Being an apparel importer for 20+ years, I have been fortunate to work for several major apparel manufacturers. These manufacturers creatively thought outside their sourcing boxes, to minimize costs and remain competitive, as well as profitable - while staying within CBP Compliance lines.
After Section 301, List 4 came out and I could not stop hyperventilating, I started thinking about the foundation upon which my compliance knowledge was built, and the days before China was a member of the WTO, which meant apparel manufactured in China was subject to quota.
As I pondered the sourcing processes during China quota years, in which multiple countries were used in the garment manufacturing process, I realized these same processes could be a realistic option to legally avoid paying the additional 25% duties being assessed under Sec. 301, List 4. It all boils down to following the Rules of Origin covered under Code of Federal Regulations, CFR, §102.21. More specifically, when utilizing more than one country in the manufacturing process, the most important assembly or manufacturing process for the garment needs to be identified, as well as a country, other than China, where that process can be satisfactorily completed.
So, I grabbed the Title Code 19 manual off the shelf, blew off all the dust and refamiliarized myself with the verbiage of §102.21 (c)(4) and (c)(5), which state:
- §102.21 (c)(4) – “Where the country of origin of a textile or apparel product cannot be determined under paragraph (c) (1), (2) or (3) of this section, the country of origin of the good is the single country, territory, or insular possession in which the most important assembly or manufacturing process occurred.”
- §102.21 (c)(5) – “Where the country of origin of a textile or apparel product cannot be determined under paragraph (c) (1), (2), (3) or (4) of this section, the country of origin of the good is the last country, territory, or insular possession in which an important assembly or manufacturing process occurred.”
Identifying Cost Savings
As we did 20 years ago, the first decision would be to determine if there would be a cost savings in using more than one country to manufacture the garment. To the best of my memory, we basically followed the below methodology to identify variables, define processes, crunch numbers and analyze data, to make an educated decision on how to proceed.
- We started with our bill of materials, BOM, that listed the costs of making the garment in China.
- Next, we made a list of all components and manufacturing processes from our Detailed Garment Specification Sheets Outline. By garment type, we determined which of the manufacturing processes would be considered “an important manufacturing process”.
- We then determined what countries, near China, have the expertise to perform the “most important manufacturing/assembly process”.
- Factories within these countries had to be evaluated to determine if they had the expertise to perform the specific manufacturing process at a reasonably cost, at an acceptable quality level and within the specified production/shipping deadlines.
- Different scenarios were created, to determine which one would be the most cost effective, while ensuring the country of origin would NOT be conferred as China.
- In some cases, utilizing §102.21 (c)(4) was the most cost-effective process to follow; in other cases, utilizing §102.21 (c)(5) was the most cost effective.
CROSS Rulings Explained
To aide in creating different scenarios, I suggest researching CROSS rulings for multi-country processing and/or rules of origin. Below are three Cross Rulings that provide good guidance in determining different scenarios to consider. Each ruling covers different garment types. The most important manufacturing process is highlighted in each of the three rulings.
1. CROSS Ruling HQ 958851 & HQ 959222
HQ 958851 provides a scenario that explains country of origin conferred utilizing §102.21 (c)(4) and HQ 959222 (clarification of HQ 958851 to correct the 102.21 (c) rule to following given the specific circumstances.)
The garment described in HQ 958851 is a women’s woven long sleeved, button front blouse. [Content of fabric does not come into play regarding country of origin determination.] The blouse has a collar, two front breast pockets, cuffs and a back yoke. “The manufacturing process is as follows:
- two front panels, single back panel and sleeve components are cut to shape;
- pocket components, collar components, cuff components and yoke are cut to shape;
- pockets hemmed and sewn to the front panels;
- collar components are attached to form the collar;
- cuff components are attached to form cuffs;
- yoke is attached to the back panel;
- the front panel is placketed and buttonholed
After all the above has been completed by the factory in country A, the blouses are sent to Country B for further process.
- front panels and the back panel are joined at the shoulders;
- the sleeves are set;
- side seams are closed;
- collar and cuffs are assembled to the blouse.
There were important processes performed in both countries, but where did the “most important process or assembly” occur? Customs ruled it was in country B, where the side seams were closed.
2. CROSS Ruling NY K81139
NY K81139 provides 3 different product plans for manufacturing Men’s & Boy’s Knit Jackets.
PLAN 1 and PLAN 2
- The sleeve & side seams were sewn closed in Country A.
- Customs ruled the country of origin was Country A.
- The sleeve & side seams were sewn closed in Country B.
- Customs ruled the country of origin was Country B, where the sleeve & side seams were sewn closed.
3. CROSS Ruling NY J89648
NY J89648 provides insight in determining the most important assembly process for Men’s and Boy’s Knit Pants.
- In Plan 1, Country A is where the pattern is made & marked; the fabric is cut into component parts; the back rise is sewn; the side seams are sewn closed with tape/piping attached; the rib waistband with elastic & drawstring is formed and the main label is sewn to the waist band.
- In Plan 1, Country B is where the front rise is sewn; the inseams are sewn; the rib waistband w/elastic & drawstring is attached; the care label is sewn to the waistband; the leg bottom is hemmed; the threads are trimmed and the garments are inspected and packet for export.
- Under Plan 1, the side seams were sewn in Country A, but the inseams were sewn in Country B; both are important assembly processes, but one is equally as important as the other. So, country of origin cannot be determined by following §102.21 (c)(4).
Therefore, we move on to §102.21 (c)(5), which states country of origin is determined in the last country where an important assembly occurred, which was in Country B. Therefore, Country B would be the country of origin on Plan 1.
- In Plan 2, Country A is where the pattern is made & marked; the fabric is cut into component parts; the back rise is sewn; the front rise is sewn; the rib waistband w/elastic & drawstring is formed and the main label is sewn to the waistband.
- In Plan 2, Country B is where the side seams are sewn closed with tape/piping attached; the inseams are sewn; the rib waistband w/elastic & drawstring is attached; the care label is sewn to the waistband; the leg bottom is hemmed; the threads are trimmed and the garments are inspected and packet for export.
- Under Plan 2, the side seams and the inseams are sewn closed in Country B. Customs ruled the country of origin was Country B, because the most important assembly or manufacturing process took place in Country B.
Food for thought to be better prepared when and if Section 301 List 4 is implemented.
Brainstorming to envision and to imagine possibilities that could lessen the potentially devastating results that will come with the increased duties from Section 301, List 4 should be encouraged within your company. If your customs broker is an asset and a resource, that keeps you informed on how the on-going Trade War between the US and China can potentially affect your company, I suggest you utilize their knowledge and partner with them to help you develop a business strategy that minimizes the impact to your bottom line.
If you do not have a broker that is a resource to your company, please contact myself, I can hook you up with the best broker I personally have ever dealt with during all my years of plowing through the wonderful world of compliance in the textile and apparel arena.
Lynne McGowan - Senior Textile & Apparel Specialist
GHY International | Geo. H. Young & Co. Ltd. | GHY USA, Inc.
1 (888) 825-0002 | firstname.lastname@example.org