Non-preferential origin in the USA: 'Substantial transformation' exemplified by a car

Introduction

Global supply chains result in products often being manufactured or pre-assembled in multiple countries. This raises the question in customs practice of which country such a product should be legally assigned to in terms of origin.

Particularly in the context of non-preferential origin (i.e., independent of free trade agreements), the concept of “substantial transformation” plays a central role.

For example, the USA imposes additional import duties on certain products of Chinese origin (e.g., Section 301 tariffs)—therefore, it is crucial to accurately determine the true origin and maintain it in the master data.

This article explains how the US Customs and Border Protection (CBP) determines non-preferential origin through “substantial transformation” and why simple final assembly processes often do not suffice to change the origin.

Determining Origin through “Substantial Transformation”

The United States defines the origin of goods (for customs purposes and trade policies) based on the criterion of substantial transformation. Simply put, a product is considered manufactured in the country where it underwent the last substantial transformation.

A substantial transformation occurs when manufacturing steps result in a new product with a new identity—in the often-cited formula: a product with a new name, character, or use.

If an imported good is merely processed or assembled in another country without its properties significantly changing, this processing does not constitute an origin-conferring transformation. US courts and customs authorities tend to not recognize mere assembly as sufficient substantial transformation, especially if the purpose of the product is already determined before assembly and the components retain their identity, no new origin is established.

A substantial transformation occurs when manufacturing steps result in a new product with a new identity—in the often-cited formula: a product with a new name, character, or use.

The Volvo Case: Final Assembly in Sweden, Modules from China

A practical example is provided by the Volvo case (CBP-Ruling HQ H302821). Volvo produced certain vehicle models through distributed manufacturing: key assemblies were pre-assembled in China, with final assembly in Sweden.

The components manufactured in China included, among others, a painted body (with parts from Italy, the United Kingdom, Slovakia, France, and China), an engine module (with parts from Sweden, Japan, the USA, and China), and a rear axle module (with parts from Sweden, Japan, and Germany).

Numerous other components from China (such as the hood, bumper, battery system, and seats) were also delivered to Sweden and assembled there during final assembly. The finished vehicles were then shipped from Sweden to the USA.

The central customs question was: What is the country of origin of these vehicles? China as the manufacturing site of the pre-assembled core modules, or Sweden as the site of final assembly?

The US Customs and Border Protection (CBP) clarified that for the application of duties under Section 301, the Substantial-Transformation-Analysis is decisive. It was crucial whether the assembly in Sweden was considered a substantial transformation, creating a new product with a new identity (name, character, use).

CBP denied this. The agency argued that the complex manufacturing step had already taken place in China and not in Sweden. The five main assemblies from China were not significantly transformed by the final assembly in Sweden to the extent that a new product was created.

Firstly, these pre-assembled modules already had a predetermined purpose within the vehicle and retained their specific functions. Secondly, CBP evaluated the assembly processes carried out in Sweden as not sufficiently complex to be considered origin-conferring manufacturing.

The individual parts (body, engine, axle, etc.) did not lose their identity under customs law through assembly. Consequently, no substantial transformation took place in Sweden; instead, the last substantial transformation was carried out in China.

The result: The vehicles were still considered products of Chinese origin despite the final assembly in Sweden. Consequently, the imported Volvo vehicles in the USA were subject to additional penalties of 25% under Section 301 on goods of Chinese origin.

This outcome may be surprising at first glance, but underlines the strict application of the origin principle: The decisive factor is not the last manufacturing location per se, but the location of the last substantial manufacturing steps.

The individual parts (body, engine, axle, etc.) did not lose their identity under customs law through assembly. Consequently, no substantial transformation took place in Sweden; instead, the last substantial transformation was carried out in China.

Complex Supply Chains Require Transparent Origin Clarification

The Volvo case is exemplary of the challenges of modern global supply chains. When components and assemblies from all over the world flow into an end product, traceability is complex but essential.

Companies must precisely document which processing steps take place in which country and where the threshold of substantial transformation is crossed.

Transparency and documentation are crucial: In case of doubt, it must be traceable which manufacturing grants a product its identity. Caution is especially necessary with simple assembly processes (such as the mere assembly of prefabricated modules)—this often is not sufficient to establish a new origin. A complete technical bill of materials and production documentation help to accurately determine the origin and demonstrate it to the authorities.

For customs officers and logistics managers, this means: In addition to correct customs classification (customs tariff classification of the goods), the origin of a product must also be accurately maintained in the ERP system.

When importing into the USA, an incorrect origin declaration can have significant financial consequences—due to unjustly paid additional tariffs or due to subsequent demands and penalties for incorrect origin declaration.

In the case of the Volvo vehicles, specifically, a vehicle originally declared as “Swedish” would have been incorrectly declared, according to the US view, since “China” continued to be considered the primary country of origin.

For customs officers and logistics managers, this means: In addition to correct customs classification (customs tariff classification of the goods), the origin of a product must also be accurately maintained in the ERP system.

Conclusion

The US customs authorities strictly apply the criterion of substantial transformation in determining the non-preferential origin. The Volvo example clearly shows that final assembly in a second country does not automatically change the origin if the pre-assembled main components have already received a new identity elsewhere.

For companies with complex production chains, the lesson is to determine and document the origin of their goods with the same diligence as their customs tariff number.

Only in this way can it be ensured that upon imports—e.g., into the USA—both the customs classification and the indication of origin are correct to avoid unexpected demands and compliance issues.