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What Does "Country of Origin" Really Mean?
At first glance, "country of origin" seems like a simple concept—it’s where a product comes from. But in practice, it’s more nuanced. A product’s country of origin isn’t necessarily where its raw materials were sourced but rather where it underwent its last substantial transformation.
For example:
- Iron ore mined in Iceland is shipped to Canada, where it's refined into steel.
- That steel is then sent to the U.S., where it’s machined into bicycle sprockets.
- The sprocket, having been substantially transformed in the U.S., now has the country of origin of the United States.
Things get more complicated when multiple parts are sourced from different countries and assembled in one location. Simply putting together parts from different countries doesn’t necessarily change the country of origin. The transformation must be significant—like machining, chemical processing, or reengineering—not just assembly.
How Do Tariffs Apply?
Tariffs are based on the country of origin of the last substantial transformation—not necessarily where a product was shipped from. If a product was made in China but shipped from a warehouse in Canada, it still carries any applicable Chinese tariffs.
A major takeaway from the conversation was that tariffs aren’t really applied to exporting countries—they’re applied to importers. If you're bringing in parts from a country with a 25% tariff, you, the importer, are the one paying that cost, not the foreign supplier.
Understanding how your supply chain is structured can help mitigate unexpected tariff costs. For instance, if you're sourcing parts from multiple locations, the country in which you perform final transformation can impact your overall tariff burden.
Where Do I Start?
If you're trying to determine the tariff implications for your components, a few key resources can help:
- Talk to your OEM or suppliers: They’ve likely navigated these waters before and can provide insight into classification and country of origin.
- Use a trade compliance expert: While hiring a lawyer is an option, other third-party trade compliance firms, like Trade Wind Networks, specialize in this area.
- Check classification codes: Tools like Cofactr’s database can help with accurate country-of-origin data and Harmonized Tariff Schedule (HTS) codes for electronic components.
Common Pitfalls to Avoid
1. Misclassification of Parts
One of the most common (and costly) mistakes importers make is misclassifying goods under the wrong HTS code. This can lead to incorrect tariff assessments and compliance issues down the road.
2. Assuming Services Aren’t Tariffed
Labor and services performed on a physical object in another country increase its value, and when the object is imported, that increased value is subject to tariffs. However, purely intellectual services—like software development—do not fall into this category.
3. Overlooking Downstream Cost Impacts
Just because you aren’t directly importing raw materials doesn’t mean tariffs won’t affect you. If your supplier is paying tariffs on critical components, expect those costs to be passed down.
4. Failing to Document Country of Origin
Customs audits can happen, and when they do, you’ll need granular documentation proving your country-of-origin determinations. The more detailed your records, the easier it is to defend your classifications.
What is a Duty Drawback?
Duty drawbacks allow businesses to reclaim some tariffs paid on imported goods under specific conditions—like when those goods are later exported. With the recent increase in tariffs, duty drawbacks have become a hot topic. If your supply chain involves importing components that are later incorporated into products for export, it’s worth investigating whether you qualify for a refund.
Final Takeaways
Understanding tariffs and country-of-origin rules is essential for manufacturers and importers. The key is staying informed, keeping detailed documentation, and leveraging resources like Cofactr to automate classification and compliance processes.
For those looking to dive deeper, our upcoming webinar on trade compliance documentation strategies will explore tools and best practices to reduce delays and risks. Stay tuned for details!