Second, under CBP regulations, a product should reflect its country of origin when imported into the United States. Deciding the country of origin early in a product’s conceptual development can prevent last-minute issues in designing and implementing country of origin labeling or embossing processes. Third, U.S. retailers may require that companies in China substantiate products’ country of origin claims reflected on product packaging.
Incorrect country of origin determinations can adversely impact an exporter’s and U.S. importer’s reputations with CBP. A U.S. importer that imports goods with incorrect countries of origin designations may face Customs penalties, increased chances of CBP audits, and delayed Customs clearance for the importer’s products.
A product’s country of origin should be decided in the early stages of the product’s conceptualization and business planning. Failing to determine a product’s country of origin, or reaching such a determination with no or unreasonable factual and legal support, can result in adverse direct and indirect company costs. Wise companies will plan for and be prepared to support an answer to the question raised in this blog post’s title: Made in China?