2010 NAFFS Yearbook


"There is a lot of concern with food safety and the relationship of country of origin surrounding it,” Craig Lewis, partner, Hogan & Hartson, told attendees at the NAFFS 92nd Annual Convention.
Why country of origin? Customers are concerned the potential for contamination of raw materials used in the flavoring industry is more likely when the raw materials come from overseas, Lewis said. Recent problems involving product from China have raised public awareness of the concern of where their food and ingredients are coming from, he said, adding there’s no doubt legislation being considered in Congress is in direct response to that concern. “So country of origin has become a food safety issue, at least in the eyes of the consuming public,” said Lewis.
Lewis’ comprehensive presentation included industry examples provided by Dr. Robert Bedoukian, president, Bedoukian Research. Raising a concern that Dr. Bedoukian wanted to bring to the audience’s attention was whether or not country of origin is being used as perhaps too blunt an instrument to address food safety. He asked if the reaction is being a blanket response to just steer clear of any products that come from China to avoid the risk of the possibility of running into a problem?

Referencing a slide of examples provided by Dr. Bedoukian,

•    Large Consumer products company X will not use any material that is of Chinese origin for their flavors and for that reason is asking for country of origin.
•    Company Y states “I am including a list of items that we have been advised come in from China. Can you tell me if Bedoukian manufactures any of these here in the U.S. or can acquire any of these items from manufacturers other than China? I would appreciate your help in this matter.”
•    Company Z is trying to ascertain how many of our raw materials come from China and/or India. “Could you please provide us with a list of products you provide that originate from either of these two countries.”
•    We are asked to deliver a certificate that guarantees that our flavors are free of Chinese raw materials and ingredients produced from Chinese materials.

Why country of origin? Food safety is the major reason, Lewis said. “Dr. Bedoukian had a few ideas for consideration by this industry on ways to address this and mitigate that rather than the blunt approach of “we’ll just stay clear of Chinese products” and find some middle ground to be able to preserve the ability to source from China because the vast majority of products from China are not unsafe.”
Lewis noted the second reason to bother with country of origin is because it’s the law. “And as it is the law, there is the very substantial risk of penalties if you get it wrong, if you mismark the product or don’t mark it at all,” said Lewis.

Lewis referenced several categories of penalties that can be imposed by Customs and Border Protection. One, which may not be widely known, is simply a surcharge – a 10 percent so-called marking duties that can be applied to the importation if they are determined to be imported “improperly marked.”

A second category is liquidated damages. Importers of record are required, as a condition of importing, to obtain a bond to secure the payment of duties and penalties associated with the importation. “It’s effectively a backup for the importer in the event that they do not comply with their obligations,” said Lewis. It’s a very common method for Customs to enforce regulations – not only the marking area but across the board. They simply impose liquidated damages on the importer on the basis of the bond. This method is more often used for fairly routine and not major violations.

There is a section 592 penalties that allows Customs to impose penalties in situations where a product is not properly marked or if there is some other flaw in the way it was imported, even if it resulted from simple negligence, noted Lewis. The level of penalties imposed is calibrated to the level of culpability from simple negligence to gross negligence to fraud. “They can be extremely high penalties and, at the highest level, they can be equal to the entire value of the shipment that’s brought in,” said Lewis.
“After 9/11, there was clearly a shift in Customs’ focus away from commercial enforcement of the kind we’re talking about here and more toward anti-terrorism activity,” said Lewis. “That pendulum is rapidly shifting back in the other direction. We’re seeing a real uptick in Customs audits and other commercial enforcement activity,” said Lewis.

Besides Customs, there are other agencies involved in country of origin determinations. The second agency is the USDA’s retail marking requirements (COOL), enforced by USDA’s Agricultural Marketing Service. The definition of the products that fall within the USDA COOL is limited, whereas, for Customs purposes, all imported articles with a handful of exceptions, are covered.

The third agency is the Federal Trade Commission (FTC). This is an important agency because Customs’ jurisdiction is limited to marking of products that are of foreign origin. “If under Customs regulations the article is determined to be of U.S. origin, Customs’ jurisdiction stops,” said Lewis. This means claims of “Made in the USA” are actually not under Customs jurisdiction; they are actually under the FTC’s jurisdiction and in certain instances, under AMS jurisdiction as well, noted Lewis.

Lewis provided a brief overview of Preferential vs. Non-Preferential trade agreements but focused his talk on the non-preferential side.

On the Non-Preferential side, there are actually two sets of marking rules. “When I say non-preferential, it means not free trade agreements, not the Generalized System of Preferences; it means general duty purposes for statistical purposes which are requirements,” noted Lewis.

The General Rules state:
…every article of foreign origin (or its container, depending on circumstances) must be marked:
    •    With the English name of the country(ies) of origin of the article
    •    In a conspicuous place
    •    As legibly, indelibly and permanently as the nature of the article (or container) will permit
    •    In such manner as to indicate the origin to an “ultimate purchaser in the U.S.”

Lewis noted who that ultimate purchaser is becomes very relevant if any further processing is done to the product.

There are a number of exceptions to the marking requirements. For example, Customs has recognized certain products can’t be individually marked. The agency has a “J-List” of articles which include “Natural products” (vegetables, fruits, nuts, berries, fish, live or dead animals – if not advanced from their natural state beyond what is necessary for their safe transportation), eggs, feathers, cut flowers and others.
Coffee and tea products, as well as spices, also have an exemption (burden on industry that uses blends, little or no U.S. production). In 1996 Congress amended the marking laws to exclude these products from marking requirements.

If they are excepted, the outermost container must be marked, Lewis said.  Articles “substantially transformed” in the U.S. are an exception. “As a general rule, it’s a risky thing not to mark the product if it’s at all possible to do so,” Lewis warned.

There are two basic rules in the non-preferential side. One is the wholly obtained criterion, which means it is wholly obtained from ingredients or dug out of the earth or grown in one country.

The other is the substantial transformation criterion. The more common issue with any manufactured or blended product is: what if you have ingredients coming from more than one source?  What is the country of origin of the product that results from that manufacturing/blending activity? The concept Customs has used for over 100 years now is the substantial transformation criterion. If the product is substantially transformed, the country of origin is the last country in which the ingredients/components underwent a substantial transformation.

What is a substantial transformation?
•    When the good becomes a different product with a different “name, character, or use.”
•    A new and different article of commerce will usually result from a manufacturing or processing operation if there is a change in:
    •    Commercial (name) designation or identity
    •    Fundamental character, or
    •    Commercial use.
•    Factors to consider to substantiate that substantial manufacturing or processing operations have occurred:
    •    The physical change in the material or article
    •    The time involved in the manufacturing or processing
    •    The complexity of the manufacturing or processing
    •    The level or degree of skill and/or technology required in the manufacturing or processing operations
    •    The value added to the article or material.

Lewis added assessing whether a substantial transformation occurred is fact-specific and subjective. If no Customs ruling exists, he suggested one consider getting a ruling.

Lewis also provided examples of what is NOT a substantial transformation.

Case-by-case determination, but
generally no substantial
transformation from:
•    Packing, packaging, or repacking
•    Testing, marking, sorting or grading
•    Repair
•    Simple assembly (.e.g., 5 or fewer parts)
•    Mere dilution with water or other substance that does not alter characteristics
•    Cleaning, washing
•    Application of preservatives or decorative coatings
•    Putting up in measured doses
Processing in the U.S. after importation may also constitute a substantial transformation, Lewis said. “If the last substantial transformation occurs in the U.S. the product is deemed to be a U.S. product and no country of origin marking is required on the final product for Customs purposes,” said Lewis.

Generally, merely blending or commingling foreign articles is normally not considered a “substantial transformation” where identity of articles is not lost. CBP has consistently held that blending a product from one country with the same product of another country does not constitute a substantial transformation. Lewis cited an example of Spanish olive oil with Italian olive oil in Italy does not result in a substantial transformation of the Spanish product, so both origins apply.

Lewis illustrated his point through industry examples:

Elaborating on how the product must be marked, Lewis said “markings must be conspicuous, legible and permanent.” Abbreviations of country names must be approved by Customs. He advised the audience to look to the USDA COOL website which has a good compilation of this information.
Lewis highlighted issues related to country of origin marking:

•    The country of origin of the product shall appear in close proximity to and in at least a comparable size, preceded by the words “made in,” “product of,” or “assembled in,” or words of similar meaning.
•    References such as “Designed in U.S.A.,” “Made for XYZ Corp, California, U.S.A.” or “Distributed by ABC Inc., Colorado, U.S.A.” are misleading to the ultimate purchaser and trigger the country of origin marking requirements of 19 CFR 134.46.

Another area of concern could be articles repacked or manipulated after importation. Unless the imported foreign articles are substantially transformed by post-importation processing, articles that are repacked or manipulated after importation must be packaged in containers that display the country of origin of the article.

Importers that repackage articles must provide Customs with a certificate of marking of repacked articles. “This is basically a certification requirement as a proxy for Customs’ inability to be there to ensure that it absolutely occurs,” said Lewis. Importers that provide articles to third parties that repackage articles must provide the third party with notice of marking requirements.

Lewis noted the country of origin rules for determining whether a product qualifies for zero or reduced duties under NAFTA are different than typical country of origin regulations. He said products from Mexico and Canada are not subject to the substantial transformation and wholly obtained rule. “The intention when the three countries agreed to a set of marking rules was to try to make them as transparent as possible,” said Lewis. They were also to make them less subjective. NAFTA marking rules have embodied the concept of tariff classification rules. Under the basic NAFTA Marking Rules:

Country of origin is the country in which:
1.    The good is wholly obtained or produced
2.    The good is produced exclusively from domestic materials
3.    Each foreign material incorporated into the good undergoes an applicable change in tariff classification (and satisfies any other applicable rules) – subject to certain de minimis exclusions, etc.
4.    Where origin can’t be determined from 1, 2 or 3, a specified hierarchy of additional rules is applied.

Under NAFTA, as with substantial transformation, certain operations such as repacking do not qualify to meet tariff shift rules, noted Lewis.

In addition to the United States’ marking requirements, Lewis touched on marking approaches being followed in other countries. The European Union doesn’t have any current marking regulation. “There have been discussions recently on imposing regulations but they’ve taken a much more pro-industry and less consumer-oriented approach,” said Lewis. He said the EU looks at more of a product-by-product category, such as leather, footwear, apparel, glassware and jewelry.

“For Most Favored Nation (MFN) tariff purposes, you still need to identify the country of origin and there the rules are similar to those discussed under NAFTA,” said Lewis.  They have a wholly obtained rule and a substantial transformation rule.

Looking at China, Lewis said “China has separate import and export rules of origin.” They also have preferential and non-preferential rules of origin for imports because China is party to a variety of free trade agreements. In the non-preferential area, they have a wholly obtained concept and a last country of “substantial processes” concept. Japan likewise has preferential and non-preferential rules, a wholly obtained and substantial transformation rule.

The WTO Agreement on Rules of Origin (1995) called for a three-year program to establish harmonized rules. Negotiations have been postponed multiple times as it was more complicated than expected, according to Lewis. He indicated there is agreement on most basic principles, such as the concept of “wholly obtained” and “tariff shift” approach with value-added in places. Also a preliminary agreement was reached on product-specific tariff shift rules for many products but others remain to be resolved.