Saturday, April 07, 2007

I'm Back

I've been away, I assume you noticed. But, I was not completely out of touch with the world of customs law. A few interesting things have happened.

One thing of note is Customs & Border Protection ruling W968421 (Jan. 9, 2007). It is a marking ruling. I have not discussed marking much in this blog. So, we should look at some background first.

All articles of foreign origin imported into the United States must be marked with their country of origin. The marking must be permanent and conspicuous. There are specific requirements for how certain products need to be marked. For example, pipes and similar articles should generally have the country of of origin die sunk or molded into the product. Generally, the product itself should be marked although in some circumstances it is permissible to mark the container. There are lots of exceptions to the marking requirements including goods that will be further processed in the U.S., goods imported by the purchaser, goods too small to be marked, etc.

The tricky thing with marking is usually figuring out the right country of origin. For most things, the country of origin is the country in which the goods last underwent a "substantial transformation." A substantial transformation occurs where there is processing that results in a change in name, character or use. Note that it is not a change in name, character, AND use as sometimes turns up in rulings. So, if Ukrainian flour is imported into Italy where it becomes pasta, the country of origin is Italy. But, if a Ukrainian rocking chair is sent to Italy where it is painted, it stays a Ukrainian rocking chair.

Often, the substantial transformation test requires a judgment call. That leads to some ambiguity and, of course, problems for importers who just want to know the "right" answer. In the NAFTA, the parties tried to deal with this by having more objective rules primarily based on tariff shifts. Similar rules apply to most textiles and apparel. Beyond that, you are stuck with substantial transformation.

On problem with all marking is that importers often source from multiple countries. For example, a honey importer probably does not care where the honey comes from and might mix it all together in a big vat before bottling for retail sale. The question that has come up is whether it is appropriate to mark that bottle as "Product of U.S., China, or Argentina." Generally, Customs has held that so-called "disjunctive marking" is not permitted. The reason for this is that it does not actually inform the consumer of the origin of the item being purchased.
Over the years, though, Customs has found several exceptions to this rule. That is what happened in W968421. The merchandise was integrated circuits that have several countries of origin and are commingled for commercially valid reasons. Customs looked back at several cases where a disjunctive ruling was permitted. For example, in a 2002 ruling involving integrated circuits Customs permitted disjunctive marking where it found that the goods were commingled to facilitate testing and repacking. In other cases involving fasteners, Customs permitted disjunctive marking where it was not economically feasible to segregate the commingled goods. But, if the fasteners were never commingled and the importer knew the country of origin, no exception was permitted (see HQ 735482).

In W968421, this is what Customs said:
In this instance, you indicate that the assemblers commingle the semiconductor devices in the shipping containers for commercial reasons. You have pointed out that the semiconductor chips are fungible and that it is expensive and burdensome to segregate the inventory of semiconductor chips from the different countries by their country of origin. Based on this practice, a shipping container can have products from China and Malaysia commingled together. Consequently, requiring each shipping container that contains commingled products to be marked with the specific country of origin combinations that is actually inside the container would add significant expense and delay to the distribution of AMD"™s products. Therefore, in accordance with the analysis set forth in T.D. 75-187 and HQ 562308, we find that the proposed marking "Product of China, Korea, Malaysia or Taiwan" is an acceptable country of origin marking that satisfies the requirements of 19 U.S.C. 1304 for indicating the country of origin of AMD"™s semiconductor devices that are the subject of this ruling.
This is a good result for the importer. Kudos to the lawyers on that. But, I have a question for Customs: In what fungible bulk product circumstance would this not apply? It seems that it would add significant expense and delay to try and segregate blended honey, wheat, screws, lock washers, or anything else that is truly fungible and many things that are not fungible.

Maybe, this is a good result for lots of importers.


Nick said...

Welcome back!

Here's a little wrinkle for you: what if one of the countries on a permissible disjunctive marking is eligible for a reduced duty rate under an FTA? Now is the importer required to separate that fungible good if she wants to claim the trade preference? Does commingling destroy the right to claim a trade preference?
We'll be hearing more about this soon, as this very issue has recently popped up under the guise of origination, though it is very closely related to marking.

Tom said...

For the origin example given to the integrated circuit, sure substantial transformation including final assembly will constitute country of origin for your device when importing into any country besides Japan and All EU countries..

For Japan and the EU, diffusion or Wafer Fabrication is used to determine the country of origin (for devices with only one die that is) what happens when you have a multi die device performing diffusion in two different countries…what then?

Anonymous said...

Yes... then what? How is the origin determined in the EU or Japan if the IC contains two die from different countries?