Rules of Origin Applicable to Imported Merchandise

SUMMARY: This document proposes to amend the Customs Regulations to set

forth uniform rules governing the determination of the country of

origin of imported merchandise. These rules would codify existing

principles used for determining when under the customs laws an article

``is wholly the growth, product or manufacture'' of a country or when

an article is ``a new and different article'' [or article of commerce]

as a result of a manufacturing process in a given country. The proposed

rules are intended to codify the present country of origin rules in

order to provide rules that are more objective and transparent and

thereby to provide greater certainty and predictability for both the

trade community and the Customs Service in making country of origin

determinations required under existing laws and regulations.

DATES: Comments must be received on or before April 4, 1994.

ADDRESSES: Written comments (preferably in triplicate) may be addressed

to U.S. Customs Service, 1301 Constitution Avenue, NW., Franklin Court,

Washington, DC 20229, and they may be inspected at the Regulations

Branch located at 1099 14th St. NW., suite 4000, Washington, DC.

FOR FURTHER INFORMATION CONTACT: Sandra L. Gethers, Office of

Regulations and Rulings (202-482-6980).

SUPPLEMENTARY INFORMATION:

Background

On September 25, 1991, a document was published in the Federal

Register (56 FR 48448) proposing to amend the Customs Regulations to

set forth a uniform rule governing the determination of the country of

origin of imported merchandise which is wholly obtained or produced in

a single country. The document also proposed to amend the Customs

Regulations to establish rules, for determining the country of origin

of imported goods, and solicited comments on those proposals. Customs

has refined the original proposal and has decided to issue this second

proposal regarding uniform rules for the determination of the country

of origin of imported merchandise.

All goods imported into the United States are subject to a

determination as to their country of origin because origin

determinations affect the treatment of imported goods under various

laws. Examples of laws that involve country of origin determinations

include laws regarding admissibility, duty assessment, country of

origin marking, and quota administration.

The rules of origin as historically applied in the United States

reflect tests and criteria developed through the years in judicial

decisions and in Customs interpretations of those judicial decisions.

In more recent years, the importance of rules of origin has been

demonstrated by the adoption of statutory or regulatory origin rules

applicable in specific contexts, including for purposes of government

procurement, certain duty-preference programs, and the U.S. textile

import program.

An article may be grown or mined or otherwise extracted from the

ground in a country and not be further processed prior to exportation.

Such an article is ``wholly the growth or product'' of that country and

as such has its origin in that country because it reflects no materials

or processing attributable to any other country. Similarly, an article

may be processed or manufactured exclusively in a country from

materials wholly grown or produced in that same country. In such a case

the article is ``wholly the product or manufacture'' of that country

and thus has its origin in that country because, again, it reflects no

materials or processing attributable to any other country. The U.S.

origin rule in these cases is expressed by the phrase ``wholly the

growth, product, or manufacture of a country'' (or ``wholly grown,

produced, or manufactured in a country'').

The more problematic origin determinations arise when an article is

not wholly the growth, product, or manufacture of a country. In these

other, more problematic determinations, the product in question

incorporates or reflects materials and/or processing which are

attributable to two or more countries. In such cases origin is

determined based on the effect of processing performed on materials or

articles which originated in another country. Under the current

judicially-developed test, a case-by-case determination is made as to

whether the processing is such that it results in a ``new and different

article'' (or ``new and different article of commerce'') having a ``new

name, character, and use'' which is different from that which existed

prior to the processing; Customs has expressed this test as the

``substantial transformation'' rule. Under this rule, the country of

origin of an imported article is considered to be the last country in

which a substantial transformation took place (in other words, the

country in which the imported article assumed its final and distinctive

identity prior to importation).

Notwithstanding the long history of the substantial transformation

rule, its administration has not been without problems. These problems

devolve from the fact that application of the substantial

transformation rule is on a case-by-case basis and often involves

subjective judgments as to what constitutes a new and different article

or as to whether processing has resulted in a new name, character, and

use. As a result, application of the substantial transformation rule

has remained essentially non-systematic in that a judicial or

administrative determination in one case more often than not has little

or no bearing on another case involving a different factual pattern.

Thus, while judicial and administrative decisions involving the

substantial transformation rule may have some value as restatements or

refinements of the basic rule, they are often of little assistance in

resolving individual cases involving the myriad of issues or tests that

have arisen, such as the distinction between producer's goods and

consumer's goods, the significance of further manufacturing or

finishing operations, and the issue of dedication to use. The very fact

that the substantial transformation rule has been the subject of a

large number of judicial and administrative determinations is testament

to the basic problem: The case-by-case approach, involving application

of the rule based on specific sets of facts, has led to varied case-

specific interpretations of the basic rule, resulting in a lack of

predictability which in turn has engendered a significant degree of

uncertainty both within Customs and in the trade community as regards

the effect that a particular type of processing should have on an

origin determination.

The United States-Canada Free-Trade Agreement (CFTA), Public Law

100-449, 102 Stat. 1851 (codified at 19 U.S.C. 2112 note), sets forth

rules for determining the origin of goods for purposes of duty

preference under the CFTA. Those rules, which are set forth in General

Note 3 HTSUS, and the rules of origin in Chapter 4 of the North

American Free Trade Agreement (NAFTA), which will supplant the CFTA

rules, provide that goods will have their origin (1) in the country in

which they are wholly obtained or produced, or (2) in the case of goods

not wholly obtained or produced in a country, in the country in which

they were transformed so as to be subject to a specified change in

tariff classification (with minimum value-added requirements applying

in addition to a tariff classification change in certain cases). The

change in tariff classification standard was specifically developed as

an alternative to the traditional substantial transformation rule in

order to obviate the problems described above. Customs believes that

rules based upon the change in tariff classification approach, would

provide by virtue of their greater specificity, more objectivity,

transparency, and predictability in origin determinations.

Consequently, Customs is proposing to adopt a system of country of

origin determination rules based on change in tariff classification

that would be applicable to all merchandise imported into the United

States. To that end, this document would amend interim regulations (19

CFR part 102) published in today's Federal Register, that follow the

change in tariff classification approach applicable to North American

products.

Discussion of Proposals

This document proposes to amend the interim regulations as set

forth in part 102 of the Customs Regulations, published elsewhere in

today's issue of the Federal Register, to make them uniformly

applicable to all merchandise imported into the United States. The

background section of the interim regulations as well as the regulatory

text of part 102, is applicable to this document. This document

proposes to amend Sec. 102.0 to set forth the scope of areas for which

the rules of origin set forth in part 102 are proposed to be used to

make country of origin determinations. These proposed rules of origin

will be applicable for all purposes for which the ``product of'' or

``country of origin'' criterion is prescribed by statute. As this

position would be consistent (except in the case of waste and scrap

which are treated as if they originated as raw materials) with the

position Customs has always taken regarding the concept of goods

``wholly grown, produced or manufactured'' in one country, including

under preferential trade arrangements, such as the Generalized System

of Preferences (GSP) and Caribbean Basin Initiative (CBI) statutes and

regulations, Customs proposes that this definition apply for all

purposes under the Customs and related laws and the navigation laws of

the United States (for example, for duty assessment and country of

origin marking purposes). Consequently, this document proposes to amend

all provisions where the phrase, ``wholly the growth, product or

manufacture'', or ``wholly obtained or produced'' or a similar phrase,

is used in the current regulations for origin purposes, by including

cross-references to the definition of ``wholly obtained or produced in

a country'' set forth in the proposed Sec. 102.1(g).

Moreover, since the new rules of origin include specific tariff

rules (tariff classification change and/or specific operations) which

codify the ``substantial transformation'' rule, i.e., the criteria for

determining whether a good has become a ``new and different article of

commerce'' as a result of a manufacturing process in a given country,

and provide the results that would be reached under a case-by-case

application of the substantial transformation rule, the new rules would

apply for all purposes where ``substantial transformation'' currently

is specified in the Customs Regulations as the test for determining

origin under Customs law. This does not include origin determinations

under antidumping, countervailing duty, or government procurement

statutes, although the authorities responsible for promulgating

determinations under those statutes may avail themselves of these rules

if they so choose. The proposed amendments to part 134 concerning

country of origin marking also clarify that the substantial

transformation rule currently used for identifying an ultimate

purchaser is the same rule that is used for determining the country of

origin of a foreign article imported into the United States. Proposed

changes were also made to parts 4, 10, 12, and 177, Customs Regulations

(19 CFR parts 4, 10, 12, and 177).

The Interim Regulations set forth in Part 102 also are proposed to

be used to determine whether a good meets the ``product of'' criterion

for receiving duty preferences under General Note 3(a)(iv), 3(c)(ii),

(viii), (ix) (Insular Possessions, Generalized System of Preferences

(GSP), Caribbean Basin Economic Recovery Act (CBERA), Freely Associated

States, Andean Trade Preferences Act (ATPA) and following bilateral

consultations now underway, under General Note 3(c)(vi) [the United

States-Israel Free-Trade Agreement]. The value content requirements

under these provisions, however, must still be met in order for a good

to qualify for the duty preference.

Comments

Before adopting the proposed amendments, consideration will be

given to any written comments (preferably in triplicate) timely

submitted to Customs. Comments submitted will be available for public

inspection in accordance with the Freedom of Information Act (5 U.S.C.

552), and applicable Treasury Department Regulations (31 CFR 1.4) and

Customs Regulations (19 CFR 103.11(b)), on normal business days between

the hours of 9 a.m. and 4:30 p.m. at the Regulations and Disclosure Law

Branch.

Comments submitted in response to this Federal Register document,

need not be duplicated in response to the Interim Rulemaking document

relating to the Rules of Origin for the NAFTA published in today's

Federal Register. Comments in response to one document will be

considered during the review of both documents.

Executive Order 12866

This document does not meet the criteria for a ``significant

regulatory action'' as specified in E.O. 12866.

Regulatory Flexibility Act

Pursuant to the provisions of the Regulatory Flexibility Act (5

U.S.C. 601 et seq.), it is certified that the proposed regulations

amendments will not have a significant economic impact on a substantial

number of small entities. Accordingly, the proposed amendments are not

subject to the regulatory analysis or other requirements of 5 U.S.C.

603 and 604.

List of Subjects

19 CFR Part 4

Customs duties and inspection, Freight, Harbors, Imports, Maritime

carriers, Reporting and recordkeeping requirements, Vessels.

19 CFR Part 10

Customs duties and inspection, Imports, Reporting and recordkeeping

requirements.

19 CFR Part 12

Customs duties and inspection, Labeling, Marking, Reporting and

recordkeeping requirements, Textiles and textile products.

19 CFR Part 102

Customs duties and inspections, Imports, Reporting and

recordkeeping requirements, Rules of origin, Trade agreements.

19 CFR Part 134

Country of origin, Customs duties and inspections, Imports,

Labeling, Marking, Packaging and containers.

19 CFR Part 177

Administrative practice and procedures, Customs duties and

inspection, Imports, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, it is proposed to amend Chapter I of Title 19, Code of

Federal Regulations (19 CFR Chapter I), by amending parts 4, 10, 12,

102, 134, and 177 as set forth below:

PART 4--VESSELS IN FOREIGN AND DOMESTIC TRADES

1. The general authority citation for part 4 continues to read as

follows:

Authority: 5 U.S.C. 301; 19 U.S.C. 66, 1624; 46 U.S.C. App. 3.

2. Section 4.80b is amended by adding a sentence at the end of

paragraph (a) to read as follows:

Sec. 4.80b Coastwise transportation of merchandise.

(a) * * * For purposes of determining whether merchandise is

manufactured or processed into a new and different product under this

section, the rules set forth in part 102 of this chapter (regarding the

determination of whether goods are substantially transformed in a

country) shall apply.

* * * * *

PART 10--ARTICLES CONDITIONALLY FREE, SUBJECT TO A REDUCED RATE,

ETC.

1. The general authority citation for Part 10 continues to read as

follows:

Authority: 19 U.S.C. 66, 1202, 1481, 1484, 1498, 1508, 1623,

1624;

2. Section 10.12 is amended by revising the last sentence of

paragraph (e) to read as follows:

Sec. 10.12 Definitions.

* * * * *

(e) * * * If the article consists wholly or partially of foreign

components or materials, the manufacturing process must be such that

the foreign components or materials have been substantially transformed

as provided in Sec. 10.14(b) of this part.

3. Section 10.14 is amended by revising the text in paragraph (b)

preceding the examples to read as follows:

Sec. 10.14 Fabricated components subject to the exemption.

* * * * *

(b) Substantial transformation of foreign-made articles or

materials. Foreign-made articles or materials will become products of

the United States if they undergo a process of manufacture in the

United States which results in their substantial transformation.

Substantial transformation occurs when under part 102 of this Chapter,

the country of origin of a good which is produced in the United States

from foreign materials is determined to be the United States.

* * * * *

4. Section 10.171 is amended by adding a new paragraph (c) to read

as follows:

Sec. 10.171 General.

* * * * *

(c) Wholly the growth, product, or manufacture defined. For

purposes of Secs. 10.171 through 10.178, the expression ``wholly the

growth, product, or manufacture'' refers to articles and materials

wholly obtained or produced within the meaning of Sec. 102.1(g) of this

chapter.

5. Section 10.176(a) is revised to read as follows:

Sec. 10.176 Country of origin criteria.

(a) Any article which is (1) either wholly the growth, product, or

manufacture of a beneficiary developing country or of any two or more

countries which are members of the same association of countries, or a

new or different article of commerce which has been grown, produced, or

manufactured in a beneficiary developing country and (2) imported

directly from such beneficiary developing country or member countries,

may qualify for duty-free entry under the Generalized System of

Preferences (GSP). However, duty free entry under GSP may be accorded

only if: (i) The sum of the cost or value of the materials produced in

the beneficiary developing country or any two or more countries which

are members of the same association of countries which is treated as

one country under section 502(a)(3), Trade Act of 1974, as amended (19

U.S.C. 2462(a)(3)), plus (ii) the direct costs of processing operations

performed in such beneficiary developing country or member countries,

is not less than 35 percent of the appraised value of the article at

the time of its entry into the customs territory of the United States.

For purposes of this section, a ``new and different article of

commerce'' exists when under part 102 of this Chapter, the country of

origin of a good, which is produced in a beneficiary developing country

from foreign materials, is determined to be that beneficiary developing

country.

* * * * *

6. Section 10.191 is amended by revising paragraph (b)(3) to read

as follows:

Sec. 10.191 General.

* * * * *

(b) Definitions.

* * * * *

(3) Wholly the growth, product, or manufacture. For purposes of

Sec. 10.191 through Sec. 10.198, the expression ``wholly the growth,

product, or manufacture'' refers to articles and materials wholly

obtained or produced within the meaning of Sec. 102.1(g) of this

chapter.

* * * * *

7. Section 10.195 is amended by adding a statement at the end of

the existing text in paragraph (a)(1) to read as follows:

Sec. 10.195 Country of origin criteria.

(a) Articles produced in a beneficiary country--

(1) * * * For purposes of this section, a ``new and different

article of commerce'' exists when under part 102 of this Chapter, the

country of origin of a good, which is produced in a beneficiary country

from foreign materials, is determined to be that beneficiary country.

* * * * *

PART 12--SPECIAL CLASSES OF MERCHANDISE

1. The general authority citation for part 12 continues to read as

follows:

Authority: 5 U.S.C. 301; 19 U.S.C. 66, 1202 (General Note 8,

Harmonized Tariff Schedule of the United States (HTSUS)), 1304,

1624.

2. Section 12.130 is amended by removing paragraphs (d) and (e) and

redesignating paragraphs (f) through (i) as paragraphs (d) through (g),

and by revising paragraph (b) to read as follows:

Sec. 12.130 Textiles and textile products country of origin.

* * * * *

(b) Country of origin. For the purpose of this section and except

as provided in paragraph (c) a textile or textile product, subject to

section 204, Agricultural Act of 1956, as amended, imported into the

customs territory of the United States shall be a product of a

particular foreign territory or country, insular possession of the

U.S., if it is wholly obtained or produced (as defined under

Sec. 102.1(g), part 102, of this Chapter) in that foreign territory or

country, or insular possession. However, except as provided in

paragraph (c), a textile or textile product, subject to section 204,

which consists of materials produced or derived from, or processed in,

more than one foreign territory or country, or insular possession of

the U.S., shall be a product of that foreign territory or country, or

insular possession where it last underwent a substantial

transformation. A textile or textile product will be considered to have

undergone a substantial transformation when under part 102 of this

Chapter, the country of origin of a good, which is produced in a

country from foreign materials, is determined to be that country.

* * * * *

PART 102--NON-PREFERENCE RULES OF ORIGIN

1. The authority citation for part 102 continues to read as

follows:

Authority: 19 U.S.C. 66, 1202 (General Note 8, Harmonized Tariff

Schedule of the United States (HTSUS)), 1624, and the North American

Free-Trade Agreement Implementation Act, Pub.L. 103-182, 107 Stat.

2057.

2. Section 102.0 is revised to read as follows:

Sec. 102.0 Scope.

This part sets forth rules for determining the country of origin of

imported goods for purposes of the Customs and related laws and the

navigation laws of the United States. The rules in this part regarding

goods wholly obtained or produced in a country are intended to apply

for all such purposes. The rules in this part which determine when a

good becomes a new and different article or a new or different article

of commerce as a result of manufacturing processes in a given country,

also are intended to apply for all purposes where this requirement

exists for ``country of origin'' or ``product of'' determinations under

the Customs laws. The rules in this part also will be applied by the

United States for determining when a good is a good of a North American

Free-Trade Agreement (NAFTA) country for the purposes specified under

Annex 311 of the NAFTA.

PART 134--COUNTRY OF ORIGIN MARKING

1. The authority citation for part 134 continues to read as

follows:

Authority: 5 U.S.C. 301, 19 U.S.C. 66, 1202 (General Note 8,

Harmonized Tariff Schedule of the United States (HTSUS)), 1304,

1624.

2. Section 134.1 is amended by revising paragraph (b);

redesignating current paragraphs (d) through (f) as (e) through (g);

adding a new paragraph (d); and revising newly designated paragraphs

(e) (1) and (2) to read as follows:

Sec. 134.1 Definitions.

* * * * *

(b) Country of origin. ``Country of origin'', when used with

reference to any article of foreign origin imported into the United

States, means the country in which the article was wholly obtained or

produced within the meaning of Sec. 102.1(e) of this chapter, or, in

the case of an article not wholly obtained or produced in one country,

the country where the article last underwent a substantial

transformation prior to its importation into the United States.

* * * * *

(d) Substantial transformation. ``Substantial transformation''

occurs when, under part 102 of this Chapter, the country of origin of a

good, which is produced in a country from foreign materials, is

determined to be that country.

(e) Ultimate purchaser. * * *

(1) If an imported article will be used in further processing, the

processor will be the ``ultimate purchaser'' if he subjects the

imported article to a process which results in a substantial

transformation of the article.

(2) If the process does not result in a substantial transformation

of the imported article, the consumer or user of the article, who

obtains the article after the processing, will be regarded as the

``ultimate purchaser.''

* * * * *

3. Section 134.35 is revised to read as follows:

Sec. 134.35 Articles substantially transformed after importation.

If an imported article will be used in further processing in the

United States, the processor will be considered the ultimate purchaser

if such article is determined to be a good of the United States under

part 102 of this Chapter. In such a case, the imported article is

excepted from individual marking pursuant to 19 U.S.C. 1304(a)(3)(D)

and Sec. 134.32(d) of this part, provided the container in which it is

imported will reasonably indicate the country of origin of the article

to the ultimate purchaser.

PART 177--ADMINISTRATIVE RULINGS

1. The general authority citation for part 177 continues to read as

follows:

Authority: 5 U.S.C. 301, 19 U.S.C. 66, 1202 (General Note 8,

Harmonized Tariff Schedule of the United States), 1624, unless

otherwise noted.

Sec. 177.22 [Amended]

2. Section 177.22(a) is amended by adding at the end the following

sentence: ``The expression ``wholly the growth, product, or

manufacture'' refers to articles wholly obtained or produced within the

meaning of Sec. 102.1(g) of this chapter.''

Approved: December 17, 1993.

John P. Simpson,

Deputy Assistant Secretary of the Treasury.

George J. Weise,

Commissioner of Customs.

[FR Doc. 93-31853 Filed 12-30-93; 8:45 am]

BILLING CODE 4820-02-P