What Country Actually Manufactured This Product?

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The issue of international trade is in the headlines with the imposition of tariffs by the US administration, followed by reciprocal tariffs from the trading partners of the US. I am in a unique position to comment on international trade issues, because for years I worked for a large multi-national corporation on global supply chain issues. In fact, I helped to implement the computer infrastructure that enabled my employer to minimize global taxes on shipments that went from continent to continent. It makes it very difficult to determine, where is a product actually made? I will try to explain one supply chain I was involved with and hope that the readers can follow the product trail.

This particular supply chain started with an intermediate chemical compound. That is, one that took a good bit of chemistry to create, but was not a finished product. We either produced that material within our company in the US, or purchased it from a third party located in China.

That intermediate chemical was shipped to our affiliated company legal entity in Puerto Rico. This requires an understanding of what constituted a legal entity in our company. A legal entity is a wholly owned subsidiary that is incorporated under the laws of its location. Since Puerto Rico had different tax structures and tax benefits than the rest of the US, we had established a Puerto Rican legal entity for the manufacturing plants we used there. Our intermediate chemical underwent a complex reaction there in order to become an active herbicide. Then the active materials were packaged into bulk containers (mainly drums), and were set to be exported to other locations where they would be formulated into finished products.

But. It was not as simple as shipping directly from Puerto Rico to our locations in France, and Australia. For the product going to the US, it was shipped directly, but for the others, the transaction was done through a legal entity located in Switzerland. That legal entity assumed responsibility for securing the transportation of the chemical and dealing with all customs payments. All in exchange for a markup fee, which raised the price of the active chemical in the formulating location. Since the price at the formulating location is higher than the cost of the chemical plus transportation fees, the Switzerland subsidiary booked a profit. Did I mention that Switzerland has a low tax rate? So for the corporation as a whole, a portion of the profit for the material was taxed at a very low rate, thus benefiting the economics for the company as a whole.

I was involved in the first setup of what were called trading companies. When we in the SAP (SAP = business enterprise software used to transact business globally) group first heard about it, our legal antenna went up, and we specifically asked “Is this legal?” Because to us, this seemed like a lot of work in order to avoid paying taxes in the countries where we really did physical work on the material. We were assured that it was legal, and we went ahead and set up the first of several trading companies. When you hear about the use of low tax countries to shelter profits, this is one way it is accomplished.

So the material has been shipped from the last manufacturing location to the country where it is formulated. The transaction to move the material was handled by the Swiss entity, but the material never touched Swiss soil. Instead, the material was unloaded at our plant in France. Now any agricultural herbicide or pesticide is a combination of one or more active ingredients, blended together with inactive ingredients, or adjuvants. These materials help in the dispersion of the product so that it may be applied, or dissolved within a spray tank, and then applied to farm fields. This process is known as formulation, and can be very involved with may different ingredients involved. The plant in France then packages the material. first in a large container (for us, multiple kilogram containers). Then, for countries close to France, they will package the material into finished products at the French plant which contain all of the country-specific labeling and use instructions, and then the materials are shipped to the countries in pallet quantities for distribution and sales. The trading company is not used for these transactions.

Logistically, it may make more sense to ship the larger containers to another country directly, where it may be transferred to country-specific packaging. Often contracters are used to accomplish this. Where an individual country market is large enough, like Russia or Ukraine, this is the preferred method for the final stage, where a finished product that will be purchased by a consumer is created.

Given all of these steps, where is the product manufactured? You can see that this becomes a difficult question to answer definitively, because with the exception of the trading company, there were manufacturing operations at all of these locations. The first two manufacturing steps where the intermediate was produced and then converted to the active ingredient added the most value to the finished product, but then even that material may have been originally manufactured in the US, or it may have been sourced from China. So take today’s situation – a tariff may be applied to a material if it were sourced from China, but not if it were manufactured in the US. Then a material is exported from Puerto Rico to Europe. Is Puerto Rico considered part of the US for the application of tariffs in Europe?

For the product I’ve traced, the system is easy in the US. The material is sent directly from Puerto Rico to the US without involving the trading company. It then is formulated and packaged for the specific US market at our plant in Illinois. By the way, did you know that there are multiple packages for use within the US? Often with herbicides and pesticides, it is necessary to have product labeling and use instructions for specific states, since some of them have requirements that are in addition to those from the Federal government. Each of these finished products have a specific bill of material, and each piece of paper or cardboard box used to hold the product had its own SKU (Stock Keeping Unit) that was included in the bill.

That was the world I worked in for the last 15 years of my career. Looking back on this process, I realized I was gaining quite a sophisticated knowledge of international business. I could look at the requirements by country, and I realized that those who complain in the US about overweening regulations stifling business activity, had never done business in Brasil. In that nation they require tracking of everything – copiers, pens, paper, costumes for demonstrations of insects, scientific instruments. Each of those things gained a material number so that they could be tracked coming into and going from their locations. I joked that I was surprised that they didn’t require bar codes on items flushed down their toilets. I was joking, but barely.

The world has become integrated by trans-national corporations. Supply chains stretch across multiple continents, and the systems are legally gamed to minimize taxes. Given all of these conditions, it is very questionable whether you could return to a process where a product is manufactured in a single country, out of components manufactured in that country, and sold not only in the country of manufacture, but exported to other countries and regions for the benefit of the country of manufacture. With the products I’ve described, I have difficulty in stating where the product was actually manufactured. Was it the last step where the product was packaged for the individual farmer? Or was it the location where the complex chemistry was performed? Or was it at the location where it was blended with its other inert ingredients? Each of those steps is a manufacturing operation. You tell me if it makes sense to identify a single origin for this material, and apply taxes and tariffs accordingly?

 

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