# Rules for Determining the Country of Origin of a Good for Purposes of Annex 311 of the North American Free Trade Agreement

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## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** June 6, 1996
- **Citation:** 61 FR 28932

## Text

SUMMARY: This document adopts as a final rule, with some modifications,
interim amendments to the Customs Regulations which established the
rules for determining when the country of origin of a good is one of
the parties to the North American Free Trade Agreement (NAFTA) as
required by Annex 311 of the NAFTA. These final NAFTA Marking Rules
apply only to all goods imported from Canada or Mexico other than
textile and apparel products, and do not apply to trade with other
countries.

EFFECTIVE DATE: August 5, 1996. These regulations shall apply to goods
entered, or withdrawn from warehouse, for consumption on or after
August 5, 1996.

FOR FURTHER INFORMATION CONTACT: Sandra L. Gethers, Office of
Regulations and Rulings (202-482-6980).

SUPPLEMENTARY INFORMATION:

Background

On January 3, 1994 Customs published two documents in the Federal
Register. One of these documents, T.D. 94-4 (59 FR 110), set forth as
interim regulations, effective January 1, 1994, rules for determining
the country of origin of goods for purposes of Annex 311 of the North
American Free Trade Agreement (NAFTA). The other document (59 FR 141)
proposed (1) to apply the same rules (set forth at 59 FR 110) to
determine the country of origin of merchandise in all cases under the
Customs and related laws and the navigation laws of the United States
and (2) to amend various provisons within parts 4, 10, 12, 134 and 177
of the Customs Regulations (19 CFR parts 4, 10, 12, 134 and 177) to
ensure that these rules would control wherever language requiring a
country of origin determination appears in those other regulatory
provisions; this notice of proposed rulemaking represented a refinement
and replacement of an earlier proposal published in the Federal
Register on September 25, 1991 (56 FR 48448). Both documents provided
for a 90-day public comment period, subsequently extended to July 5,
1994, by notices published in the Federal Register on March 10, 1994
(59 FR 11225) and March 11, 1994 (59 FR 11547). On February 3, 1994, a
notice was published in the Federal Register (59 FR 5082) setting forth
corrections to the interim regulations contained in T.D. 94-4.
The rules set forth in T.D. 94-4 were made effective January 1,
1994, for trade with Canada and Mexico in order to fulfill the United
States obligation under paragraph 1 of NAFTA Annex 311 which provides
that the parties to the NAFTA shall establish, by January 1, 1994,
rules (referred to as ``Marking Rules'') for determining whether a good
is a good of a party (that is, whether the country of origin of a good
is either the United States, Canada or Mexico) for purposes of the
following NAFTA Annexes: (1) Annex 311 (Country of Origin Marking); (2)
Annex 300-B (Textile and Apparel Goods); and (3) Annex 302.2 (Tariff
Elimination). T.D. 94-4 set forth these interim ``Marking Rules'' as a
new part 102 of the Customs Regulations (19 CFR Part 102), entitled
``Rules of Origin'', and also set forth consequential conforming
interim amendments to existing sections within parts 12 and 134 of the
Customs Regulations (19 CFR parts 12 and 134).
Interim part 102 consists of Secs. 102.0-102.20 and, following
Sec. 102.0 (Scope), is divided into two subparts. Subpart A is entitled
``General'' and consists of Sec. 102.1 (Definitions), and Subpart B is
entitled ``Rules of Origin'' and consists of Secs. 102.11 through
102.20. Section 102.11 sets forth the general rules for determining the
country of origin of a good and consists of paragraphs (a) through (d)
which are applied in a hierarchical and sequential manner. Thus,
reference must be had first to paragraph (a) which provides that the
country of origin of a good is: under subparagraph (1), the country in
which the good is wholly obtained or produced; under subparagraph (2),
the country in which the good is produced exclusively from domestic
materials; or, under subparagraph (3), the country in which each
foreign material incorporated in the good undergoes an applicable
change in tariff classification set out in Sec. 102.20 and/or satisfies
any other applicable requirements contained in that section or
elsewhere in part 102. If the country of origin cannot be determined
under paragraph (a) because the good does not meet the terms of
subparagraph (1), (2) or (3), then resort must be had to paragraph (b)
and, if that fails, then to paragraph (c) and, if that fails, finally
to paragraph (d). Sections 102.12-102.19 set forth additional rules
that serve to interpret, clarify, limit or otherwise control the
application of the general rules contained in Sec. 102.11 as well as
the specific rules contained in Sec. 102.20. Section 102.20 contains
the specific change in tariff classification rules and/or related
requirements referred to in the country of origin rule set forth in
Sec. 102.11(a)(3); the rules in Sec. 102.20 are set forth for each
Harmonized Tariff Schedule of the United States (HTSUS) chapter, and
the applicable rule is determined by the HTSUS tariff classification
that is applicable to the finished good at the time the country of
origin determination is being made.
In view of the fact that the January 3, 1994, notice of proposed
rulemaking presented the same regulatory scheme as the rules contained
in T.D. 94-4, each document referred to the other and stated that
public comments submitted in response to either document would be
considered in connection with the review of both documents. The notice
of proposed rulemaking further indicated that the background section
and interim Part 102 regulatory texts set forth in T.D. 94-4 were
applicable to it. Thus, it was intended that the two documents be read
together so that, following public notice and comment procedures, one
final rule document could be derived from the interim and proposed rule
documents, consistent with the overall goal of promulgating uniform
rules of origin for Customs and related purposes.
Based on a review of the comments received in response to the
interim and proposed rule documents published in the Federal Register
on January 3, 1994, and as a result of independent review of the
interim and proposed texts within Customs, it was determined that some
clarification and further explanation of the intent behind the proposed
uniform rule concept should be provided and that some changes should be
made to the interim and proposed texts and that those changes should be
the subject of public notice and comment procedures before proceeding
to the final rule stage in this matter; the interim texts as published
in T.D. 94-4 (and as subsequently corrected) would remain in effect
pending completion of such final rule action. In addition, Customs
determined that public comments should be solicited regarding the
appropriate use of a delayed effective date for any final rule
resulting from the interim and proposed rules and from any additional
proposed changes to those interim and proposed rules.

[[Page 28933]]

Accordingly, on May 5, 1995, Customs published in the Federal
Register (60 FR 22312) a document that (1) provided supplemental
background information regarding the proposed uniform rule concept, (2)
set forth proposals to amend the interim regulatory texts contained in
T.D. 94-4 published at 59 FR 110 and corrected at 59 FR 5082, (3)
republished (and thus replaced) all of the proposed regulatory
amendments published at 59 FR 141 on January 3, 1994, with certain
changes thereto, and (4) also invited public comments on the
appropriate effective date for a final rule on this matter. The May 5,
1995, document stated that it was the intention of Customs to address
in that document only those comments submitted in response to the
January 3, 1994, notices that involved substantive changes to the
interim or proposed texts requiring further public comment procedures;
other such previously submitted comments would be addressed in an
appropriate final rule or other document to be published at a later
date. Comments would be accepted and considered in response to that
document only in regard to (1) the proposed changes to the interim
regulatory texts as discussed and set forth therein, (2) all other
proposed regulatory amendments as discussed and set forth therein which
represented a substantive change to the proposals published on January
3, 1994, and (3) the final rule delayed effective date issue.
Therefore, comments which concerned other issues involved in the
January 3, 1994, documents, or which did not otherwise relate to the
new proposals set forth in the May 5, 1995, document, would not be
accepted and considered by Customs. The May 5, 1995, document also
stated that, for purposes of that document, the background sections of
the January 3, 1994, interim and proposed rule documents were
applicable except where otherwise required by a change set forth in
that document. The May 5, 1995, document provided for a 45-day public
comment period which was subsequently extended to July 19, 1995, by a
notice published in the Federal Register on June 5, 1995 (60 FR 29520).
After publication of the May 5, 1995, notice of proposed
rulemaking, additional issues came to the attention of Customs that
warranted publication of further proposed changes to the interim
regulatory texts published in T.D. 94-4, with opportunity for public
comment thereon. Accordingly, on July 12, 1995, Customs published in
the Federal Register (60 FR 35878) a notice of proposed rulemaking
setting forth additional proposed changes to the tariff shift and other
requirements of interim Sec. 102.20. Final action on the additional
proposals set forth in that document also would be reflected in the
single final rule document intended, as stated in the May 5, 1995,
document, to cover both the T.D. 94-4 interim regulations and the
subsequently published proposed regulatory amendments. Since that July
12, 1995, document set forth proposals that were in addition to the
proposed changes to the T.D. 94-4 interim regulations contained in the
May 5, 1995, proposed rule document, the background section of that May
5, 1995, document was stated to be applicable for purposes of the July
12, 1995, document except where otherwise required by a change set
forth in the latter document. Comments submitted in response to the
July 12, 1995, document would be accepted and considered only to the
extent that they address specific proposals set forth in that document;
comments submitted in regard to matters raised in the May 5, 1995,
proposed rule document that were not related to a specific proposal
contained in the July 12, 1995, document would remain subject to the
public comment period specified in the earlier document. The public
comment period specified in the July 12, 1995, document closed on
August 28, 1995, and a correction document involving the Background
discussion in that document was published in the Federal Register on
July 31, 1995 (60 FR 38982).

Deferral of Decision to Extend Section 102 to All Trade

Customs has decided that the proposal to extend Section 102 to all
trade, as reflected in the May 5, 1995, notice of proposed rulemaking,
should not be adopted as a final rule at this time but rather should
remain under consideration for implementation at a later date.
Accordingly, this final rule document concerns only the interim NAFTA
Marking Rules (as amended by T.D. 95-69 discussed above) and related
interim texts published on January 3, 1994, and those proposed
regulatory amendments published on May 5 and July 12, 1995, that relate
only to those interim texts, with certain changes thereto as discussed
elsewhere in this document. Thus, this document does not include those
May 5, 1995, proposed regulatory changes under the uniform rule concept
involving part 10 (Secs. 10.12, 10.14, 10.171, 10.176, 10.191 and
10.195), part 12 (Sec. 12.130), part 102 (Sec. 102.0), part 134
(Secs. 134.1 and 134.35) and part 177 (Sec. 177.22). Consequently,
those submitted public comments that addressed the proposed regulatory
changes that would apply a uniform method of determining origin to all
trade, including the delayed effective date issue, are not discussed in
this document but rather will be dealt with, as appropriate, in a
future Federal Register document once a final decision is taken on
whether to apply a uniform method of determining origin to all trade.

Rules of Origin for Textile and Apparel Products

On September 5, 1995, Customs published in the Federal Register (60
FR 46188) T.D. 95-69 which set forth final amendments to the Customs
Regulations to implement the provisions of section 334(b) of the
Uruguay Round Agreements Act (``the Act''), Public Law 103-465, 108
Stat. 4809, regarding the country of origin of textile and apparel
products. Those final regulations will apply to goods entered, or
withdrawn from warehouse, for consumption on or after July 1, 1996,
and, except for the purpose of identifying products of Israel and
except as otherwise provided for by statute, will govern the
determination of the country of origin of imported textile and apparel
products for purposes of all laws enforced by Customs. The regulatory
provisions in T.D. 95-69 that implement the basic origin principles of
section 334(b) of the Act are contained in a new Sec. 102.21 of the
Customs Regulations (19 CFR 102.21), and, in order to reflect the broad
applicability and precedence of the statutory origin principles as
implemented by those Sec. 102.21 rules, T.D. 95-69 also included
consequential cross-reference amendments to Secs. 12.130, 102.0 and
102.11 of the Customs Regulations (19 CFR 12.130, 102.0 and 102.11).
New Sec. 102.21 was modeled on the approach taken in the interim
Part 102 texts as published in T.D. 94-4 and thus incorporates a
general statement of applicability (paragraph (a)), various definitions
(paragraph (b)), general origin rules (paragraphs (c) and (d)), and
specific tariff shift and/or other requirements (paragraph (e)) that
apply under the second general rule. Of particular note for purposes of
the present document is the definition of ``textile or apparel
product'' in Sec. 102.21(b)(5) which delineates the class of goods
covered by the Sec. 102.21 rules. That definition identifies those
goods with reference to classification in the HTSUS and refers to
Chapters 50 through 63 (that is, all of Section XI) of the HTSUS as
well as to specific headings and 6-, 8- or 10-digit subheadings of the
HTSUS that fall outside Section XI. Thus, if a good is classifiable in
an HTSUS provision

[[Page 28934]]

listed in Sec. 102.21(b)(5), precedence must be given to the
Sec. 102.21 rules over any other regulatory origin provision with
regard to that good, including any origin rules contained elsewhere in
part 102. The consequential amendments to Secs. 12.130, 102.0 and
102.11 mentioned above were intended to reflect this precedence
principle.
In view of the precedence that must be given to the Sec. 102.21
origin rules which were adopted as a final rule after the completion of
separate public notice and comment procedures, it is clear that, for
purposes of the present document, all earlier public comments as
regards any goods now covered by Sec. 102.21 relating to textile and
apparel products (that is, those submitted in response to the interim
and proposed rule documents discussed above) have been rendered moot
and thus are no longer relevant. Accordingly, this document contains no
substantive discussion of any such comments insofar as they involve
Sec. 102.21 goods.
Since the Sec. 102.21 origin rules will also apply for the purposes
cited elsewhere in part 102 (that is, in Sec. 102.0), Customs believes
that all appearances of possible conflict between the two sets of rules
should be avoided. In keeping with the precedence to be given to the
Sec. 102.21 rules, the most appropriate means for accomplishing this is
(1) to remove, or otherwise exclude, from the table under Sec. 102.20
all those HTSUS references, together with their related tariff shift
and/or other requirements, that are included in the Sec. 102.21(b)(5)
definition of ``textile or apparel product'' and (2) in order to ensure
continuity of regulatory standards, to provide that the regulations set
forth in this final rule document will take effect on July 1, 1996,
when the Sec. 102.21 provisions become operative (see Sec. 102.21(a)).
Accordingly, the following changes have been made to the Sec. 102.20
table as set forth below to reflect these considerations:
1. The listing for subheading 3005.90 has been removed.
2. A new Chapter 39 Note has been added to provide that origin
shall be determined under the provisions of Sec. 102.21 in the case of
goods classified in subheadings 3921.12.15, 3921.13.15, and
3921.90.2550.
3. Since the new Chapter 42 Note as proposed in the May 5, 1995,
document would be superseded by the Sec. 102.21 provisions, this
proposed Note has been modified to simply provide that origin shall be
determined under the provisions of Sec. 102.21 in the case of goods
classified in subheadings 4202.12.40-80, 4202.22.40-80, 4202.32.40-95,
4202.92.15-30, and 4202.92.60-90.
4. The Section XI provisions have been removed.
5. The Chapter 64 Note has been modified by adding a sentence at
the end to provide that origin shall be determined under the provisions
of Sec. 102.21 in the case of goods classified in subheadings
6405.20.60, 6406.10.77, 6406.10.90, and 6406.99.15.
6. Since the new Chapter 65 Note as proposed in the May 5, 1995,
document would be superseded by the Sec. 102.21 provisions, this
proposed Note has been omitted.
7. The listing for headings 6501-6502 has been removed.
8. The listing for headings 6503-6506 has been replaced by the
following: (1) A listing for subheading 6505.10 (hair-nets), which
specifies a change to that subheading from any other subheading; and
(2) a listing for heading 6506, which follows the interim tariff shift
rules for headings 6503-6506 but with one consequential editorial
change in the first rule.
9. The listing for heading 6601 has been removed.
10. A new Chapter 70 Note has been added to provide that origin
shall be determined under the provisions of Sec. 102.21 in the case of
goods classified in subheadings 7019.19.15 and 7019.19.28 (subheadings
7019.10.15 and 7019.10.28 in the interim texts--see the 1996 HTSUS
conforming changes discussion below).
11. The listing for subheading 7019.20 has been removed.
12. The listing for subheadings 8708.10-8708-29 has been replaced
by separate listings for subheading 8708.10 and for subheading 8708.29,
with the tariff shift rule in each case following the interim rule.
13. The listing for headings 8804-8805 has been replaced by a
listing for heading 8805, with consequential editorial changes to the
interim tariff shift rule to reflect that only one heading is involved.
14. A new Chapter 91 Note has been added to provide that origin
shall be determined under the provisions of Sec. 102.21 in the case of
goods classified in subheading 9113.90.40.
15. The new Chapter 94 Note proposed in the May 5, 1995, document
has been modified by adding a sentence at the end to provide that
origin shall be determined under the provisions of Sec. 102.21 in the
case of goods classified in subheadings 9404.90.10 and 9404.90.80-95.
16. The listing for subheading 9502.91 has been removed.
17. A new Chapter 96 Note has been added to provide that origin
shall be determined under the provisions of Sec. 102.21 in the case of
goods classified in subheading 9612.10.9010.
In addition, for the above reasons and based on the considerations
reflected in the below comment discussion regarding Sec. 102.19(a),
references to ``Sec. 102.21'' have been added to the texts of
Secs. 102.13, 102.15 and 102.17 as set forth below.

Changes to Conform to 1996 HTSUS

A number of conforming changes have been made to the table under
Sec. 102.20 as set forth in this document, principally to the tariff
shift rules therein, to reflect changes included in the 1996 version of
the HTSUS as a result of amendments made to the international
Harmonized System. Those HTSUS changes involve primarily the product
coverage and/or numbering of some headings and subheadings, and the
conforming changes reflected in the Sec. 102.20 texts in this document
are not intended to have any other substantive effect. The specific
Sec. 102.20 conforming changes incorporated in this document are
reflected in the text of Note 1 to Section VI and in the following
heading and subheading listings: 0405.10, 0405.20, 0405.90, 0406,
0901.90, 1520, 1521-1522, 1903, 1904.10, 1904.20, 1904.90, 1905,
2106.90, 2207, 2208.20-2208.70, 2208.90, 2836.99, 2841.61-2841.69,
2848, 2849.10-2849.90, 2903.11-2903.30, 2903.41-2903.49, 2903.51-
2904.90, 2905.11-2905.19, 2905.45, 2914.31-2914.39, 2914.40-2914.70,
2932.11-2932.99, 3206.11-3206.19, 3206.20-3209.90, 3214.10-3214.90,
3302, 3304.10-3306.10, 3306.20, 3306.90-3307.90, 3402.11, 3402.12-
3402.20, 3502.11-3502.19, 3502.20-3502.90, 3823.11-3823.13, 3823.19,
3823.70, 3824.10, 3824.20, 3824.30, 3824.40, 3824.50, 3824.60, 3824.71-
3824.90, 4823.60-4823.70, 4823.90, 7019.11-7019.19, 7019.40-7019.59,
7116, 7507.11-7508.90, 7616.10-7616.99, 7907, 8005, 8406.10, 8406.81-
8406.82, 8456.10-8456.99, 8469.11-8469.12, 8469.20-8469.30, 8470.10-
8471.50, 8471.60-8472.90, 8475.10, 8475.21-8475.29, 8476.21-8476.89,
8506.10, 8506.30, 8506.40, 8506.50-8506.80, 8510.10-8510.30, 8517.11-
8517.80, 8519.10-8519.40, 8519.92-8519.93, 8519.99, 8520.10-8520.20,
8520.32, 8520.33, 8520.39-8520.90, 8521.10 8521.90, 8525.30-8525.40,
8527.12-8527.13, 8527.19-8527.90, 8528.12-8528.30, 8539.10-8539.31,
8539.32-8539.39, 8539.41-8539.49, 8540.11-8540.20, 8540.40-8540.60,
8540.71-8540.99, 8543.11-8543.19,

[[Page 28935]]

8543.20-8543.30, 8543.40-8543.89, 9007.11-9007.19, 9007.20, 9010.10,
9010.41-9010.50, 9010.60, 9018.11, 9018.12-9018.14, 9018.19, 9022.12-
9022.14, 9022.19-9022.90, 9030.10-9030.40, 9030.82-9030.83, 9030.89-
9030.90, 9031.10-9031.30, 9031.41-9031.49, 9031.80, and 9614.20. In
order to accurately reflect the public comments and the context in
which they were submitted, the comment discussion set forth below
refers to the interim Sec. 102.20 texts and published proposed changes
thereto and thus does not reflect these conforming changes.

Discussion of Comments

A total of 183 commenters responded to the solicitation of comments
in the interim and proposed rule documents referred to above. The
comments submitted, except those relating to textile and apparel
products and those relating to the uniform origin rule concept, and the
Customs responses thereto are set forth below.

Removal of Secs. 10.22, 102.14 and 134.43(e)--U.S. Goods Returned

Comments: Section 10.22, Customs Regulations (19 CFR 10.22),
provides that assembled articles eligible for subheading 9802.00.80,
HTSUS, treatment are considered products of the country of assembly for
purposes of country of origin marking. Section 102.14 of the interim
regulations provides that U.S. goods advanced in value or improved in
condition abroad are considered to be products of the country where the
U.S. goods were advanced in value or improved in condition, and
Sec. 134.43(e) of the interim regulations provides for special methods
of marking goods the origin of which is determined under Sec. 102.14 of
the interim regulations. Five comments opposed the removal of these
sections, and five comments favored their removal.
The commenters opposing the removal assert that since the foreign
assembly of U.S. components does not necessarily result in a
substantial transformation or tariff shift, resulting in a change in
origin of a good, Secs. 10.22 and 134.43(e) provide a means to identify
U.S. components in goods assembled abroad. Additionally, in situations
where assembled goods consist largely or entirely of U.S.-made
components and there is a change in origin, it is claimed that the use
of ``Assembled in'' will be eliminated, and ``Made in'' or ``Product
of'' is not only inaccurate, but does not serve the purpose ``to inform
the ultimate purchaser of the country of origin''. Furthermore, it is
stated that U.S. Note 2(a), Subchapter II, Chapter 98, HTSUS, still
provides that any product of the U.S. advanced in value or improved in
condition, or assembled abroad will be considered a foreign article
upon its return to the U.S.
The commenters who favor the removal of Secs. 10.22, 102.14 and
134.43(e) assert that U.S. products should not have to be marked upon
return to the U.S., unless they are substantially transformed.
Requiring U.S. goods to be marked restricts U.S. companies to the term
``Assembled in'' when all the components being assembled are of U.S.
origin, and it is suggested that this does not advise the ultimate
purchaser as to the real origin of the imported merchandise.
All of the comments, favorable and unfavorable, urged the continued
use of ``Assembled in'' when an eligible subheading 9802.00.80, HTSUS,
assembly operation constitutes a substantial transformation conferring
origin pursuant to Sec. 102.20 of the interim regulations. The
commenters also urged the general usage of the legend ``Assembled in''
as a valid country of origin marking when an assembled good is a
product of the country indicated.
One commenter also suggested that if Sec. 10.22 is removed without
further amending part 134 to authorize the use of ``Assembled in'' for
subheading 9802.00.80 merchandise, there will be ambiguity as to
whether ``Assembled in'' is a permissible country of origin marking
under the Customs Regulations, inasmuch as rulings approving the use of
``Assembled in'' are still in effect. Furthermore, if Sec. 10.22 is
removed, it was suggested that Part 134 be amended to confirm that in
all cases, information respecting assembly of an imported product may
be noted within an origin statement.
Customs Response: Customs' proposal to remove Sec. 10.22 was
originally discussed in the May 5, 1995, notice of proposed rulemaking
in the context of the uniform rules proposal. However, as demonstrated
by the above comments, the proposed removal of Sec. 10.22 is directly
related to the proposed removal of Secs. 102.14 and 134.43(e) of the
interim regulations. For this reason, Customs is responding
collectively to comments regarding the proposed removal of Secs. 10.22,
102.14 and 134.43(e).
Customs agrees that 19 U.S.C. 1304 does not preclude the use of
``Assembled in'' or require the use of ``Made in'' or ``Product of'' in
a country of origin statement. However, outside the context of articles
eligible for subheading 9802.00.80, HTSUS, treatment (i.e., when
Sec. 10.22 is applicable), Customs in the past has by rulings
determined that the phrase ``Assembled in'' is not an acceptable
country of origin statement. Reference was made by a commenter to
C.S.D. 79-244 as support that Customs approves of the marking
``Assembled in''. However, that determination involved calculators
assembled in Hong Kong with U.S. and/or foreign components.
Consequently, it appears that the calculators imported into the United
States were eligible for entry under item 807.00, Tariff Schedules of
the United States (TSUS) (now subheading 9802.00.80, HTSUS). It is
clear that there has been confusion as to the use of ``Assembled in''
when articles eligible for subheading 9802.00.80, HTSUS, treatment
contain foreign components as demonstrated by the series of
inconsistent rulings subsequent to the determination made in HQ 731507.
Consequently, instead of modifying all of the inconsistent rulings
concerning the use of ``Assembled in'', and since articles eligible for
subheading 9802.00.80, HTSUS, treatment may not undergo a substantial
transformation or tariff shift in the country of assembly, it is
Customs' opinion that Sec. 10.22 as well as Sec. 102.14 of the interim
regulations should be removed so that the country of origin of articles
assembled or advanced in value abroad is determined in the same manner
as any other good imported into the United States.
All of the comments mention the purpose of 19 U.S.C. 1304, which is
to inform the ultimate purchaser of the country of origin. Some of the
comments assert that Sec. 10.22 provides the ultimate purchaser with
information regarding the country of assembly and the origin of the
components used, while other comments suggest that the country of
assembly may not necessarily be the true country of origin. It is
Customs' opinion that an ultimate purchaser most likely will not be
aware that an article imported with the marking ``Assembled in'' is
eligible for subheading 9802.00.80, HTSUS, treatment. While U.S. Note
2(a), Subchapter II, Chapter 98, HTSUS, does provide that any product
of the United States advanced in value or improved in condition, or
assembled abroad, will be considered a foreign article upon its return
to the United States, Customs has reconsidered the position that this
Note applies for general country of origin purposes. Therefore, once
Sec. 10.22 and Sec. 102.14 of the interim regulations are removed, all
rulings based on those regulations may no longer be relied upon.
Accordingly, goods of U.S. origin which are assembled abroad or

[[Page 28936]]

otherwise advanced in value or improved in condition abroad, but which
do not undergo a change in origin as a result of these operations, will
not be required to have any country of origin marking pursuant to 19
U.S.C. 1304 when they are imported into the United States.
However, since all of the comments favor the use of ``Assembled
in'', Customs has reconsidered the proposal to remove all regulations
allowing the use of this phrase. Therefore, Sec. 134.43(e) will be
retained but in modified form, as set forth below, so as to be limited
to assembled goods when the origin of such goods is the country of
final assembly.

Section 102.1(g)--Definition of Wholly Obtained or Produced

Comment: A commenter suggests adoption of the Kyoto Convention
Rules of Origin definition of ``wholly obtained goods'' in order to
eliminate doubts as to when a good is considered to be wholly the
growth, product or manufacture of one country.
Customs response: The definition of ``wholly obtained or produced''
contained in Sec. 102.1(g), which is incorporated by reference in
Sec. 102.11(a)(1), is substantively identical to the definition set
forth in Annex D.1 to the Kyoto Convention, with the single exception
that the Part 102 definition also includes goods taken from outer
space, provided that they are obtained by that country or a person of
that country. Therefore, Customs agrees with this commenter that the
definition of wholly obtained or produced goods, which is patterned
after Kyoto Convention Annex D.1, provides more predictability in
determining when goods are wholly the growth product or manufacture of
a single country.

Section 102.1(m)--Definition of Minor Processing

Comment: One comment was received regarding this section. This
commenter expressed concern regarding subparagraph (5), which includes
``[u]nloading, reloading, or any other operation necessary to maintain
the good in good condition.'' The commenter stated that this language
appears overly broad and could be misinterpreted to apply to industrial
operations necessary to preserve a good, but which also alter the
essential character of the good. Therefore, this commenter suggests
that this provision be amended to read as follows: ``Unloading,
reloading, or any other insubstantial operation that does not add
significant value to the good and is performed solely to preserve or
maintain the good in good condition for shipment.''
Customs Response: Customs disagrees. The underlying premise of this
comment is that the definitions of Sec. 102.1, unlike most regulatory
``definitions'', can operate independently of other regulatory
provisions. This, however, is not the case here. The definition of
``minor processing'' only can operate in the context of other rules set
forth in part 102, particularly those provisions setting forth a
criterion for determining origin. The definition of ``minor
processing'' does not operate as a general disqualifer to the origin
criteria of other provisions, such as the way in which the ``non-
qualifying operations'' set forth in Sec. 102.17 are generally
applicable to all determinations under the specific tariff rules of
Sec. 102.20. When the definition of ``minor processing'' is applicable,
it normally is expressed as part of a ``negative'' origin criterion,
meaning that it is used to illustrate when a change of origin does not
occur. Therefore, if the other operations suggested by the commenter
also are performed, the good will not be deemed to have been produced
``only'' as a result of ``minor processing'', and thus a change of
origin could still be possible under the rules.

Section 102.1(p)--Definition of Substantial Transformation

Comment: One commenter submits that as a result of the proposed
elimination of the definition, the question of what constitutes a
``substantial transformation'' now can be determined only on the basis
of the specific Sec. 102.20 rule. The commenter also suggests that in
the absence of a general definition of ``substantial transformation'',
there will be a lack of certainty which is not only needed for Customs
origin determinations, but also for other purposes such as origin
determinations relating to ``industrial property rights''.
Customs Response: Customs disagrees. First, it is the position of
Customs that the principle of substantial transformation is reflected
and codified not only in the Sec. 102.20 rules but also in the entire
hierarchy of Sec. 102.11. In fact, Sec. 102.20 is only applicable
through its incorporation in Sec. 102.11(a)(3). The definition of
``substantial transformation'' was set forth in interim Sec. 102.1(p)
only because of the references made to that term in interim Sec. 102.16
and in certain specific interim rules contained in Sec. 102.20.
Customs, however, stated in the May 5, 1995, notice of proposed
rulemaking that Sec. 102.16 (in its entirety) and the references to
``substantial transformation'' contained in certain Sec. 102.20
specific rules were being proposed for removal because experience in
administering the interim regulations had demonstrated that the
application of the hierarchy contained in Sec. 102.11 will yield a
result that codifies the substantial transformation principle set forth
in interim Sec. 102.1(p). If origin is not determined under
Sec. 102.11(a)(3) [the section in which the Sec. 102.20 rules are
incorporated by reference], the question of whether or not there has
been a substantial transformation is not yet answered; the next step in
the hierarchy must be considered. As a result of the application of the
hierarchy, a specific determination of origin of a good can be made.
If, in the final analysis, the origin of the good under the hierarchy
is different from the origin of its materials, then there will have
been a substantial transformation of those materials.
Therefore, contrary to the underlying premise of this comment, it
is specifically because of the need for more certainty in origin
determinations that Customs is expressing the substantial
transformation principle through the step-by-step operation of the
Sec. 102.11 hierarchy. Customs' proposed removal of those provisions,
which merely incorporate the abstract definition of ``substantial
transformation'' without expressing when the criteria have been met, is
consistent with and promotes the overall objective of certainty.

Section 102.11(c)--General Rules

Comments: Two commenters state that Sec. 102.11(c), as applied to
mixtures and composite goods, is contrary to 19 U.S.C. 1304 and to
judicial precedents promulgated thereunder. These commenters expressed
concern that pursuant to Sec. 102.11(c), when no single material,
foreign or domestic, imparts the essential character, the mixture will
have the origins of the significant materials or ingredients used to
produce that mixture, as opposed to considering the mixture itself as a
new and different article of commerce.
These commenters also suggest that Customs include an ``escape
clause'' to appropriately deal with these and other unforeseeable
instances when processing in a country under existing precedent
constitutes a substantial transformation, but is not treated as such
under the new rules. In this regard, the commenter suggests that when
processing is deemed insufficient under Sec. 102.11(a)(3) or
Sec. 102.11(b) to confer origin in the country where the processing
takes place, this should

[[Page 28937]]

create a presumption that no substantial transformation occurs.
However, this presumption could be rebutted by factual evidence
establishing that the processing causes a change in name, character or
use.
Customs Response: Customs disagrees. Section 102.11 sets forth the
hierarchical rules for determining the country of origin of goods other
than textile and apparel products which are covered by Sec. 102.21. If
the country of origin of a good is not determined under Sec. 102.11(a)
or (b), Sec. 102.11(c) of the hierarchy must be considered. Thus, by
the time Sec. 102.11(c) of the hierarchy is reached, it already has
been determined: (1) That the processing performed with respect to
foreign materials contained in the good was insufficient to meet the
specific tariff rule under Sec. 102.20; and (2) for mixtures and
composite goods, that there is no single material that imparts the
essential character to such goods.
Consequently, when this provision is applicable, the country of
origin of such sets, mixtures, or composite goods is the country or
countries of origin of those materials or components meriting equal
consideration for determining the essential character of the good. A
material or component need not be determined to actually impart the
essential character to a good in order to merit equal consideration
(i.e., be considered a consequential material or component) for such
purpose of making the essential character determination for
classification or origin purposes.
Section 102.11(c) is not a departure from Customs practice under
the country of origin marking statute. Indeed, it follows and is
specifically intended to codify Treasury Decision (T.D.) 91-7, dated
January 8, 1991, in which Customs considered, inter alia, the country
of origin marking requirements of GRI 3, HTSUS, sets, mixtures and
composite goods. In this decision, Customs stated that, notwithstanding
that these goods may be classified pursuant to GRI 3(b) on the basis of
the material or component that imparts the essential character to the
good, ``if the materials or components are not substantially
transformed as a result of their inclusion in a set or mixed or
composite goods * * * each item must be individually marked to indicate
its own country of origin.'' Contrary to the suggestions by the
commenters, the practice established in T.D. 91-7 has not been limited
to ``sets'', but also has been applied to mixtures and composite goods.
See HQ 735085 dated June 4, 1993.
With regard to the suggestion by one of the commenters that the
Part 102 rules contain an escape clause, it is the opinion of Customs
that such a clause would negate the primary benefit of these rules:
Codification of the substantial transformation principle as interpreted
by Customs and the courts, while providing predictability, transparency
and objectivity in origin determinations.

Sections 102.12 and 102.11(b)(2)--Fungible Goods and Materials

Comment: One comment was received regarding Sec. 102.12 which
provides for the country of origin determination of commingled fungible
goods to be made by either direct physical identification or, if that
is impractical, by the use of one of the inventory management methods
provided under the Appendix to Part 181 of the Customs Regulations
(which implements the preferential tariff treatment provisions of the
NAFTA). While this commenter endorsed the need for an alternative
method to physical identification, the commenter stated that the use of
an inventory management method to determine origin of these goods is
not workable. As an alternative, the commenter suggests that Customs
expand and codify the ``major supplier'' marking policy that exists for
country of origin marking of fruit juice products made from juice
concentrate of various countries.
Customs Response: First, it should be clarified that the ``major
supplier marking'' policy is not an origin rule, but rather is a manner
of marking policy that is applicable to certain goods after the
determination of origin is made. In contrast, Sec. 102.12, like all of
the rules of part 102, will be used to determine the origin of the good
at issue. It is only after reaching the origin determination that
Customs can address the issue of the appropriate manner of marking the
good for purposes of 19 U.S.C. 1304. Both the ``major-supplier'' rule,
which applies to manner of marking, and the inventory management
option, which is used to determine origin, co-exist. If, under the
inventory management method, a single origin is determined, there is no
need to use a ``major-supplier'' approach to mark the good in question.
In T.D. 89-66, dated April 7, 1989, which was cited by this
commenter, Customs addressed only the issue of the number of countries
representing sources of the foreign juice concentrate that had to be
physically identified on the retail juice products. The question of
origin regarding the juice products already had been settled as a
result of the Court of International Trade decision in National Juice
Products Assn. v. United States, 628 F.Supp. 978 (CIT 1986).
Therefore, Customs reserves the right to address the manner of
marking issue relating to commingled goods and materials on a case-by-
case basis similar to the way the issue was addressed for the juice
concentrate products. Customs believes, however, that
Secs. 102.11(b)(2) and 102.12 provide a practical solution to the
problems that gave rise to the major supplier country of origin marking
policy. These provisions allow for practical and logistical problems to
be resolved at the time the origin determination is being made for
fungible goods and materials. Contrary to the commenter's suggestion,
the specific inventory management methods set forth in the appendix to
part 181 of the Customs Regulations are not so circumscribed to the
NAFTA preference rules that they cannot be employed for other origin
determination purposes. The examples provided in that Appendix clearly
illustrate how accounting methods can be used to assign origin to
inputs and outputs. Therefore, Customs believes that inventory
management methods allow for adaptable recordkeeping that provides
another option to determine origin.

Section 102.13--De Minimis

Comments: Two commenters expressed concern that the de minimis rule
set forth in Sec. 102.13 is not applicable to certain agriculture
products. These commenters note that if a ``major supplier'' marking
rule is adopted, it can include a de minimis amount of 7 percent.
Customs Response: These commenters also confuse ``manner of
marking'' issues with ``determination of origin'' issues. Section
102.13 is only applicable in conjunction with the specific tariff rules
of Sec. 102.20. Due to the nature of these products and because of
health and food safety concerns, Customs has exercised its discretion
not to allow a de minimis standard to apply in determining the origin
of most agricultural products. This policy, which is incorporated into
Sec. 102.13, is consistent with Customs' past practice with regard to
country of origin determinations of agricultural products. Therefore,
Customs will retain the rule in Sec. 102.13 as it currently exists.

Removal of Sec. 102.16--Goods and Its Parts; Parts of Parts

Comments: Two commenters express concern that, by the elimination
of Sec. 102.16, Customs is adopting an ``essential character'' standard
in its origin hierarchy for all goods (except for

[[Page 28938]]

``sets'') for which country of origin is not determined pursuant to
Sec. 102.11(a). Another commenter submits that by eliminating
Sec. 102.16, Customs ignores the situation in which imported goods
classified as an ``unfinished article'' under GRI 2(a) may be subject
to extensive and significant manufacturing processes that change the
name, character, or use of the article and add enormous value to the
finished product. This commenter suggests adopting the NAFTA preference
rules which in some cases include a value added criterion for
determining ``originating'' status.
In opposing the removal of Sec. 102.16, these commenters also
expressed concern that the hierarchy set forth in Sec. 102.11 does not
codify the principle of substantial transformation for goods classified
pursuant to GRI 2(a) and the court's decision in United States v.
Gibson-Thomsen Co., Inc., 27 CCPA 267, C.A.D. 98 (1940); on the other
hand, one of the commenters suggests that origin would not necessarily
be determined under Sec. 102.11(b) (on the basis of essential
character) if several equally important parts are assembled. Another
commenter sought specific clarification in connection with the removal
of Sec. 102.16 as to whether the country of origin of a single
component which has not undergone the applicable change in tariff
classification will always be found to impart the ``essential
character'' to the product.
Customs Response: It is apparent that these commenters have assumed
that interim Sec. 102.16 had a much broader application than it
actually did. First, Sec. 102.16, by its very terms, only applied to
goods which were assembled from parts that were classified along with
the good in the same undivided heading or in the same subheading.
Second, even when Sec. 102.16 was applicable, the country of origin of
the good would not always be determined under Sec. 102.16. If pursuant
to this section Customs concluded (as has happened in some instances)
that there was no substantial transformation of the parts, then resort
must be had to the next step in the hierarchy under Sec. 102.11, that
is, paragraph (b) (or paragraph (c) if the good is a ``set''). In other
words, Sec. 102.16 was only applicable within the context of
Sec. 102.11(a)(3) and the specific tariff rules of Sec. 102.20. It did
not have a life of its own.
Customs also does not agree with the other underlying premise of
these comments, i.e., that Customs is creating the ``essential
character'' standard. As Customs thought had been made clear in the
SUPPLEMENTARY INFORMATION portion of the May 5, 1995, notice, whether
or not there is a change in the essential character of an article is
the principle factor considered by the courts in determining whether
there has been a substantial transformation. In United States v.
Gibson-Thomsen Co., supra, the court found that the marking statute was
not intended by the Congress to have application to an imported article
further processed in the United States so that it became a ``new
article having a new name, character and use'' (emphasis added).
Although the courts with customs jurisdiction in more recent cases,
and Customs in its rulings, have often characterized the standard as
``new name, character or use'', the courts and Customs have actually
required a change in the name, character and use of an imported article
for a finding of substantial transformation into a new and different
article of commerce. In addition, the courts have actually given much
less significance in recent cases to the ``name'' and ``use'' of an
article but have emphasized the significance of a change in its
``character'' in making substantial transformation decisions. See,
e.g.: National Juice Products Assn. v. United States, supra; Uniroyal,
Inc. v. United States, 542 F.Supp. 1026 (CIT 1982); and National Hand
Tool Corp. v. United States, 16 CIT 308, aff'd 989 F.2d 1201 (Fed. Cir.
1993). Therefore, consistent with the courts' interpretation of the
substantial transformation standard over recent years, Customs has
administered the standard as originally enunciated by the Gibson-
Thomsen Co. decision as requiring a change in the name, character and
use of the article and has placed more emphasis on a change in the
character of the article than on any change in its name or use. With
regard to one of the commenter's suggestions of using the NAFTA
preference rules incorporating a value-content requirement, Customs
notes that even the Court of International Trade has stated that
``there is no reason to find `substantial transformation' on the basis
of value added in the United States.'' National Hand Tool Corp. v.
United States, supra.
As previously noted, the Sec. 102.11 hierarchy does not stop at the
failure of the foreign materials to meet the specific tariff rule of
Sec. 102.20. Therefore, one commenter correctly observed that in the
case involving multiple parts that are classified in the same undivided
heading or same subheading as the finished good (e.g., multiple
forgings for a single hand tool), it is possible to conclude that no
single one of those parts imparts the essential character to the
finished tool. (For purposes of this determination under
Sec. 102.11(b), materials which are classified at the subheading level
specified in the rule under a general descriptive provision (e.g. a
``parts'' provision) will be considered, when distinct in style or
type, as separate materials, while materials which are classified at
the specified subheading level under a provision which reflects a more
specific description (e.g. ``fresh cut flowers'' under subheading
0603.10) will be considered collectively as a ``single material''.) If
the good is not classified as a ``set'', ``mixture'' or ``composite
good'', Sec. 102.11(c) would not be applicable and in such instance
Sec. 102.11(d) would be applicable. If the production of the good from
the parts involved more than ``simple assembly'' or ``minor
processing'', then it is possible to conclude pursuant to
Sec. 102.11(d)(3), that the country of origin of the good is the last
country in which the good underwent production.
In response to the question of whether, if there is only one
component in a good which is classified in a provision from which a
change in tariff classification is not allowed under the Sec. 102.20
rule, that one component always will determine the country of origin,
the answer is yes for the following reason. The specific tariff (tariff
shift in most cases) rules were developed with the specific view of not
allowing a change in tariff classification from materials that can
impart the essential character to the good. In those instances in which
the tariff shift rule excludes a particular tariff provision, Customs
has determined that the processing required to shift from that tariff
provision to the provision for the good is not, in itself, sufficient
to result in a change in the essential character of the materials
classified in the provision from which a change is not allowed.
Therefore, unless the good is classified as a set, if a good is made
from a single material that is classified in a tariff provision from
which a change is not allowed, the single material will be found under
Sec. 102.11(b) to impart the essential character to the good, and the
country of origin of that material will be the country of origin of the
good under Part 102.
As an example of the foregoing, a forging for a flat wrench is
imported into the United States. The shape of the flat wrench is
defined by the forging such that the two teeth of the open end of the
wrench are in place with just a thin web of metal which must be
removed, and the closed end of the wrench (a circle) also has a thin
piece of metal inside which must be removed, and then heat treated,
belt polished, vibrated, acid cleaned, and chrome

[[Page 28939]]

plated. If the flat wrench forging is the only material that does not
meet the tariff shift rule under Sec. 102.20 as a result of being
classified in a provision from which a change is not allowed (the
forging is usually classified in the same provision as the finished
wrench), this is the single material that imparts the essential
character to the finished flat wrench, and the country of origin of
this material is the country of origin of the finished flat wrench. In
order to clarify this issue, Sec. 102.18(b) has been modified as set
forth below to make it clear that if there is only one component or
material that is classified in a provision from which a change in
tariff classification is not allowed under the Sec. 102.20 rule, that
material will constitute the single material that imparts the essential
character to the good for purposes of determining country of origin
under Sec. 102.11(b).

Section 102.18(a)--Rules of Interpretation

Comments: One commenter states that since Sec. 102.18(a) only
applies to rules which contain an exception relating to GRI 2(a) of the
HTSUS, two questions remain unanswered. First, how will the origin
differ when an unassembled article is shipped with all of its parts in
one shipment, therefore invoking GRI 2(a), versus shipping parts
separately and thereby not triggering the application of GRI 2(a)?
Second, does the assembly of the article under either of the above
scenarios determine the country of origin of the assembled article? If
the answer to the second question is yes, the commenter questions
whether this applies only when the rule for the article does not
contain a GRI 2(a) exception.
Another commenter presents an example of semi-knocked-down
(``SKD'') bicycles (classified under heading 8712), which are complete
bicycles, individually boxed and ready for sale to the ultimate
purchaser which, however, are not fully assembled (the seat, seat post,
front wheel [consisting of a hub, spokes, nipples, rim, tire, inner
tube and rim strip], pedals, handlebars and handlebar stem are not
assembled to the bike, but are simply placed separately in the shipping
carton in order to reduce the size of the carton thereby reducing
freight costs). The SKD bicycles are classifiable as complete bicycles
under GRI 2(a), and the commenter seeks confirmation that as a result
of the applicability of Sec. 102.18(a) and the proposed new text of
Sec. 102.17(e), the assembly or collection of the bicycles will not
result in a tariff shift.
Customs Response: The first commenter correctly notes that
Sec. 102.18(a) is applicable only when there is reference to GRI 2(a)
in a specific tariff rule under Sec. 102.20, which, in turn, only
applies in the context of determining origin under Sec. 102.11(a)(3).
Section 102.18(a) operates just like the definitions in Sec. 102.1: It
cannot be invoked unless specifically referenced in a rule. Thus, the
question of whether or not the assembly of an unassembled good confers
origin cannot be answered in the abstract. This determination will
depend upon the application of the hierarchical rules of Sec. 102.11 to
the specific goods and parts in question. Customs also agrees with the
conclusions of the second commenter, but probably for slightly
different reasons. The response below to the example presented by the
second commenter illustrates how the GRI 2(a) exception operates in the
Sec. 102.20 rules.
The Sec. 102.20 specific tariff shift rule for bicycles, which are
classified in heading 8712, HTSUS, is as follows:

8711-8713
A change to heading 8711 through 8713 from any other heading,
including another heading within that group, except from heading
8714 when that change is pursuant to General Rule of Interpretation
2(a).

If the production of an SKD bicycle in Country A entails the use of
a subassembly imported from Country B that is classifiable under
heading 8714, HTSUS, Sec. 102.18(a) is applicable and the tariff shift
from the subassembly (classifiable under heading 8714) to the SKD
bicycle (classifiable under 8712 pursuant to GRI 2(a)) will not be
allowed.
Also, pursuant to the proposed new text of Sec. 102.17(e), a tariff
shift would not be allowed for collections of bicycle parts or
incomplete bicycle ``subassemblies'' which as collected are
classifiable in the same manner as the complete bicycle, pursuant to
GRI 2(a). However, neither Sec. 102.17(e) nor Sec. 102.18(a) will be
the reason that the final assembly of the SKD bicycle into the fully
assembled bicycle does not result in a tariff shift. In this instance,
the tariff shift does not occur simply because the unassembled SKD
bicycle and the fully assembled bicycle are classified in the same
tariff provision.

Section 102.19--NAFTA Preference Override

1. Section 102.19(a)
Comments: One commenter believes that the application of this
provision can result in more than one NAFTA country of origin. Another
commenter states that Sec. 102.19(a) should be applicable to goods the
origin of which is determined under Sec. 102.21.
Customs Response: Customs disagrees with the comment that this
provision can result in more than one country of origin. In
Sec. 102.19(a), the word ``single'' before the words ``NAFTA country''
expressly makes clear that it is impossible for originating goods that
meet the criteria of this provision to have multiple countries of
origin. Customs has not been presented with a scenario in which two
parts of a good were produced at the exact same time in two NAFTA
countries, which would be the only circumstances in which there can be
two last NAFTA countries ``in which the good underwent production other
than minor processing''. Moreover, Sec. 102.11(c) will never be
applicable to goods that meet the criteria of Sec. 102.19(a), since
this provision is triggered whenever a single country of origin is not
determined after applying both Sec. 102.11(a) and Sec. 102.11(b).
Customs, however, agrees that Sec. 102.21 should be included within
the scope of Sec. 102.19(a). Paragraph (c) of Sec. 102.21 (``general
rules'') already incorporates by reference all of the additional
requirements and conditions of Secs. 102.12 through 102.19.
Nevertheless, in order to make this point even clearer, Sec. 102.19(a)
as set forth below has been modified to expressly refer to Sec. 102.21
so that if a good, which otherwise meets the requirements of
Sec. 102.19, is not determined under Sec. 102.21 to have a single NAFTA
country, the country of origin of such a good will be determined under
Sec. 102.19.
2. Section 102.19(b)
Comments: Two commenters requested clarification that this
provision does not apply for marking purposes but rather applies solely
for customs duty purposes.
Customs Response: Customs agrees that this provision does not apply
for country of origin marking. As stated in the SUPPLEMENTARY
INFORMATION portion of the May 5, 1995, notice of proposed rulemaking,
the term ``Customs duty purposes'' in Sec. 102.19(b) is intended to
include merchandise processing fees. This term, however, does not
include country of origin marking. Customs believes, however, that the
fact that the provision clearly states it is applicable for ``Customs
duty purposes'' makes it clear that the use of this provision for any
other purpose, such as for country of origin marking, would be
improper.

[[Page 28940]]

Therefore, Customs believes that there is no need to amend the
provision.

Headings 0202, 0210 and 1602 (Meats)

Comments: One comment concerned the fact that the specific tariff
rules for these goods do not allow some operations, such as the
grinding or blending of imported beef with U.S. beef to produce
hamburger meat or patties, to constitute an acceptable change in tariff
classification. This commenter also believes that the USDA has the
specific statutory jurisdiction over the marking of meat and poultry
products whether imported or domestic, pursuant to the Federal Meat
Inspection Act, 21 U.S.C. 601.
Customs Response: Customs disagrees. Although Customs has not
issued a specific ruling regarding this issue, it is Customs' position
that the grinding or blending of foreign raw beef with U.S. beef does
not constitute a substantial transformation. In other cases concerning
food, Customs has not recognized merely blending or chopping food,
without cooking or other preparation, to constitute a substantial
transformation. In this regard, it should be noted that consistent with
its application of the substantial transformation principle, the tariff
shift rules for prepared meat (heading 1601) allow a change from any
other chapter, which will include the frozen, salted, and dried meats
of Chapter 2.
With regard to the country of origin marking of imported meats, it
suffices to point out that 19 U.S.C. 1304, the country of origin
marking statute, applies to all goods of foreign origin, unless
specifically exempt by statute or by the specific regulations
authorized by the statute. This statute does not exempt imported meat
products from marking, unless Customs determines that the product is
substantially transformed into a new and different article by the U.S.
importer/processor. As stated above, Customs does not view the mere
grinding of fresh meats into hamburger as a substantial transformation;
therefore, Customs believes that, notwithstanding any other domestic
laws that may be applicable for its marking, such meats should be
marked as to country of origin prior to reaching the ultimate purchaser
thereof in the United States. In connection with this issue, it should
be noted that Customs has issued a General Notice regarding the country
of origin marking of beef jerky. 26 Cust. Bull. And Decisions 51
(December 16, 1992). While Customs in this General Notice recognized
that there may be conflicting country of origin marking requirements
imposed by the USDA and Customs, Customs nevertheless explained the
legal basis for the Customs marking determination as well as the basis
for Customs jurisdiction in the matter.

Heading 0304 (Fish Fillets and Other Fish Meat, Fresh, Chilled, or
Frozen)

Comment: The specific rules for the goods of this heading, except
for fillets, require a change to these goods from any other chapter,
while for fish fillets the rules allow a change to this heading from
any other heading. One commenter states that the rule should generally
allow a change to goods of this heading from any other heading, citing
the belief that the production of fish meat requires as much or more
processing than the production of fillets.
Customs Response: The commenter has not provided, nor has Customs
been able to find, any evidence to substantiate the claim that the
production of fish meat results in a substantial transformation of the
fish. The Explanatory Notes to the Harmonized System describe ``other
fish meat'' merely as fish meat from which the bones have been removed,
whereas the production of fillets from fish involves specific
operations which have been recognized by the Court of International
Trade as resulting in a substantial transformation of the fish. See
Koru North America v. United States, 701 F.Supp. 229 (CIT 1988),
discussed in the SUPPLEMENTARY INFORMATION portion of the May 5, 1995,
notice of proposed rulemaking.

Heading 0710 (Vegetables, Uncooked, Steamed, Boiled or Frozen)

Comments: Two comments were received concerning this specific rule.
These commenters expressed concern that the rule does not recognize a
substantial transformation resulting from the processing performed to
produce mixtures of vegetables classified in subheading 0710.90. One
commenter noted that in producing their vegetable combinations,
imported vegetables are combined with domestic vegetables in precise
mixtures through highly sophisticated proprietary mathematical
formulas, using state-of-the-art weighing and mixing processes.
According to one commenter, the combinations are the result of
extensive marketing and product research as well as capital investment
and technology to appropriately provide for the blending of the
different vegetables. Therefore, these commenters suggest that this
specific rule be amended to allow a change to subheading 0710.90
(mixtures of vegetables) from any other subheading, provided that no
single vegetable ingredient of foreign origin constitutes 75 percent or
more of the product by net weight.
Customs Response: Customs cannot agree to this proposal. Customs
addressed the very facts presented by these commenters in a ruling
issued in the year before the proposed rules were published. In HQ
735085, dated June 4, 1993, the frozen vegetable products were produced
by combining foreign broccoli, cauliflower, water chestnuts, and peas
with domestic carrots, yellow peppers, and asparagus and then packaging
them for retail sale. Beyond bagging, there was no processing of the
combined frozen vegetables, such as cooking or adding sauces. Customs
found that the individual imported vegetables retain their identities
after the combining operations. Consequently, the vegetable mixtures
were not considered different kinds of food articles, and imported
vegetables were not considered to have undergone a substantial
transformation. In HQ 735085, Customs distinguished prior rulings such
as HQ 555524, dated April 11, 1990, (which involved manufacturing soup
by mixing eleven ingredients, boiling the mixture to achieve desired
consistency, and packaging for retail sale). Customs still adheres to
the position expressed in HQ 735085 and for this reason does not agree
that the specific tariff rule for vegetable mixtures classified in
subheading 0710.90 should be amended as proposed by the commenters.

Headings 0904-0910 (Spices)

Comment: One comment was received concerning the proposal to delete
the second tariff shift rule for headings 0904-0910, which provides for
a change to crushed, ground, or powdered products of heading 0904
through 0910 from within Chapter 9, if put up for retail sale. This
commenter submits that the cleaning (by gas treatment or otherwise),
crushing or grinding, and retail packaging of spices substantially
transforms the imported whole spices into new and different articles of
commerce having a new name, character or use.
Customs Response: Customs agrees. In view of the commenter's
analysis and in light of the fact that Customs Headquarters has never
issued a binding letter ruling with respect to the country of origin
marking of spices, Customs has reconsidered the proposal to amend the
Sec. 102.20 rules for these goods and has reverted to its original
position, published in T.D. 94-4 (59 FR 110) on January 3, 1994.
Accordingly, the May 5, 1995, proposal to delete the second tariff
shift rule set forth in Sec. 102.20 for goods of headings 0904-0910
should

[[Page 28941]]

not be adopted, and the interim tariff shift rules as published in the
January 3, 1994, document are reflected in this final rule document.

Heading 1517 (Vegetable oil)

Comment: One comment was received in connection with the rules for
this heading. The interim rules for this heading provided for a tariff
classification change to subheading 1517.10 (margarine, excluding
liquid margarine) from any other heading and a change to subheading
1517.90 (other edible mixtures or preparations of animal or vegetable
fats) from any other chapter. In consideration of an initial comment,
Customs proposed in the May 5, 1995, document to amend the rule for
subheading 1517.90 by adding an alternative second tariff shift rule
which would allow a change from any other heading so long as ``no
single oil ingredient of foreign origin constitutes more than 60
percent by volume of the good''. The commenter believes that the
processing and blending required to create various blends and grades of
a type of oil (e.g. palm and sheanut oils) requires rigorous quality
control procedures in order to achieve the necessary physical
characteristics and thus should be considered a substantial
transformation whether or not the resulting product contains more than
60 percent by volume from a single foreign country.
Customs Response: Customs disagrees. First, the tariff shift rule
for subheading 1517.90, as proposed to be amended, is supported by the
case law. See National Juice Products Association v. United States,
supra, where the Court of International Trade upheld Customs
determination that imported orange juice concentrate is not
substantially transformed when mixed with water, orange essences,
orange oil and in some cases fresh juice and either packaged in cans
and frozen or pasteurized, chilled and packed in liquid form, and
Coastal States Marketing, Inc. v. United States, 646 F.Supp. 255 (CIT
1986), where the court held that mixing Soviet Union gas oil with
Italian fuel oil in Italy did not result in a substantial
transformation such that the mixture became a product of Italy. In both
of these cases, the court concluded that the essential character of the
foreign component (juice concentrate and Russian oil) remained
unchanged after the mixing process. The proposed tariff shift rule
which would allow a change of origin if no single foreign oil
ingredient in the mixture exceeds 60 percent of the mixture is designed
to ensure that there is a change in the essential character of the
foreign vegetable oil. This proposed rule is consistent with the
proposed rule for mixtures of juices (e.g., a mixture of apple, grape,
papaya juices), which is based upon the conclusion that in such
mixtures, the individual fruit juices would lose their separate
identities and thus there would be a change in the name, character and
use of the individual juice ingredients. Thus, this rule represents an
effort to distinguish between those blending operations which generally
do not result in a substantial transformation and other blending
processes which can result in a substantial transformation due to a
change in name, character, and use.
However, Customs believes that a technical correction of the
proposed amendment to the Sec. 102.20 rule for this subheading is
required, involving expression of the 60 percent requirement in terms
of ``weight'', rather than in terms of ``volume'', because the unit of
measure indicated in the HTSUS for subheading 1517.90 is kilograms. The
second tariff shift rule for subheading 1517.90 as set forth below has
been modified accordingly.

Chapter 20 Note

Comments: The Note for the Chapter 20 rules under Sec. 102.20
provides that, notwithstanding the specific rules of the chapter, nuts
of Chapter 20 that have been prepared merely by roasting, either dry or
in oil (including processing incidental to roasting), shall be treated
as a good of the country in which the fresh good was produced. One
commenter submits that the roasting of nuts should be considered a
substantial transformation. This commenter also suggests that the
mixing of nuts should constitute a substantial transformation since FDA
regulations (21 CFR 164.110) consider mixed nuts a standardized food
which, as such, must meet certain formulation requirements.
Customs Response: Customs disagrees. It has been the Customs
position for ten years that roasting, or roasting and salting, or
roasting and salting and coloring, of pistachio nuts, without more,
does not result in a substantial transformation. See T.D. 85-158, dated
October 15, 1985. Thus, the Chapter Note is consistent with prior
Customs position and practice for these goods. With regard to the
mixing of different nuts, Customs is not persuaded, by the fact that
the Food and Drug Administration considers these mixtures to be a
standardized product, that various types of nuts have been
substantially transformed as a result of being combined with one
another. The same analogy could have been made with regard to the
orange juice concentrate and retail juice beverages involved in the
National Juice Products Ass'n., supra. Moreover, just as Customs
believes that the individual frozen vegetables which are combined and
packaged for retail sale remain separately identifiable (HQ 735085,
June 4, 1993), Customs maintains that the individual types of nuts that
are blended together after roasting and salting do not lose their
identities and therefore are not substantially transformed into new and
different articles of commerce, having a new name, character, and use.

Subheadings 2009.11-2009.30 (Fruit and Vegetable Juices)

Comment: One comment was received concerning this tariff shift
rule. This commenter suggested that this rule, which allows a change to
these subheadings from any other chapter, be amended to preclude a
change from heading 0805 (fresh or dried citrus fruit). The commenter
points out that this change would make these rules consistent with the
NAFTA preference rules for these goods.
Customs Response: Customs cannot agree. First, it should be pointed
out that the purpose for development of these rules is not to provide
origin determinations that are necessarily consistent with the NAFTA
preference rules (19 U.S.C. 3332). Instead, Customs' goal has been to
develop rules that would codify the substantial transformation
principle as interpreted by the courts and Customs. Customs recognizes
that the NAFTA preference rules are not always consistent with the
origin determinations reached under the substantial transformation
principle. As a result sometimes the part 102 rules will be less
restrictive and in some cases they may appear to be more restrictive.
The part 102 rules are less restrictive than the NAFTA preference rules
for goods of subheading 2009.11 through 2009.30 because Customs has
consistently recognized the production of fruit juices from the fresh
fruit as a substantial transformation of the fresh fruit into a new and
different article of commerce. See HQ 555982 dated August 1991
(substantial transformation of grapefruit and oranges made into juice
concentrate) and HQ 084346 dated August 8, 1989 (substantial
transformation of cranberries made into juice concentrate).

Subheading 2101.10 (Extracts, Essences and Concentrates of Coffees)

Comments: Three comments were received concerning the Sec. 102.20
tariff shift rule for heading 2101, which requires a change to heading
2101 (extracts, essences, and concentrates of

[[Page 28942]]

coffee, etc.) from any other heading. These commenters submit that the
rule should be amended to allow a change to subheading 2101.10.21
(extracts, essences, and concentrates of coffee) from elsewhere within
heading 2101 since they believe that a change from ``soluble coffee
powder'' to ``retail instant coffee products'' should be recognized as
a substantial transformation. They cite as support for their position
the argument that bulk soluble powder is not purchased by consumers but
by coffee manufacturers and is used in non-coffee products such as ice
cream as well as in coffee products. They further submit that the use
of expensive machinery and the employment of experts and technically-
skilled persons are necessary in order to blend, agglomerate, aromatize
(often the flavoring and aromas are proprietary) and eventually package
the product for retail sale. They claim that the cost of such
processing runs about 120 percent of the cost of the soluble powder.
Customs Response: Customs does not agree that the operations
described above result in a substantial transformation of water soluble
coffee powders (known technically in the trade as spray-dried coffees).
Customs addressed this issue in a ruling as early as 1986 (HQ 727913
dated February 5, 1986). In that case, the agglomerated coffee was
produced in Canada as a result of blending and agglomeration of various
Latin American spray dried coffees. Customs found that the agglomerated
coffee imported into the United States from Canada had to be marked to
indicate the individual Latin American countries.
Customs most recently addressed this issue in HQ 734479 issued on
January 29, 1993. Customs still does not believe that the blending and
agglomeration of spray dried coffees from different countries result in
a new and different article of commerce, having a new name, character
and use. The facts presented in the 1993 ruling concerned the
processing of the various Latin American blends of spray dried coffees
in a European Community (EC) country, which at that time was subject to
the 100 percent special duty rates applicable to these products from
the EC. After reviewing the technical literature regarding the
processes, Customs concluded that blending and agglomerating spray
dried coffee constituted refining and finishing operations which did
not change the fundamental character or use of the spray dried coffee.
Customs further concluded, consistent with prior rulings, that the
agglomerated coffee, while an improved product, remained instant coffee
after the processing, and therefore, was not considered an EC product
but a product of the various Latin American countries from which the
coffee originated. As one requester of a marking ruling issued in 1991
pointed out, the ``spray-dried powder is a finished form of coffee that
can be dissolved in hot water to produce a tasteful cup of coffee.''
Customs believes that such a statement is testament to the absence of a
substantial transformation when the coffee powders are subjected to the
agglomeration process.

Heading 2710 (Petroleum Products)

Comment: One comment was received concerning the tariff shift rules
for this heading, which allow a change to the heading from any other
heading or a change to goods of the heading from other goods of that
heading if the change resulted from a chemical reaction (defined in the
Chapter 27 Note). The commenter suggests that the tariff shift criteria
applicable to heading 2710 should be expanded to include a change
within heading 2710 from motor fuel blending stocks to motor fuel. The
commenter argues that finished gasoline differs from each of the
blending stocks in name, character and use. Thus, under the traditional
change in name, character and use test, the commenter submits that the
blending of the various stocks to produce gasoline constitutes a
substantial transformation.
Customs Response: Customs disagrees. The specific rules for heading
2710 codify prior Customs rulings regarding the country of origin of
various petroleum products. For example, in HQ 555032 dated September
23, 1988, and HQ 557180 dated December 23, 1993, Customs addressed the
issue of whether certain petroleum products, such as gasoline and
diesel fuel, produced in the U.S. Virgin Islands qualify for duty-free
treatment under General Note 3(a)(iv), HTSUS (the duty-free program for
products of U.S. insular possessions). Customs determined that one or
more substantial transformations occurred when crude oil imported into
the Virgin Islands was subjected to refining and other processes,
resulting in chemical reactions and the creation of various motor fuel
blending stocks and other motor fuel components. Thus, it was
determined in the above rulings that the petroleum products qualifed as
``products of'' the insular possession. While Customs also held in HQ
555032 and HQ 557180 that the subsequent blending of the blending
stocks and other motor fuel components in the Virgin Islands to create
the final petroleum products resulted in a substantial transformation,
this portion of these rulings was not an origin determination but
rather pertained solely to the issue of whether the imported crude oil
could be considered a domestic material for purposes of the foreign
material value limitation of General Note 3(a)(iv), HTSUS. Therefore,
the Sec. 102.20 rules, which provide for a change to heading 2710 from
any other heading (e.g., crude petroleum of heading 2709) or a change
to any good of heading 2710 from any other good of heading 2710,
provided the change is the result of a chemical reaction (e.g.,
alkylate produced from a chemical reaction affecting a heading 2710
good), are consistent with Customs country of origin rulings on these
products. However, as Customs previously has stated, the Part 102 rules
will not be applicable for determining the value content requirements
under duty preference programs.

Subheading 2936.90 (Vitamins)

Comment: One comment was received concerning the specific tariff
rule for these goods. This commenter suggested that the rule, which
provides for a change to this subheading from any other subheading
except from subheadings 2936.10 through 2936.29, should be less
restrictive. This commenter believes that changes from the other
vitamin provisions in this heading should be allowed.
Customs Response: Customs disagrees. Consistent with Customs'
interpretation of the substantial transformation standard, this rule is
designed to keep simple blending of different vitamins, which after
such blending remain classified in this heading, from being considered
a substantial transformation. Customs believes that no degree of
blending can substantially transform foreign constituent vitamin
components into a product of the country in which the blending occurs.
The Customs position on this matter is consistent with the position
regarding similar processing of other chemical products, such as
pharmaceuticals and herbicides. See the analysis of comments below in
connection with these products.

Chapter 30 (Pharmaceuticals)

Comments: Six comments were filed in response to the interim and
proposed Sec. 102.20 rules applicable to pharmaceuticals of Chapter 30.
These rules, for the most part, allow a change to the subheadings of
this chapter, which consist of prepared pharmaceuticals, from any other
subheading except from the bulk pharmaceuticals of Chapter 29 or other

[[Page 28943]]

provisions. The commenters essentially claim that the formulation of
dosage form pharmaceuticals is a substantial transformation of the bulk
pharmaceuticals of Chapter 29. They claim that the Chapter 29
pharmaceuticals are unsuitable for therapeutic or prophylactic use. In
order to be usable, the commenters state that the pharmaceuticals must
be worked up to particular dosage forms which involves numerous complex
intermediate steps ranging from exact weighing to final presentation in
tablets, capsules, injections or ointments and which adds more than 50
percent to the value of the product. In this regard one commenter
argues that for a gastric acid secretion pharmaceutical, a substantial
transformation occurs when a special coating is given to the medicine
so that it can pass through the stomach intact for release in the
intestines. Finally, some commenters claim that the ``40 percent''
criterion that is contained in the specific rules for blends of
pharmaceuticals, is inconsistent with current practice. Under these
rules, if a mixture or blend of bulk pharmaceuticals, classified in
this chapter, contains at least 40 percent domestic content of the bulk
pharmaceutical, the specific tariff rule of Sec. 102.20 would be met.
Customs Response: Customs disagrees with these comments. Customs
believes that the Sec. 102.20 rules properly reflect Customs' current
position regarding the substantial transformation of bulk
pharmaceuticals. It is Customs' view as reflected most recently in 1993
(HQ 735146 issued on November 15, 1993 ) that the bulk (pure) active
pharmaceutical ingredient which is reduced in potency by dilution with
other inert ingredients, such as starch and other excipient, is not
substantially transformed into a new and different article having a new
name, character and use. The essential character of these products,
both chemically and functionally, remains the same after the processes
performed to make them readily consumable. For example, when Customs
concluded in the 1993 ruling that the processing of 100 percent pure
acetaminophen, through granulation and addition of excipient to make a
90 percent pure product that is then used to make tablets, was not a
substantial transformation, Customs took note of the following: (1)
Like most pharmaceutical products, the ``name'' of the product did not
change from the bulk pharmaceutical to the finished product (the
product was still referred to as ``acetaminophen''); (2) the ``use''
did not change, since both the original and finished products were used
for medicinal purposes (while the metabolic activity of the drug is
standardized as a result of a controlled dilution, it is not changed);
and (3) finally, the essential character of the product as a medicine
did not change even after processing into tablets. The essence of the
pharmaceutical ingredient had not changed fundamentally. Indeed,
regardless of the commercial brand under which it is marketed, the
product being purchased to provide pain relief is the drug,
acetaminophen. Similar rulings were issued previously in 1979 (HQ
005716 dated July 12, 1979, C.S.D. 80-34, with regard to the
granulation and dilution of Naproxin with starch) and in 1986 (HQ
554067 dated May 23, 1986, with regard to oxfendazole, a veterinary
drug, which was micropulverized and packaged into dosages fit for
veterinary use). Thus, in response to the comment concerning
encapsulation, Customs believes that this process does not alter the
fundamental nature of the pharmaceutical. Although it helps to deliver
the product, the pharmaceutical still has the same activity.
In response to the comments claiming that significant value is
added as a result of the processing of the bulk pharmaceuticals,
Customs finds relevant the fact that the Court of International Trade
has held that in determining the issue of substantial transformation,
the ``name, character, or use'' test should be sufficient since the use
of a value criteria can lead to anomalous results. National Hand Tool
v. U.S., supra. In any case, however, Customs believes that in regard
to the total production of pharmaceuticals classified in Chapter 30,
the predominate costs are incurred in the production of the bulk
pharmaceutical drugs classified in Chapter 29 and other chapters under
the HTSUS. In most instances, costs of end processing of the
pharmaceutical drug are inconsequential when compared to the enormous
costs involved in the multi-stage chemical reactions and separations
and the years of research needed to develop and produce the bulk
pharmaceutical.
Finally, Customs also disagrees with the commenters' objections to
the ``40 percent'' criterion in the tariff shift rules for
pharmaceuticals mixtures. Under this rule, a change of origin can occur
as a result of blending different imported bulk pharmaceuticals with
domestic pharmaceuticals if the finished product (i.e., the Chapter 30
product) contains at least 40 percent, by weight, of domestic bulk
pharmaceutical. Customs finds this rule to be entirely consistent with,
if not more liberal than, Customs' current practice of applying the
substantial transformation principle to blending operations involving
chemical products. Generally, the simple blending together of
chemicals, which does not result in a chemical reaction that creates a
new chemical has not been recognized as a substantial transformation.
However, if one or more of the chemical ingredients was produced in the
country where the blending occurs, Customs would not view the
production of the mixture as resulting solely from a simple combining
or blending operation. See, e.g., 19 CFR 10.195(a)(2). Customs,
however, does not always find a substantial transformation in cases in
which there is more than a simple blending. The ``40 percent'' rule,
however, codifies the position that when the blending operation
involves as least 40 percent domestic origin bulk pharmaceutical, it
will not be considered a simple blending and will always be sufficient
to confer origin.

Headings 3302 Through 3303 (Perfumes)

Comment: One comment was received concerning the Sec. 102.20 rules
for these goods. The first of the two rules disallows a change to
heading 3302 (mixtures of odiferous substances that are ``of a kind
used as raw materials in industry'') from essential oils of heading
3301 and from ethyl alcohols of headings 2207 and 2208. The rule for
perfumes and toilet waters (heading 3303) disallows a change from the
perfume oil mixtures and blends of subheading 3302.90. The commenter
objects to the above rules, claiming that they are too restrictive.
Customs Response: Customs disagrees. The commenters fail to note
that the rules do allow a change from the essential oils of heading
3301 to the perfumes and toilet waters of heading 3303, which is
consistent with Customs' application of the substantial transformation
principle to these goods. In HQ 723312 dated November 22, 1983 (cited
with approval in HQ 733945 dated March 26, 1991), Customs ruled that
the production of perfumes as a result of blending foreign essential
oil with U.S. origin denatured alcohol, stabilizer, coloring matter and
water resulted in a substantial transformation of the foreign essential
oil. The Sec. 102.20 rule for perfumes goes even further by allowing
the denatured alcohols included in the blend to be foreign as well.
Thus, it appears that the commenter's objection is to the fact that the
rules do not allow a simple dilution of perfume bases (a change from
subheading 3302.90 to heading 3303) or

[[Page 28944]]

a simple blending of essential oils and alcohols (a change from heading
3301, 2207 or 2208 to heading 3302). Customs believes that a simple
dilution or blending of these goods does not represent a substantial
transformation into a new and different article of commerce. However,
Customs believes that when the raw materials of headings 3301, 2207 and
2208 are processed to make a finished product such as perfumes or
toilet water, they have been substantially transformed, and, as stated
above, the Sec. 102.20 rule codifies this position.

Subheading 3402.11 (Linear Alkylbenzene Sulfonates)

Comment: Two comments were received concerning the Sec. 102.20 rule
for these goods which provides: ``A change to subheading 3402.11
through 3402.20 from any other subheading, including another subheading
within the group.'' Although both commenters support Customs' efforts
toward greater objectivity and predictability in origin determinations,
they suggest that a change from subheading 3817.10 to subheading
3402.11 should not be allowed since such a change can result from a
very simple process which does not result in a substantial
transformation.
Customs Response: Customs agrees that the described change should
not be recognized as constituting a substantial transformation. The
process normally involves in part the segregation of the individual
linear alkylbenzene components from mixed linear alkylbenzenes
classified in subheading 3817.10. However, in Sec. 102.20, Note 2 to
the Section VI (Chapters 28 through 38) tariff shift rules sets forth a
``Separation Prohibition'' provision which expressly precludes ``a
change from one classification to another merely as the result of the
separation of one or more individual materials or components from a
man-made mixture unless the isolated material/component, itself, also
underwent a chemical reaction.'' Therefore, Customs believes that the
concerns raised by the commenters will be resolved by this note.
However, in order to clarify this issue, the Sec. 102.20 rule for
subheading 3402.11 has been modified to make clear that a substantial
transformation does not result from a change from mixed linear
alkylbenzenes of subheading 3817.10.

Headings 3701-3703 (Photographic Film)

Comments: Two comments were received concerning these rules. One of
these comments focused primarily on the general result of operating
under Sec. 102.14 (U.S. goods returned) and thus is no longer relevant
in light of the adoption of the proposal to remove this section as
discussed above. The other commenter claims that the Sec. 102.20 rules
should allow a change in tariff classification from jumbo rolls of film
classified in subheading 3702.41 to the smaller sized film cartridges
classified in subheading 3702.51 and subheading 3702.41 so as to be
consistent with the substantial transformation principle.
Customs Response: Customs disagrees. The rules for these goods
require a change to headings 3701 though 3703 from headings outside
that group. It has been a longstanding position of Customs that cutting
to length and width does not result in a substantial transformation of
the article subjected to such processing. Customs specifically
addressed this issue in connection with the production of photographic
film cartridges in HQ 732842 dated February 23, 1990. In HQ 732842, the
foreign material consisted of sheets of photographic film in rolls
measuring 58 inches wide and 9,500 feet long, which were subjected to
processes consisting of applying a non-photosensitive emulsion coating,
cutting the bulk photographic film to length and width, inserting them
into cassettes, and then placing the cassettes into plastic sealed
containers and cartons for retail sale. The imported film base in HQ
732842 already had been ``sensitized'', i.e., it already had been
subjected to an application of photosensitive emulsion. (This is the
process which, in ORR 217-69 dated March 28, 1969, Customs had ruled
resulted in a substantial transformation of the film base into
photographic film, a new article with new physical characteristics
(light sensitivity and ability to form an image from which a positive
can be made) and new uses different from the base from which it was
made.) Thus, Customs concluded in HQ 732842 that the processes to which
the already-sensitized photographic film was further subjected (e.g.,
cutting to length and width, inserting into cartridges, and packaging)
did not result in a new and different article with new name, character
and use.
Customs believes that the positions expressed in the above rulings
properly interpreted the substantial transformation standard, and the
Sec. 102.20 rules for these goods are entirely consistent with these
rulings. The rules allow a change from headings 3701 through heading
3703 from headings outside the group. This would allow changes from the
unsensitized film base (plastic or paper provisions outside of Chapter
37), consistent with ORR Ruling 217-69. Moreover, the rules do not
allow a change from one size of sensitized film to another when the
difference in sizes is in terms of length and width.

Subheadings 3808.10 and 3808.20-3808.90 (Pesticides, Herbicides and
Fungicides)

Comments: Three comments were received. These commenters object to
the proposed tariff shift rules for subheadings 3808.10 and 3808.20-
3808.90 that do not allow a change in origin for bulk insecticides,
fungicides, herbicides, rodenticides or pesticides of Chapter 28 or 29
that are converted to Chapter 38 products. One commenter agrees that if
the conversion only represents mere dilution, there is no change in
origin; however, it is suggested that Sec. 102.17 of the interim
regulations disqualifies operations involving the mere dilution with
water or another substance. Rather, it is stated that some conversion
processes are more than ``mere dilution'', such as where an active
ingredient is converted to a finished product by formulation and
granulation. During formulation, the ingredient is blended with
selected inert ingredients and milled. Although the inert ingredients
do not chemically react with the active ingredient, it is stated that
they do provide a specific functionality as dispersants, wetting
agents, defoamers, buffers, binder, diluents, etc. Following the
formation process, the material undergoes granulation which is an
agglomeration process designed to produce product granules of specified
size and characteristics.
One commenter asserts that Customs ignores sophisticated
manufacturing procedures such as the conversion of bulk Flumetron into
the finished products ``Cotoran 4L'' and ``Cotoran DF''. ``Cotoran 4L''
is manufactured by grinding Flumetron and dispersing the ground product
in liquid. ``Cotoran DF'' is a dry herbicide produced by blending
Flumetron with inert materials (form of dilution) which is then
granulated into the finished product. Another commenter suggests that
origin should be conferred by processes such as chemical
transformation, physical processing that would place an herbicide into
a substrate or medium, and physical processing which modifies a
quality.
Customs Response:
Customs disagrees. These rules are consistent with Customs'
practice and interpretation of the substantial transformation
principle. In HQ 555064 dated March 29, 1990, Customs determined that
the formulation of

[[Page 28945]]

propanil-4, a herbicide for rice, from technical propanil did not
constitute a substantial transformation for purposes of the Caribbean
Basin Economic Recovery Act. This decision was based on T.D. 78-168, 12
Cust. Bull. 353 (1978), which held that the formulation of the
herbicide diuron wettable powder by mixing technical diuron with
various agents was not a substantial transformation for purposes of the
Generalized System of Preferences. These findings are also consistent
with National Juice Products Association v. United States, supra, where
the court found that imported manufacturing orange juice concentrate
was the very essence of frozen concentrated orange juice and
reconstituted orange juice. The court noted that the addition of water,
orange essence and oils to the concentrate, while making it suitable
for retail sale, did not change the fundamental character of the
imported product and, therefore, was not a substantial transformation.
While Customs does not dispute the importance to the end user of
placing herbicides, such as Flumetron, into its final dilute wettable
form, it is the opinion of Customs that these final steps simply place
the herbicide in an applicable form without changing its function or
chemical structure. Additionally, because the bulk product is more
compact than the finished product, it is economically feasible to trade
the bulk form (``Flumetron'') of the herbicide rather than the final
dilute wettable or liquid forms of the herbicide (``Cotoran''). It is
also the opinion of Customs that these tail-end procedures are far less
important when compared to the production of the bulk herbicide. The
manufacture of the bulk herbicide is a complicated multi-step organic
synthesis which takes place in a petrochemical facility. This process
normally follows a significant number of years and amount of resources
committed to the research and development of the bulk herbicide. Thus,
in addition to the fact that the process of mixing the bulk herbicide
with inert materials or with a wetting agent to place it in an end use
form does not change the essential character of the herbicide, this
process, when compared to the manufacture, research, and testing of the
bulk herbicide, involves significantly less economic outlay. Therefore,
it is the opinion of Customs that the processing of bulk herbicides
into dilute wettable form herbicides does not substantially transform
the bulk herbicides.

Headings 4104-4107 (Leather)

Comment: One comment was received concerning the May 5, 1995,
proposal to amend the Sec. 102.20 interim rule for headings 4104
through 4107 to disallow a change from ``wet blues'' leather to
``finished leather''. This commenter supported the proposed amendment
on the grounds that processing raw hides to wet blues leather is
sufficient to confer origin and that additional processing to make wet
blues into finished leather constitutes finishing operations which are
insufficient to change the country of origin of the leather.
Customs Response: Customs agrees with the comment. For the above
reasons and the reasons cited in the May 5, 1995, notice, the proposed
rule for goods of heading 4104 through 4107 is reflected in Sec. 102.20
as set forth below.

Headings 6401-6405 (Complete Footwear)

Comment: The interim Sec. 102.20 rule for the above goods provides
for a change to headings 6401 through 6405 from any heading outside the
group, except from formed uppers. One comment was received concerning
this rule. This commenter noted, and expressed approval for, the fact
that the above rule is consistent with Customs longstanding application
of the substantial transformation principle to footwear.
Customs Response: Customs agrees that the Sec. 102.20 rule for
these goods is consistent with its interpretation of the substantial
transformation principle. It should be noted that Customs' practice in
this area is also in direct compliance with the decision in Uniroyal,
Inc. v. United States, supra, where the court held that footwear uppers
which were ``lasted'' or permanently molded into the ultimate shape,
form, and size of the complete shoe, were not substantially transformed
by the attachment thereto of an outsole since the upper was the very
``essence'' of the finished shoe. Therefore, with the exception of
footwear with uppers and soles made of wool felt (which are covered by
new Sec. 102.21--see the above discussion regarding rules of origin for
textile and apparel products), the Sec. 102.20 rule for goods of
headings 6401 through 6405 is set forth below without substantive
change.

Headings 7010-7018 (Glass Articles)

Comments: Only one comment was received in response to the May 5,
1995, proposal to amend several of the Sec. 102.20 rules for goods of
the above headings. This comment expressed support for the proposed
amendment to the Sec. 102.20 rules applicable to decorative crystal,
which will now recognize certain prescribed operations performed on
uncut and unpolished glassware blanks as resulting in a change of
origin of the glass blanks.
Customs Response: For the reasons stated in the background
discussion for the proposed amendments, as well as the reasons cited
elsewhere in this document for general changes affecting these rules,
and in consideration of the comment received, the proposed changes to
the Sec. 102.20 rules for goods of headings 7010 through 7018, are
adopted and set forth below without substantive change.

Chapter 72 Note (Cold Rolled, Flat Rolled Steel)

Comments: Three comments were received in response to the July 12,
1995, proposal to amend the Sec. 102.20 rules for Chapter 72 goods by
adding a note that allowed cold rolled, flat rolled steel, which is
produced by reduction of hot rolled flat rolled steel, to be treated as
a good of the country in which the cold reduction occurred. Two
commenters supported the note as proposed. One of these commenters
stated that the proposed note was consistent with Customs' longstanding
position that these cold rolled flat rolled products are substantially
transformed in the country where cold reduction took place. The second
of these commenters noted its support for all of the Chapter 72 and 73
rules, citing its belief that these rules are more transparent and
predictable for determining country of origin. The third commenter
supported the principle reflected in the proposed Chapter 72 note but
also suggested that the scope should not be limited to flat rolled
products but rather should include other products such as pipe that are
subjected to a cold reduction process. This commenter stated that the
rationale for the Chapter 72 note, i.e., that there is a significant
reduction in the thickness of hot rolled, flat rolled, product which
changes the crystalline structure of the steel products by elongating
it, applies to hot extruded tubular products which are subjected to a
cold reduction process.
Customs Response: Customs does not agree with the comment
suggesting that the proposed note be amended to cover additional
products. Customs believes that the cold reduction of hot rolled flat
rolled steel results in a substantial transformation of the hot rolled
flat rolled steel not only because there has been reduction in size but
also because of the changes in use caused by this process.

[[Page 28946]]

Unlike the circumstances relating to the hot extrusions (hollows)
and wire rod, Customs finds that the hot rolled flat rolled steel
product is not necessarily dedicated to becoming cold rolled flat
rolled steel. The cold reduction process results in changing a product
(hot rolled steel) which has versatile uses to one that has limited
uses. For example, in HQ 080277 dated September 21, 1987, in which
Customs ruled that hot rolled steel coil was substantially transformed
when made into cold rolled full hard steel coil as result of a cold
reduction process, Customs noted the fact that each of the two products
was marketable to a distinct consumer group and that thin gauge hot
rolled coil generally could be substituted for cold rolled full hard
steel coil in commercial applications. Thus, hot rolled flat rolled
steel is not dedicated to become cold rolled flat rolled steel before
it can be used for any intended purpose. For example, hot rolled, flat
rolled steel can be used as steel planks, ship hulls and similar
products, or it can be cold rolled into steel sheeting having specific
uses (e.g., automobile steel). For reasons explained more fully below,
Customs does not agree that the same rationale applies to wire and tube
products.

Heading 7210 (Flat Rolled Steel, Coated, Clad or Plated)

Comment: One comment was received regarding the Sec. 102.20 rule
for heading 7210 (flat-rolled iron or steel of 600 mm or more, coated,
clad, or plated), under which a change from headings 7208 through 7212
is not allowed. This commenter proposes that origin be conferred when
flat-rolled steel of heading 7209 is coated, clad, or plated.
Customs Response: Customs disagrees. Consistent with the rationale
set forth in the Superior Wire case discussed in the response to the
next comment, it is the position of Customs that a substantial
transformation does not occur through the coating, cladding or plating
of flat-rolled steel. It is Customs' view that the use and character of
such products are predetermined by the imported steel, and that
coating, cladding, and plating merely constitute finishing steps in the
completion of the product.

Headings 7217 and 7223 (Wire)

Comments: Four comments pertain to the processing of wire rod into
wire. Under the Sec. 102.20 rules, a change is not allowed to heading
7217 (wire of iron or non-alloy steel) from headings 7213 through 7215
(bars and rods of iron or non-alloy steel); nor is a change allowed to
heading 7223 (wire of stainless steel) from heading 7221 or 7222 (bars
and rods of stainless steel).
Each of the four commenters believes that a change should be
allowed when wire rod is converted to wire under certain circumstances.
One commenter believes that the rule should take into account the heat
treatment (annealing) involved in treating stainless steel rod; another
commenter is of the opinion that drawing and annealing the rod should
confer origin if at least a minimum reduction of 75 percent in surface
area occurs; and a third commenter proposes that origin be conferred
when the conversion of wire rod to wire includes the process of
galvanizing. The fourth commenter believes that a change should be
allowed to heading 7217 from headings 7213 through 7215 if there is
either a substantial transformation or a regional value content of not
less than 50 percent of the net cost of the good. A change would not be
allowed if the carbon content of the wire rod is less than a certain
minimum, the reduction in cross-sectional area is less than 75 percent,
and the wire is not further processed by heat treatment or coating.
Customs Response: In Superior Wire v. United States, 11 CIT 608,
669 F. Supp. 472 (CIT 1987), aff'd, 867 F.2d 1409 (Fed. Cir. 1989), the
Court of International Trade held that the drawing of wire rod into
wire through a multi-stage process did not constitute a substantial
transformation of the wire rod, since there was no significant change
in use or character of the imported material. The court noted that
while the wire emerged stronger and more rounded after drawing the wire
rod, its strength characteristic was metallurgically predetermined, and
the chemical content of the rod and the processes used in its
manufacture determined the properties the wire would have after
drawing. Thus, while the wire rod and wire had different names and
identities in the industry, the court found that they were essentially
different stages of the same product.
The Sec. 102.20 rules codify the court's decision in Superior Wire
that a substantial transformation does not occur when wire rod is
converted to wire. While the record in Superior Wire does not indicate
whether annealing also took place, Customs notes that the most
significant operation involved in transforming wire rod to wire is the
drawing process, which reduces the rod in cross-sectional area. It is
Customs opinion, based on the rationale of Superior Wire, that heat
treatment (annealing) and/or galvanizing (which may be performed
subsequent to the drawing process) do not change the use or character
of the wire, which is predetermined by the wire rod. These processes
are merely finishing steps in the processing of the wire rod to wire.
With regard to the fourth commenter's suggestion of the use of a value
added criterion, the Customs responses to previous comments in this
document (e.g. Sec. 102.16, Sec. 102.20 (pharmaceuticals)) are hereby
incorporated by reference.

Subheading 7304.41 (Pipes and Tubes)

Comments: Two comments were received regarding the Sec. 102.20 rule
applicable to seamless tubing and pipe classifiable under subheading
7304.41, HTSUS. The rule for these goods provides for a change to
heading 7301 through 7307 from any other heading, including another
heading within that group. The two commenters oppose this Sec. 102.20
rule. One commenter states that these products are produced by cold
working processes performed on thick-walled hot extrusions known as
hollows. The hollows are subjected to a cold-working process known as
``pilgering'' which employs matched pairs of rotating dies in
conjunction with a mandrel to reduce the diameter and wall thickness.
Drawbenches, another cold-working process, is also used in conjunction
with pilgering equipment to produce the smallest-sized product range.
Other processes, including degreasing, heat treating, straightening,
cutting, deburring, and polishing, are also performed. The commenters
claim that these processes performed on hollows to produce stainless
steel pipe and tube in sizes ranging from \1/4\ inch up to 1\1/2\ inch
in outside diameter result in a substantial transformation of the
hollows.
Customs Response: Customs disagrees. Customs has found the decision
in Superior Wire v. United States, supra, supportive of the conclusion
that tube hollows cold drawn to smaller sizes are not substantially
transformed. See HQ 558825 dated February 9, 1995, and HQ 556932 dated
January 14, 1993. In HQ 556932, only a seven-step process performed on
imported steel rod, consisting of pickling, drawing, threading, die-
forming, threading of bolts and tapping of nuts, heat treatment, and in
some cases, plating, collectively constituted a single substantial
transformation. Accordingly, Customs disagrees that the Sec. 102.20
rule, which disallows a change in origin for hollows subjected to
pilgering, are inconsistent with the court's application of the
substantial transformation test to similar merchandise, e.g., wire rod
to wire. To the extent that there may be

[[Page 28947]]

rulings which indicate that similar processes resulted in a substantial
transformation, these rulings were issued prior to the decision in
Superior Wire.

Subheadings 8470.10-8471.91 (Calculating, ADP Machines (Computers))

A. Comments on Computers in General

For those Sec. 102.20 rules for goods of Chapters 84 and 85, which
generally disallowed tariff changes resulting from a ``simple
assembly'', Customs proposed revisions which clarified that only those
changes from specifically identified tariff provisions will be
disallowed when the production of the good resulted from a ``simple
assembly'' as defined under Sec. 102.1(o). Only those provisions from
which a change in tariff classification indeed can result from simple
assembly are now included in the ``simple assembly'' provisos in these
tariff shift rules. Thus, the proposed rules for subheadings 8470.10
through 8471.91 (which covers ADP machines) was proposed to be revised
to read as follows:

A change to subheading 8470.10 through 8471.91 from any
subheading outside that group, except from heading 8473; or A change
to subheading 8470.10 through 8471.91 from any subheading within
that group or from heading 8473, provided the change is not the
result of a simple assembly.

Three comments were received concerning the Sec. 102.20 rules
applicable to the production of computers from foreign materials. One
commenter claims that, since a change in tariff classification occurs
when a CPU chip is mounted onto a stuffed printed circuit board, a
change of origin should also occur as a result of this operation.
Another commenter states its belief that in order to determine the
origin of a computer not wholly obtained in a country, one must
identify the country in which an identically classified PCA (printed
circuit assembly) underwent a prescribed change in classification and
then assign that origin to the entire computer. Finally, the third
commenter complained that under the Sec. 102.20 rules, the assembly of
a motherboard (single board computer) into a housing would not
represent the requisite change in tariff classification under the
rules.
Customs Response: Customs disagrees with the above comments. As
noted above, many of the tariff changes are precluded because of a
``simple assembly'' of the finished good. Section 102.1(o) defines this
term as ``the fitting together of five or fewer parts all of which are
foreign (excluding fasteners such as screws, bolts, etc.) by bolting,
gluing, soldering, sewing or by other means without more than minor
processing.''
With respect to the comment regarding the mounting of a CPU chip
onto an otherwise stuffed printed circuit board, Customs has ruled that
the simple mounting of a CPU chip (classifiable in heading 8542, HTSUS)
onto a stuffed printed circuit board (classifiable in heading 8473,
HTSUS), which results in a good (a ``motherboard'') classified in
subheading 8470.10 through 8471.91, is not a complex and meaningful
operation which should confer origin. See, HQ 734518 dated June 28,
1993, wherein Customs ruled that the mounting of a CPU chip onto the
motherboard was a simple operation which did not constitute a
substantial transformation. Therefore, if both the CPU chip and the
stuffed printed circuit board are of foreign origin, pursuant to
Sec. 102.1(o), the operation of mounting the CPU chip onto the board is
a simple assembly and the result reached under the Sec. 102.20 rule is
consistent with the Customs position set forth in the cited ruling.
However, if either the CPU chip or the stuffed printed circuit
board is of domestic origin, the operation would not be considered a
simple assembly under Sec. 102.1(o) and, therefore, the motherboard
would meet the tariff shift rule and a change of origin would occur. In
addition, even if there is a ``simple assembly'' and the tariff shift
rule is not met, by operation of the Sec. 102.11 hierarchy, it must be
determined under Sec. 102.11(b) whether one of these parts imparts the
essential character to the finished motherboard. If, as a result of the
consideration of relevant factors set forth in Sec. 102.18(b), it is
determined that one of these parts imparts the essential character to
the good, the origin of that part is the origin of the good. If neither
of these parts imparts the essential character to the good, then
pursuant to Sec. 102.11(d) the origin of the good would be the country
of origin of both parts if they are products of the same country, or
the country in which the motherboard was finally assembled if these
parts have different countries of origin.
Contrary to the general tenor of the comments, Customs believes
that, as compared to Customs current practice and rulings under which
these goods may have multiple countries of origin in many instances,
the part 102 rules for computers are fairly liberal and easily
implemented. Essentially, any change in tariff classification at the
subheading (six-digit) level results in a change of origin, unless the
change is from heading 8473 (parts for computers) or unless the change
is from another subheading within the same group covered by the rule,
in which case the change in tariff classification still could be
allowed so long as the change did not result from a ``simple assembly''
of the finished good.
With respect to the issue of the motherboard, Customs has
consistently held that a completed motherboard imparts the essential
character to a computer and is therefore classified in the same
provision as the computer. The term, ``motherboard'' generally refers
to a single board computer generally missing only the housing, fan, and
power supply. Therefore, Customs would not consider that there has been
a substantial transformation, i.e., a change in name, character or use
as a result of incorporating a motherboard into a housing. Therefore,
since the motherboard is not classified under heading 8473 or outside
the subheading covering the computer to which it relates, but instead
is classified as the computer itself, any foreign motherboard will not
meet the Sec. 102.20 rule, even if the finished computer did not result
from a ``simple assembly''. Customs believes this interpretation is
entirely consistent with Customs' longstanding position that the
motherboard, when assembled into a housing to make the finished
computer, does not undergo a substantial transformation. See HQ 734093
dated August 8, 1991, where Customs ruled for country of origin marking
purposes that the final assembly of motherboards (i.e., boards that
already included the CPU chips) with other components consisting
primarily of connectors did not result in a substantial transformation
of the motherboard.

B. Comment on Subheading 8470.50 (Point-of-Sale Terminals)

One comment was received concerning the specific rule applicable to
point-of-sale terminals which are classifiable in subheading 8470.50,
HTSUS. This commenter states that these goods rarely consist of more
than five parts (a logic unit, a keyboard, a printer unit, a display
stand and a cash drawer) and thus expresses concern about the
difficulty in meeting the Sec. 102.20 rule.
Customs Response: Customs disagrees with this comment, which was
not supported by specific facts. Customs believes it is unlikely that
the assembly of a point-of-sale terminal would include five or fewer
parts. For instance, if the assembler adds a power cord or power supply
to the unit as described by the commenter, and all of these parts

[[Page 28948]]

were assembled in one country, there would have been an assembly of
more than five parts.

C. Comment on Processor Units of Subheadings 8471.20 and 8471.91

One comment was received concerning the application of the
Sec. 102.20 rule for goods of the above subheading. This commenter
expressed concern that the incorporation of a hard disk drive and a
floppy disk drive of subheading 8471.93, or a display unit of
subheading 8471.92, into processor units of subheadings 8471.20 and
8471.91 would not be an acceptable change in tariff classification
under Sec. 102.20.
Customs Response: Customs disagrees. One of the Sec. 102.20 rules
for processor units of subheadings 8471.29 and 8471.91 expressly allows
a change in tariff classification from hard or floppy disk drives of
subheading 8471.93 to display units of subheading 8471.92, since these
latter subheadings are outside the group to which the tariff shift rule
applies (that is, subheadings 8470.10 through 8471.91). Therefore,
incorporating disk drives and display units into ADP processor units
would result in a tariff shift, thereby con

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A96-14027. Public record. Not legal advice.