Industry News

Recent Customs Ruling Raises Concern about Applicability of Section 301 Duties on Goods Not Qualifying for NAFTA Duty Preference

October 15, 2018
By: Sandra Liss Friedman

A recent ruling letter issued to Johnson Electric, HQ H300226 dated September 13, 2018 held that a brushed electric motor classified under subheading 8501.10.40 which failed to meet the applicable NAFTA rule of origin, was subject to the Section 301 duties as a Chinese product. This conclusion was reached, notwithstanding the fact that Customs also determined that, after applying the NAFTA marking rules, the motor was required to be marked as a Product of Mexico.

Customs reached this apparently confusing conclusion after reviewing the assembly process in Mexico, which consisted of the assembly of three Chinese components: a stator or rear housing, the rotor or armature assembly and the end cap assembly. The motor could not qualify for the NAFTA duty preference because the rule of origin applicable to subheading 8501.10.40 disqualified motors which were made with foreign (non-NAFTA originating) stators and rotors. Because the assembly occurred in Mexico, the marking of the product had to be determined under the NAFTA marking rules. In applying those rules, Customs correctly concluded that the motor had to marked as a Product of Mexico.

However, Customs’ analysis did not stop there. Customs asserted that in any instance where a product may be subject to antidumping, countervailing or “other safeguard measures,” it was required to apply a “substantial transformation” test. Based on the simple assembly of three components or subassemblies in Mexico, Customs concluded that the finished motor had not been substantially transformed because these three components had “a pre-determined end use and did not undergo a change in use due to the assembly process in Mexico.” Accordingly, Customs concluded that the country of origin of the finished motor was China and that the Section 301 duties, which Customs determined, without discussion, to be ‘safeguard measures,’ applied. It is not clear from the ruling, whether Customs would have applied the substantial transformation test if the motor had qualified under the applicable NAFTA rule of origin.

While this is certainly not a good result for the importer in this instance, we should anticipate that other products which fail a NAFTA origin rule, and perhaps, even products that meet the applicable NAFTA origin rule, but which use only or numerous Chinese inputs will be subjected to a substantial transformation test, even if the final production process occurs in a NAFTA country such as Mexico or Canada.