Womble Carlyle Supply Chain Management Blog

Following legal issues related to supply chain management.

Tuesday, January 20, 2009

Country of Origin Determinations: Where Your Supply Chain Begins Matters to the U.S. Government

A number of U.S. Government agencies apply different and sometimes conflicting rules to determine where a company sources products. So-called “country of origin” determinations – an every day reality for businesses whose supply chain includes foreign-sourced supplies – are rife with potential traps for the unwary.

U.S. Customs and Border Protection (“Customs”) requires imported articles of foreign origin to be marked in a conspicuous place to indicate the country of origin of the article. Also, Customs enforces duty assessments on imported articles that are determined by the country of origin of the articles. Customs’ country of origin determinations generally focus on where the product has been “substantially transformed” into a new and different article of commerce with a name, character or use distinct from that of the article(s) from which it was transformed. The Federal Trade Commission (“FTC”) also makes country of origin determinations of sorts when it enforces regulations prohibiting unfair or deceptive claims that a product is “Made in the USA.” Finally, federal agencies buying products must rely on country of origin determinations under the Buy American Act (“BAA”) and the Trade Agreements Act (“TAA”). Under the BAA, suppliers may only sell “domestic end products” to the U.S. Government, i.e. products deemed to be manufactured in the U.S. because the cost of their components mined, produced, or manufactured in the U.S. exceeds 50% of the cost of all components. The TAA, where it applies, allows the U.S. Government to buy either “U.S.-made” end products or products from certain designated, Caribbean Basin or NAFTA countries. Qualifying products under the TAA are either mined, produced or manufactured in the U.S. or an eligible country, or have been “substantially transformed” in the U.S. or an eligible country.

The upshot of these multiple regulatory regimes, not surprisingly, can be results which are unpredictable and confusing. For example, finished product that need not be marked under Customs rules because it is not deemed to have originated in a foreign country, may nonetheless not be deemed to be eligible to be labeled as “Made in the USA” under FTC rules. Likewise, finished product that must be marked with a foreign country of origin under Customs’ rules, and can not be labeled as “Made in the USA” under FTC rules, may still be eligible for sale to the U.S. Government under the BAA or TAA.

Thus, supply chain risk management should include processes for tracking country of origin of components and final products. In addition to civil or criminal penalties, violations under Customs, FTC, and procuring agency rules can cause substantial supply chain disruption if mis-marked products are impounded at ports of entry.

As complicated as current “country of origin” rules are, the regulatory landscape may grow even more complex. Customs has proposed revisions to its “country of origin” rules to replace current reliance on “substantial transformation” with the “tariff-shift” test employed for NAFTA country of origin determinations. Stay tuned.

-- Jim Kearney

Monday, January 12, 2009

Supply chains as strategic defense tool

Supply Chains as a strategic defense initiative? A recent NY Times article explicitly addressed the importance of supply chains as a strategic defense tool. In it’s article describing a secret request to the U.S. by Israel last year for bunker-busting bombs it wanted for an attack on Iran’s main nuclear complex, the NY Times discussed a new covert U.S. action intended to sabotage Iran’s suspected effort to develop nuclear weapons. The covert operation, started in early 2008, includes renewed American efforts to penetrate Iran’s nuclear supply chain abroad. It is aimed at delaying the day that Iran can produce the weapons-grade fuel and designs it needs to produce a workable nuclear weapon.

This small mention of the Iranian nuclear supply chain indicates that global supply chains are a fact of every project (good and bad), and that supply chain disruptions have such dramatic impact on operations that they can serve strategic defense objectives, and serve as a possible alternative to direct military action.

This underscores the importance of considering your overall supply chain, identifying the weak points, and understanding what a disruption would mean to your ability to continue operations. Pre-planning for a supply chain disruption is no longer optional – particularly in the current global economic crisis. Supply agreements should address disruption planning, and procurement/supply chain management teams need to ensure workable contingency plans are ready to go.

-- Greg Chabon