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TAA Compliance: It’s All about Substantial Transformation

May 13, 2021

Any vendor who sells to the U.S. government on a General Services Administration (GSA) contract requires that products comply with the Trade Agreements Act (TAA) (19 U.S.C. & 2501-2581). It’s serious business. If the products you sell aren’t compliant, your company could face hefty fines that run in the hundreds of thousands of dollars and could even see your GSA contract canceled. If the U.S. government is responsible for a significant part of your revenue, that could permanently put your organization out of commission.

So, it’s essential to comply with TAA. What are the requirements to comply with the TAA? You have to certify that the final product was manufactured or “substantially transformed” in the United States or a country designated as approved by the TAA. “Substantial transformation” is a phrase that’s doing a lot of work here, however, so it’s important to understand what it means.

Substantial Transformation — What it Means

Here’s how the International Trade Administration (ITA), an agency that promotes U.S. exports, defines it: “Substantial transformation means that the good underwent a fundamental change (normally as a result of processing or manufacturing in the country claiming origin) in form, appearance, nature, or character, which adds to its value an amount or percentage that is significant in comparison to the value which the good (or its components or materials) had when exported from the country in which it was first made or grown.”

ITA provides the example of nuts, flour, butter, salt and sugar sourced from separate countries, which are then substantially transformed elsewhere into a new product: a batch of cookies. If we were to apply this to the electronics space, a company might buy transistors, subassemblies and other parts that are then substantially transformed to create a computer server. At least 50% of the manufactured cost has to have taken place in a TAA-designated country; so if, say, the motherboard is manufactured in a non-TAA designated country such as China, the product is unlikely to be compliant. On the other hand, the transistors can come from anywhere, as they are insubstantial to the assembly.

The list of TAA compliant countries designated countries list is long, and we won’t list them all here. But broadly speaking, they fall into four categories:

  • World Trade Organization Government Procurement Agreement Countries
  • Free Trade Agreement Countries
  • Caribbean Basin Countries
  • Least Developed Countries

As for countries that are not TAA designated, that’s a shorter list, but it’s worth pointing out that they include China, India and Russia.

How MBX can Help You Become TAA Compliant

At MBX, we take TAA compliance very seriously. The requirements start from the outset – when you request a quote from us, it needs to specify the order will require TAA compliance. Then when the order is placed, your purchase order also needs to document TAA compliance.

Many of our customers sell to industries that require TAA compliance, which carries over into our supplier relationships. Ongoing communications and redundancy in our supply chain assure we have multiple suppliers and alternatives for ensuring compliance. For example, a mandatory requirement for compliance is knowing the country of origin for the manufacture of various components we assemble into these TAA compliant products. If a part turns out to be manufactured in a non-TAA designated country and poses a problem for certification, it’s flagged. Our TAA process won’t allow us to put a part on an assembly or even create a part number for a bill of materials until we have the country of origin.

That’s the key to compliance: ensuring you have a process to verify the country of origin for each component of your product and making sure you retain all documentation. There’s no certificate you need to apply for or process you must follow. You just need to be able to demonstrate compliance should someone come asking you to show evidence that your final products are TAA compliant.

If it’s a challenge to determine the country of origin for your product components, let us show you a demo of MBX Hatch™, the toolset for MBX customers to manage every facet of their hardware program. The Supply Analyzer tool in Hatch puts compliance information right at your fingertips.

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