On March 16, U.S. Customs and Border Protection (“CBP”) issued a final country of origin determination that will be of interest to the consumer electronics device industry generally.  CBP ruled that under four different scenarios involving the manufacture and assembly of laptops abroad, downloading an operating system was not enough to change the computers’ country of origin for purposes of U.S. Government procurement.

CBP found each of the four scenarios presented in the ruling request failed to satisfy the “substantial transformation” test under the Trade Agreements Act, and squarely rejected the argument that downloading firmware, including a basic input/output system (“BIOS”), transforms “discrete and inoperable components into a finished product with a different name, character and use.” While CBP acknowledged that “the programming of a device that defines its use generally constitutes a substantial transformation,” it determined that downloading firmware and software, by itself, “does not amount to programming, which involves writing, testing, and implementing code necessary to make a computer function in a certain way.”

CPB specifically distinguished between scenarios in which (a) the majority of the key components of a laptop are sourced from multiple countries and assembly operations and the firmware download occur in a third country from scenarios in which (b) the majority of key components are sourced and assembled in a single country and the only activity which occurs in a third country is the firmware download.  CBP found that the former scenario may satisfy the substantial transformation test (see HQ 560677) while the later scenario will not.

This ruling has broad implications for consumer electronics manufacturers facing pressure to reduce manufacturing and assembly costs by moving as many operations as possible to less expensive markets, such as China.  If CBP’s ruling stands, U.S. government contractors will not be able to classify laptops and other consumer electronic devices as U.S. origin products as a result of the fact that U.S. designed/developed firmware or software is loaded in the United States onto hardware that was manufactured and assembled abroad.  Prior rulings by CBP had left this position somewhat in doubt.  See e.g., HQ  H 241177 which appeared to suggest that CBP might distinguish between “situations in which assembly is performed in one country and software is developed in a second country and downloaded in a third country” from “situations in which assembly is performed in one country and downloading is performed in another country using programs developed in the same country in which the software is downloaded.”

This decision is subject to judicial review by the Court of International Trade and interested parties may request that CBP reexamine the determination and issue a new final ruling.