Does software have a "country of origin"?
An interesting case study on the application of administrative law in an area for which it wasn't designed
One would not normally think that the US Customs and Border Protection agency cares much about software. Most of the agency’s activities revolve around controlling the flow of people and physical goods into the United States’ borders. However, one of the CBP’s core missions is to “enable fair, competitive and compliant trade and enforce U.S. laws to ensure safety, prosperity and economic security for the American people.” This means that they are also responsible for enforcing some policies that have been enacted to protect domestic manufacturers from foreign competition.
One such policy is the requirement to define and label the country of origin on products entering the US. Such a requirement is relatively common globally. Having country of origin labelling allows governments to determine the correct tariffs for a shipment, facilitates traceability of products that may be related to public health, and helps to inform the consumer about their potential purchases. Not many of these reasons apply to software, but there is one use that does: determining whether a product is American-made so that it can be procured by federal entities that are required to buy domestic products.
The Buy American Act (1933) was the first major federal law to require government procurement agents to buy American-made goods. Since the 30s, it has been amended and expanded by further bills, such as the Berry Amendment (which many postal workers might recognize when attempting to purchase “Berry-compliant” shoes to wear on the job). And there are other procurement-related rules that disallow procurement of goods from certain sanctioned countries. In some cases, it is up to the CBP to decide a product’s country of origin to determine whether it qualifies for these procurement rules.
Talend Inc. ruling
In 2011, a company called Talend Inc. sent a letter to the CBP asking them to rule on the country of origin for its software products so that they could sell them to federal agencies bound by such procurement rules. Talend makes database-related software products, and submitted details on two of their products to the CBP to rule on.
Talend completes various design, development, and deployment steps in different countries. For example, their database management software application has its requirements specified, architecture designed, and GUI developed in France. Its source code is programmed in China and built into executable code in France. The final product is tested in China, and finally the software is burned onto CDs for distribution in either France or the United States.
CBP responded a few months later with a letter containing their ruling. In the letter, they quote the Trade Agreements Act of 1979, which defines “country of origin”:
An article is a product of a country or instrumentality only if (i) it is wholly the growth, product, or manufacture of that country or instrumentality, or (ii) in the case of an article which consists in whole or in part of materials from another country or instrumentality, it has been substantially transformed into a new and different article of commerce with a name, character, or use distinct from that of the article or articles from which it was so transformed.
The CBP focuses on the concept of “substantially transformed” in discussing globally-developed software. The application of this concept with traditional physical goods is easy to understand: A shirt made with fabric from Malaysia, buttons from Germany, and thread from Vietnam can be considered to be “made” or “assembled” in the US if it is sewn and assembled there. The global materials are “substantially transformed” into the final product (a shirt) in the US.
Regarding software, the CBP references a 1982 court case, Data General v. United States, in deciding how to apply this concept to software. In that case, the court decided that it was the act of programming a memory chip, not the manufacturing of the chip hardware itself, that constitutes “substantial transformation”. The CBP likens this act to the building/compiling of executable software that Talend does in France, and therefore the country of origin for Talend’s database management software is France.
Does this interpretation of the law make sense?
While this interpretation equating physical assembly to build/compile has some logic to it, it’s also somewhat odd. Choosing the country of origin based on the “substantial transformation” of a physical good makes sense because the assembly of a physical good has a significant economic impact where it is done. It requires some sort of manufacturing facility, usually with investment in machinery, technicians, engineers, and distribution infrastructure. The intent of the “Buy American” laws is to promote this kind of economic investment and activity in the US, so using this activity in defining country of origin makes sense.
But for software, doing the build/compile is probably one of the least economically impactful parts of the software development process. It’s a bit odd to allow companies to perform the entire design, development, and testing process outside of the country but let them label it as “Made in the USA” because they do the compile step in the US. It doesn’t fulfill the original intent of the administrative law.
Regardless, this ruling provides some insight into why administrative laws are sometimes vague and require interpretation by their enforcement agencies or the court system. Lawmakers cannot always predict the situations (or in this case, technologies) that the law must account for. We can only hope that the interpretations made by those enforcing the laws makes sense.
Note: I don’t see a way to attach a document to a Substack post, but if you’d like a copy of the CBP’s advisory ruling letter, email me and I will send you a copy.