Understanding Country of Origin in Manufacturing

As tariffs and trade regulations continue to shape global manufacturing decisions, more companies are looking to shift production out of China. Strategies like “China +1” are gaining traction, with brands moving final assembly to countries like Thailand, Vietnam, or Mexico to diversify their supply chains and reduce tariff exposure.

However, many products still rely on Chinese-made components, even if they’re assembled in another country. That raises an important question: what defines where the product is made? The answer has serious implications for tariff rates, import duties, and compliance with trade laws. Before assuming your product qualifies for preferential treatment under a new country’s trade agreement, it’s important to understand how customs authorities determine where a product is “from.”

In this blog, we’ll break down what country of origin means, how it’s defined by trade authorities like U.S. Customs, and why it matters when shifting your supply chain under the China +1 strategy.

Definition of Country of Origin

In manufacturing and international trade, the country of origin refers to the country where a product is considered to have been made. While that may sound straightforward, determining the country of origin becomes complicated when multiple countries are involved in the sourcing, production, and assembly process.

Customs authorities use the country of origin to apply tariffs, determine eligibility under trade agreements, and enforce labeling and marking requirements. It influences everything from import duties to product labeling and consumer disclosures.

The U.S. Customs and Border Protection (CBP) defines country of origin based on where the last “substantial transformation” took place. That means the product must undergo a significant manufacturing process that changes its name, character, or use. For example, simply packaging or assembling parts may not be enough to change the origin. It also states that a substantial transformation will not result from a minor manufacturing or combining process that leaves the identity of the article (product) intact. 

According to the International Trade Administration (via trade.gov), different rules may apply under specific trade agreements, such as NAFTA (now USMCA), CAFTA-DR, or GSP, which may use criteria such as tariff classification changes or minimum value-added percentages to determine the product’s origin.

Understanding how your product is classified and what rules apply is critical to avoid unexpected tariffs or customs issues. Country of origin is not where the goods are shipped from, it’s where customs deems they were “made,” which can have a major impact on your landed cost and supply chain strategy.

How Country of Origin Is Determined

Determining the country of origin isn’t always as simple as identifying where a product was assembled or shipped from. Most customs authorities rely on a set of rules to determine where a product was substantially transformed, meaning where it underwent a meaningful change in form, function, or use.

The most common standard used by U.S. Customs and many other countries is the Substantial Transformation Rule. Under this rule, the country of origin is the location where the product takes on its final identity. For example, if individual electronic components are made in China but fully assembled, programmed, and tested into a functioning product in Thailand, the country of origin may be considered Thailand, if the transformation is deemed significant enough.

Some trade agreements apply different criteria. In these cases, customs may use:

• Tariff Shift Rules: If the final product falls under a different tariff classification than its imported parts, it may qualify as a different origin.

• Value-Added Requirements: A certain percentage of the product’s total value must come from within the country claiming origin.

These rules can vary by agreement and product category, so applying them correctly often requires careful analysis and documentation. U.S. regulations, such as 19 CFR Part 134, provide further guidance on how country of origin is marked and enforced.

When operating under a China +1 strategy, it's especially important to review these rules early in the sourcing and production planning process. Simply moving final assembly to a new country may not be enough to shift your product’s origin, and if the majority of components still come from China, your shipment could still face the same tariffs you were trying to avoid.

Country of Origin and Tariffs

Tariffs are applied based on a product’s country of origin, not the country it’s shipped from. This distinction is critical for companies trying to reduce costs by relocating production. If your product is assembled in a country like Thailand but still relies heavily on Chinese components, it may still be considered Chinese origin in the eyes of customs, and therefore subject to U.S.-China tariffs.

This has been a major concern since the implementation of Section 301 tariffs on Chinese goods. Many companies moved final assembly out of China under the China +1 strategy, expecting to avoid these duties. But without a qualifying change, like substantial transformation or a tariff classification shift, the product may still be classified as Chinese.

Customs authorities scrutinize these cases closely. If they determine that the transformation outside of China was minimal or superficial, the product may be flagged for transshipment—an attempt to bypass tariffs by routing goods through a third country.

To avoid costly surprises, it’s essential to:

• Understand how origin is defined for your specific product category.

• Document the transformation process clearly.

• Consult with trade compliance experts if the origin status is unclear.

Making the right moves in your supply chain isn’t just about geography, it’s about compliance with the rules of origin. Without a clear understanding, you may end up paying the same tariffs, even if your product never ships directly from China.

Conclusion

As companies look to reduce tariff exposure, understanding country of origin has become a strategic part of manufacturing planning. Moving final assembly out of China is a good start, but it doesn’t automatically change the origin of your product in the eyes of customs authorities.

If your product still relies on components from China, it may still be classified as of Chinese origin, making it subject to the same tariffs you were trying to avoid. That’s why it's critical to understand how origin is determined, where substantial transformation occurs, and what rules apply based on your target markets.

If you're developing your China +1 strategy and exploring new supply chain options, we’re happy to help. Contact us to discuss your sourcing goals, product requirements, and how to build a compliant, cost-effective production plan.