Country of Origin vs. Country of Diffusion: The New Semiconductor Tariff Battleground

Since the 2025 trade wars began, an import’s country of origin (COO) has become a critical factor in determining its total cost and, in some cases, long-term sourcing viability. U.S. President Trump has made the vast majority of his tariffs country—rather than sector—specific, meaning that the tariff rates for specific goods are primarily dictated by the country where they were manufactured.

For goods that are manufactured in multiple countries—which happens most often in technologically advanced industries like electronics, semiconductors, automotive, and aerospace and defense—most governments determine COO according to the last location of “substantial transformation.” Substantial transformation is a legal principle that refers to “a fundamental change in form, appearance, nature, or character” that “adds to the good’s value at an amount or percentage that is significant,” according to the U.S. International Trade Administration. For example, for a product that had manufacturing inputs in China, Vietnam, and Mexico, in that order, the official COO designation would be Mexico. 

Substantial transformation is a legal principle that refers to “a fundamental change in form, appearance, nature, or character” that “adds to the good’s value at an amount or percentage that is significant,” according to the U.S. International Trade Administration.

Recently, however, there have been some major changes to the way the world’s two largest economies have interpreted COO and assigned tariff rates as it pertains to a specific critical import: semiconductors. 

China Shifts Tariff Classification to Country of Diffusion

• In early April, China’s General Administration of Customs (GACC) modified its rules for how the COO of imported semiconductors are determined. Rather than the last location of substantial transformation, which would typically be an assembly, testing, and packaging (ATP) facility, GACC is now using the “country of diffusion” to determine tariffs. 
• In the semiconductor industry, “country of diffusion” refers to the country where the wafer used in the semiconductor was fabricated. This means that China is now levying tariffs for imported chips based on the fabrication site for the chip, rather than the packaging or IC assembly facility. 
• On April 11, the China Semiconductor Industry Association published a notice stating that the official COO for semiconductor products imported into China is the country where the chip’s wafer was originally fabricated. 
• This has been broadly seen as a tactical measure intended to hurt U.S. semiconductor firms like Intel, Texas Instruments, and GlobalFoundries, who use fabs based in America. As a result of the new rules, chips those manufacturers import to China are now subject to the nation’s 125% tariff on U.S. imports. 

U.S. May Now Also Be Using Country of Diffusion

In recent weeks, a significant number of Z2Data customers have been reporting that Customs and Border Protection (CBP) and other customs officials are now sometimes using country of diffusion (COD) to determine tariff rates for imported semiconductors. While we are not aware of any official policy changes related to this at the federal level, a range of anecdotal reporting suggests that CBP may be shifting its tariff enforcement strategy with respect to imported semiconductors. 

In recent weeks, a significant number of Z2Data customers have been reporting that Customs and Border Protection (CBP) and other customs officials are now sometimes using country of diffusion (COD) to determine tariff rates for imported semiconductors.

For a comprehensive analysis of your supply chain—including identifying the COO and the COD of your imported semiconductors—schedule a free demo with one of our product experts.