Friday, July 01, 2005

Suddenly, I am an Environmental Lawyer

Yesterday, CBP published a Federal Register notice completing a project we started about five years ago. The idea was to interpret the NAFTA rules of origin in a way that encourages the recycling of industrial equipment in North America by granting NAFTA-originating status to the reclaimed parts.

The typical scenario is this: You make locomotives. Turns out, no one wants to throw out old locomotives. They are difficult to get to the curb and the trash guys have a hard time tossing them into the truck. Instead, you take apart old locomotives, collect any useful parts you can, fix them up as necessary, and use them in your service and repair operation. Anything that is left is scrap. That is called "remanufacturing."

The problem is that your remanufacturing operation might be in Canada or Mexico and it is going to cost you money in duties to get the old locomotive or parts there and the fixed up parts back here. One solution is to apply the NAFTA rules and say that when you disassembled the locomotive, you had a tariff shift sufficient for at least some of the recovered parts to qualify as originating. Other parts might also require a specified amount of Regional Value Content, which you can account for through the cost of repair.

This analysis seemed simple enough (at least to me). But, there was a problem: tariff shifts for NAFTA purposes need to come from "production" in North America and the definition of "production" did not very clearly include disassembly (although it does include "processing"). So, we went to Customs with a proposal to change the rule to make parts recovered through a remanufacturing process originating for NAFTA purposes.

There was a little give and take and then lots of silence. We knew we were on the right track because rules like this popped up in newer free trade agreements like Chile and Australia. Well, now Customs has issued a notice saying that "production" includes disassembly as long as you are not starting with a new product. That seems like a good result.

The downside is that this is a unilateral interpretation. It is not at all clear to me that the Canadians or Mexicans will accept it. As a result, there might be divergent processes for completing Certificates of Origin. That needs to be worked out, but this is a good start.