Country of Origin vs Country of Export

In recent news reported by CNBC, there have been concerns regarding China’s potential strategy of moving goods through Mexico to circumvent the Section 301 tariffs imposed by the Trump administration. However, it’s crucial to clarify that merely transiting goods through Mexico does not exempt them from these tariffs. Goods manufactured in Mexico, on the other hand, can avoid these tariffs. The key distinction lies in the assessment of tariffs based on the country of origin, not the country of export.

The Customs Form 7501, used for declaring imported goods, includes fields for both country of origin and country of export. 

Some might think, “We’ll just manufacture our goods in Mexico using Chinese inputs.” While this approach seems plausible, it’s essential to adhere to not only the NAFTA marking rules but also the USMCA product-specific rules of origin—two mutually exclusive sets of rules—to avoid Section 301 tariffs. Without significant value addition in Mexico, the goods will still be considered of Chinese origin and subject to the Section 301 tariffs upon entry into the United States.

Country of Export

Per the instructions on the 7501, the country of export is ““The country of exportation is the country of which the merchandise was last part of the commerce and from which the merchandise was shipped to the U.S. without contingency of diversion.”  

“Diversion” has multiple definition, based on the context.  For example, there is a definition in 15 CFR for the export of civil and dual-use goods; there is a different definition in the UCP600 when addressing letters of credit; each free trade agreement has its own definition (but they are all closely aligned).   For now, our working definition of diversion will be “clearing customs.”

For example: goods leaving Germany, passing through the US, and arriving at their final destination in Mexico.  Let’s also assume that the goods originate under the EU/Mexico free trade agreement.  If the goods, while passing through the US, clear US customs, then they were diverted, and the goods lose their EU/Mexico free trade status and when entering Mexico; normal duties are assessed.  If the goods, while passing through the US do not clear US customs but instead pass in bond, they keep their EU/Mexico free trade status and can enter Mexico duty-free.  The presumption behind this definition is that if the goods clear customs in a country between the country of origin and the country of destination, they can have value-added work done, potentially changing their identity and hence their country of origin.

Country of Origin

The determination of the country of origin of a good is itself worthy of a separate blog/video, so we will treat the topic briefly here.

The globally accepted definition from the World Customs Organization is that the country of origin is the last country in which the goods underwent substantial transformation before arriving at the final country of their destination.

“Substantial transformation” has not been defined by the WCO, but it is defined in the NAFTA and the subsequent USMCA.  In fact, it is defined twice: once for duty purposes and once for marking purposes.

The NAFTA country of origin marking rules are intended to determine when a good can be marked “Made in Mexico” or not.  The USMCA product-specific rules of origin are intended to determine whether that good can enter the US duty-free under the free trade agreement.  So, the Chinese goods, if they are to avoid the Section 301 tariffs by passing through Mexico, must meet the product-specific rules of the USMCA; otherwise, even if they meet the NAFTA marking rules and are allowed to be marked “Made in Mexico,” will be treated as Chinese for duty purposes.

Moving forward, it’s important to note that the NAFTA agreement, while not entirely gone, has been replaced by the USMCA, often referred to as NAFTA 2.0. 

On another note, China’s automotive manufacturing sector, long dominated by US companies, is now dominated by domestic firms.  And these firms want to begin exporting their Chinese-made cars to the US (we have a very desirable market).  The same CNBC article speaks to concerns about China potentially “flooding” the American market with Chinese automobiles. It’s crucial to use precise terminology. Rather than “flooding,” the term “dumping” is more appropriate. Dumping refers to the practice of selling goods in a foreign market at a lower price than in the home market. If China were to sell automobiles in the U.S. at a lower price than the goods were sold in China, they would be subject to antidumping duties, which aim to prevent unfair competition.  Antidumping—both theory and application—are best addressed in a separate article.

It’s worth noting that antidumping duties are not unique to the United States; many countries around the world have similar measures in place. These duties are essential for maintaining fair trade practices and preventing market distortions caused by artificially low prices.  When one thinks of “free market capitalism,” it must be remembered that, just like in mixed martial arts competitions often marketed as “anything goes” bouts, there are rules that aim to protect the fighters, just like there are rules in free-market capitalism that aim to keep the playing field level.

In conclusion, to avoid punitive tariffs on goods, businesses must ensure a certain level of value-added work is performed in the country of export, as determined by the product-specific rules of origin under free trade agreements such as the USMCA. Failure to meet these requirements may result in goods being subject to tariffs based on their country of origin regardless of their country of export.