Trade Attorneys Anticipate More Scrutiny of Rules of Origin During USMCA Negotiations

"If you look at the example of the playbook followed with automobiles, we may see the Trump administration really trying to ensure that it's not only North American content, but also U.S. content," attorney Richard Mojica said during the webinar. "So, despite it being a three-party, a three-country agreement, I think Trump will do his best to try to bully his position of increasing certain of the content of certain products that he deems essential, like, say, a steel content or an aluminum content."

However, as companies revisit their supply chains, what Mojica and others at his law firm have observed is that businesses are opting to continue to find alternatives to China as a sourcing region while also still continuing to pursue manufacturing options in Mexico.

"We don't hear about companies wanting to exit the market, but instead, [they are seeking to] find ways to weather the storm until the situation is remedied because there's already so much investment there. And there's a notion, there's a sense that, based on precedent, that there's a negotiated solution around it," Mojica said. "I think what we will see is the Trump administration requiring the countries to minimize their Chinese inputs. I think that's particularly true of Mexico, that we will see Trump pressuring Mexico to impose higher tariffs on China-origin inputs so that North American inputs, namely U.S. inputs, become more prominent in products that are made in Mexico."

Mojica and his colleague Julie Herring discussed on the webinar the options that they have been providing to clients on ways to lower their exposure to tariffs or reduce related compliance costs. The three areas that they discussed are country of origin, tariff classification and the customs value of a product.

"Companies may look to getting an opinion from outside counsel or getting a binding ruling from customs to see if there is a reasonable justification for making a change to the tariff classification of a product," Mojica said. "If there isn't, sometimes, what a company can consider is to look at alternative tariff classifications and determine what would need to happen to the product so that the product can be classified in another tariff classification that carries a lower duty in tariff rate. So that is sometimes referred to as tariff engineering. You are engineering a result based on a more favorable duty rate, in this case, also tariff rate."

To pursue this route, companies need to ensure that they have as much information on the product as possible, including technical specifications and discussions with the product development team to understand the make-up of the product and how it works, according to Mojica.

For country of origin, companies need to determine which country represents where the product received its essence or where it was substantially transformed. However, companies also need to be aware that a certificate of origin may not be enough to fulfill CBP's criteria.

Showing where the substantial transformation has occurred "is not something that is always reflected in a certificate of origin, meaning that the certificate of origin can be issued by different global customs authorities or export authorities based on a criteria that does not necessarily incorporate the substantial transformation test that CPP cares about," Mojica said.

He continued: "I think we will continue to see how perhaps we're going to see a focus on 15 countries with reciprocal tariffs, so countries not on that list by definition become more appealing than those that are subject to tariffs. And so we may see an analysis that is less China-focused, as has been the focus historically, and more towards how do we make a product that has traditionally been of another origin, and we really haven't looked into this carefully to make sure that now we are covering another jurisdiction."

As for valuation, "There's only so many ways to try to chip at your tariff exposure naturally. The value is one of those ways, and companies are trying to find ways to lower that value, in light of these huge tariffs. This, I think, is the most dangerous of the three mitigation strategies ... [because the] customs valuation statute has some very clear rules as to how to determine the value that must be declared to U.S. Customs," Mojica said.

However, companies can examine their valuations to assess whether there might be a way to trim costs.

"The value of imported goods determines the amount, and companies must ensure that their value declared is accurate," Herring said. "It's consistent with most often the transaction value, and generally, duties are based and assessed on an import's transaction value. ... The reason this is important right now and why this might be considered a mitigation strategy or how you can use valuation is that there are certain expenses that are not included in this value." Expenses might include costs, charges and expenses incurred for transportation, insurance-related services, inland freight and other inland charges and other post-importation transportation costs, Herring said.