December 12, 2018
A recently issued ruling issued by U.S. Customs and Border Protection (CBP) held that Cable modems that are made up of Chinese parts but assembled in Mexico are subject to the 10 percent Section 301 tariffs on goods from China.
Under consideration were two types of modems, consisting of materials that were all products of China, including the case components, feet, screws and labels. In Mexico, the modems would be completely assembled, including having the printed circuit board assembly (PCBA) board programmed.
Regarding the country of origin marking, CBP analyzed that issue systematically, in accordance with Part 102, Customs and Border Protection Regulations (19 C.F.R. Part 102), the NAFTA Marking Rules. Because the imported modems were neither wholly obtained nor produced exclusively from “domestic” (i.e., Mexican, in this case) materials, sections 102.11(a)(1) and 102.11(a)(2) did not apply and CBP had to look to section 102.11(a) (3):
“Foreign material” is defined in 19 C.F.R. § 102.1(e) as “a material whose country of origin as determined under these rules is not the same country as the country in which the good is produced.” The applicable rule for subheading 8517.62.0010, HTSUS, in section 102.20 requires:
[a] change to other units of automatic data processing machines of subheading 8517.62 through 8517.69 from any other good of subheading 8517.62 through 8517.69 or from any other subheading, except from subheading 8504.90 or from heading 8473 or subheading 8517.70 when the change is the result of simple assembly
The foreign components of both modems are classified under subheading 8517.70, HTSUS, and meet the tariff shift requirement. Therefore, the country of origin, for purposes of marking, of the electric motor is Mexico.
Nonetheless, despite the marking result and all the work that was done in Mexico, CBP determined that this did not constitute a “substantial transformation” of the Chinese components:
In this case, the foreign subassemblies are imported into Mexico where they will be assembled into cable modems. The foreign components (PCBA, housing/case, rubber feet, labels) all had a pre-determined end-use and did not undergo a change in use due to the assembly process in Mexico. Based on the information provided, the production process performed in Mexico does not result in a substantially transformation of the Chinese components.
As the assembly of the Chinese components in Mexico does not result in a substantial transformation of the Chinese parts, the modems remain a product of China. Products of China classified under subheading 8517.62.0010, HTSUS, unless specifically excluded, are subject to the additional 10 percent ad valorem rate of duty. At the time of importation, you must report the Chapter 99 subheading, i.e., 9903.88.04, in addition to subheading 851762.0010, HTSUS, listed above.
Accordingly, importers may wish to consider seeking legal assistance / CBP’s opinion regarding the classification of merchandise that may be undergoing new sourcing and / or the benefit of a “substantial transformation.”