You may have also heard news commentators quip that it’s futile for a single country to engage in a trade war. This is because the 1974 Kyoto Convention specifies that the country of origin can be set by the last country where a product’s HS code has changed – known as the ‘substantial transformation criterion’. So, even if 99% of the value-add could occur in country A, as long as the last 1% value-add in country B legitimately changes the HS code of the product, the country of origin is B.
This is why ‘last screw’ operations are getting so much attention now. China can still produce the circuit boards and plastic case for a typical consumer electronic product, but the country where these get screwed together – a simple, low-value operation – can be legitimately claimed as the country of origin under these rules. Ironically, the tariff policy, as implemented, makes it extremely unattractive to move ‘last screw’ operations into the US, because taxes are highest on the parts, components, and tools necessary to implement a last-screw operation.
If you’re planning a new product, I’d encourage taking a deeper look at these trade rules, as tweaking your product’s function or packaging, or perhaps a small adjustment to your supply chain, could significantly alter the cost structure for your product.
