Uptick in “Nearshoring” Presents New Compliance Challenges for Importers

February 12, 2024

Last week the U.S. Census Bureau published its annual statistics on U.S. International Trade in Goods and Services. The data show that in 2023 Mexico was the United States’ top source of official imports ($475.6 billion), beating out China ($427.2 billion) for the first time in 20 years.

The new data highlight the impact of ongoing U.S.-China trade tensions, including nearly six years of Section 301 tariffs. But these import data trends also underscore a recent “nearshoring” of manufacturers relocating from China to Mexico to take advantage of the country’s geographic proximity and largely duty-free access to the U.S. market under the United States-Mexico-Canada Agreement (“USMCA”). These relocations are largely facilitated by Mexico’s maquiladora or IMMEX program, which allows eligible manufacturers to import raw materials and components into Mexico duty-free, provided that the finished goods are exported from Mexico within a set time frame. Within the last few years, Chinese FDI in Mexico hit all-time highs.

All “Mexican” Imports Are Not Created Equal

While the nearshoring trend presents opportunities for manufacturers, it also presents a host of challenges for U.S. importers who must increasingly grapple whether products acquired from Mexico — but often made with Chinese or other foreign inputs — are in fact of Mexican origin under applicable trade laws.

U.S. law contains various sets of rules for determining the county of origin of goods imported into the United States. Importantly, because different legal tests apply in different contexts, it is possible for a single imported product imported from Mexico to have more than one country of origin for customs purposes.

  • For goods that are not subject to preferential treatment and that consist of materials from more than one country, the good’s origin is determined by where it is “substantially transformed” into the finished, imported article. Country of origin for purposes of Section 301, Section 232, and Section 201 duties, as well as for marking purposes for non-preferential goods, are also usually determined in accordance with the substantial transformation test.
  • The USMCA and certain other preferential agreements utilize a tariff shift method to determine eligibility for originating status under the agreement. To be considered a Mexican product for USMCA purposes, non-originating components must meet the tariff shift rules of General Note 11 to the Harmonized Tariff Schedule of the United States, which requires a change in tariff classification as a result of production occurring entirely in Mexico.
  • Goods from a USMCA member country also have a separate and distinct set of tariff shift rules to determine the country of origin for marking purposes.

The bottom line for U.S. importers: just because a final product is manufactured in Mexico does not mean that the product is considered a Mexican product under U.S. law.

Recent CBP Rulings Underscore Complexity of Country-of-Origin Determinations

Such country-of-origin complexities are highlighted in a number of recent CBP rulings in which the agency considered the country of origin of products manufactured or assembled in Mexico from Chinese components:

  • In ruling N337260, CBP considered the country of origin of a heat sink assembly intended to be mounted to a machine processor for heat dissipation and cooling. The final heat sink assembly was manufactured in Mexico, using Chinese components. CBP determined that the heat sink assembly qualified for USMCA preferential treatment and could also be considered a product of Mexico for marking purposes because the requisite tariff shift rules had been met. However, CBP determined that imported heat sink was still nonetheless subject to Section 301 duties because the Chinese origin components were not substantially transformed by the Mexican assembly operations.
  • In ruling N335654, CBP considered the country of origin of aluminum fence retail kits produced in Mexico from Chinese aluminum components and connecting hardware. CBP determined that the aluminum fence retail kits were not originating products under USMCA and should be marked as a product of China because the requisite tariff shift rules were not met. However, CBP determined that the imported Chinese components underwent a substantial transformation in Mexico and therefore were excluded from Section 232 duties applicable to Chinese imports.
  • In ruling N317669, CBP considered the country of origin of a subassembly used in a speed reducer that underwent final assembly in Mexico from Chinese and Japanese components. CBP determined that the imported subassembly qualified as an originating good for USMCA purposes because the transformation in Mexico met the requisite tariff shift rules for origination. However, CBP determined that the product was nonetheless a product of China for both Section 301 and marking purposes because the Chinese H-casing, which imparts the essential character of the product, was not substantially transformed by machining operations in Mexico and the tariff shift rules for marking were not met.
Compliance Lessons 

With shipping pattern changes in response to special tariff programs and increased Chinese-led foreign direct investment, importers are facing increasing challenges when it comes to determining and declaring a country of origin. Recent import trends showing Mexico overtaking China as the top source for imports into the United States at the same time as substantial increases in Chinese FDI in Mexico underscore the diligence that U.S. importers must undertake before declaring a country of origin on entry documents. Importers of record are required to exercise reasonable care when declaring the country of origin at the time of entry. To mitigate risk of a CBP enforcement action, importers should consider regularly reviewing the declared country of origin of their imports on a case-by-case basis and within the context of each applicable U.S. legal test.

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Contact us if you have questions about country-of-origin classifications or their potential impact on your business.