In a time of escalating tariff tensions, companies are investing heavily in analyzing the impact of tariff changes on their business and adapting to the shifting trade landscape. To mitigate tariff impacts and maintain competitiveness, many explore supply chain adjustments, such as alternative sourcing or relocating production. While “tariff engineering” is becoming an increasingly popular strategy, it carries significant risks. Businesses must ensure that their sourcing and relocation strategies align with legal standards, economic rationality, and customs scrutiny to minimize trade disruptions and financial exposure. In this article, we examine common tariff-related pitfalls that businesses should consider when making sourcing and relocation decisions.
Customs country of origin and its importance in destination markets
As governments impose specific tariffs on imports from certain countries, the (non-preferential) customs country of origin (COO) plays a critical role in determining whether a product is subject to these tariffs. COO directly influences tariffs, trade barriers, and economic policies, making it essential for businesses to correctly identify and assess the origin of their goods.
Determining COO is a technical customs analysis, independent of the location from which a product is shipped. Instead, it depends on where the product is substantially transformed as part of the production process. Under the globally harmonized, yet incomplete, COO framework, an assembled product is considered to originate in a country if it undergoes its last substantial transformation there. At a high level, this means the last point in the supply chain where the product was fundamentally altered or where it acquired new functionalities.
In other words, not all processing activities confer COO. Various “minimal operations”—such as screwdriver assembly, simple packaging, or minor alterations like cutting and sorting—do not qualify as substantial transformation. Additionally, jurisdictions may define product-specific binding and non-binding rules for substantial transformation, making it a complex issue for companies operating across multiple markets. With each jurisdiction applying its own legal framework, companies must assess COO requirements separately for each destination market.
Three key pitfalls in sourcing and relocation decisions
Businesses considering alternative sourcing or relocation in response to tariff changes must navigate several risks. We have identified three major pitfalls in the decision-making process.
- Ambiguity around substantial transformation
The determination of “substantial transformation” is not harmonized across jurisdictions. Each importing country interprets the concept differently, leading to inconsistencies in COO assessments. Customs authorities evaluate supply chain facts based on country-specific frameworks, making borderline cases—where the transformation’s substantiality is questionable—common. The ambiguity can be rooted in several causes. For instance, import countries use different legal standards, causing identical production processes to yield different COO conclusions depending on the jurisdiction. In addition, if final assembly is moved but critical components still originate from a high-tariff country, customs authorities may question whether the relocation meaningfully alters the product’s COO. - Misrepresentationon origin and supplier dependence
When importers rely on third-party manufacturers for production, additional risks emerge. Suppliers may have commercial incentives to misrepresent COO, leading to potential compliance violations for importers. Common tactics to manipulate COO include transshipment – where goods are routed through an intermediary country and repackaged or relabeled to mask true origin; minimal processing—where minor, insufficient modifications are performed to claim a new COO; and falsified documentation—where forged certificates of origin are used to deceive downstream importers and customs authorities.
Importers must be aware that certificates of origin, which are commonly used in practice, do not guarantee compliance. Customs authorities actively monitor trade flows and conduct onsite verifications in export countries. If COO misrepresentation is uncovered, importers bear the legal and financial consequences, even if the misrepresentation was made by a supplier. Companies must therefore implement rigorous due diligence measures to validate COO claims and protect against liability. - Tariff circumvention and the importance of intentionality
Relocation decisions made in response to tariffs are scrutinized by regulators, particularly when they appear to be motivated solely by tariff avoidance rather than genuine economic reasons. Trade policies are often driven by political considerations, meaning that even legally sound COO claims can be challenged if authorities suspect an attempt to circumvent tariffs.
A key precedent for this occurred during the “trade war” under the first Trump administration (2017-2021). In response to EU rebalancing duties on U.S. goods, Harley-Davidson shifted production of EU-destined motorcycles to Thailand to escape the tariffs. However, the EU ultimately rejected the COO change, ruling that the relocation was primarily tariff-driven rather than economically justified. This case underscores that customs authorities may disregard COO claims if the relocation lacks a genuine commercial rationale beyond tariff mitigation.
Steps to mitigate country of origin risks
To navigate COO complexities and avoid regulatory pitfalls, we recommend that companies adopt risk-mitigating strategies:
- Different jurisdictions have unique COO rules, requiring a comprehensive analysis of legal standards across all destination markets before making supply chain adjustments.
- Importers must verify production processes through robust due diligence on suppliers and take contractual steps to protect against supplier misrepresentations.
- Companies must ensure that relocations have genuine business justifications; if a shift in production is primarily driven by a desire to avoid tariff changes, customs authorities may reject the new COO claim. Many jurisdictions offer advance customs rulings on COO, providing legal certainty before goods are imported. Companies should carefully weigh the benefits and risks of seeking an advanced customs ruling.