Thursday, April 16, 2015

Ruling of the Week 2015.13: Origin, NAFTA and Circular Reasoning

The NAFTA Marking rules are a giant mystery to many people.

Let's assume you are importing evaporator cores from Mexico. The cores are initially produced in South Korea and shipped to the U.S. From here, they are exported to a facility in Mexico that adds fittings and connections before shipping them back to the U.S. Once back here, they are used in the assembly of automotive air conditioners. When returned to the U.S., the cores are not NAFTA originating. You can assume that set of fact because it is what happened in CBP Ruling N014917 (Aug. 2, 2007).

So, how do you analyze the origin of the cores?

The U.S. has various rules used to determine country of origin. Most products that are not wholly the growth or product of a single country are deemed to originate in the last country in which it was subject to a substantial transformation, i.e., a change in name, character, or use. See 19 CFR 134.1(b). That section goes on to say "however, for a good of a NAFTA country, the NAFTA Marking Rules will determine the country of origin." Those rules are in Part 102 of the Customs Regulations.

The NAFTA Marking Rules are not based on substantial transformation; they are an exception to it. The NAFTA Marking Rules are a hierarchy of successive tests, one of which might determine the country of origin. In the case of these evaporator cores, the first applicable test was whether the foreign materials, in this case the Korean parts, made a qualifying change in tariff classification as a result of the processing in Mexico. They did not.

The next applicable test stipulates that the country of origin will be the country or countries of origin of the single material that imparts the essential character to the good. In this case, that was the Korean-origin core. Bingo! Korea is the country of origin. So says Customs, read it for yourself.

I have two thoughts on this.

First, there is an interpretive note stating that the only materials that merit consideration as imparting the essential character are those materials that are classified in tariff provisions from which a change in tariff classification is not allowed. This seems like an odd rule and it is pretty obscure, but it makes sense. The changes in tariff classification appear to be designed to require a lot of processing and added value. Often, for example, a change from a parts subheading to a finished goods subheading in the same heading will not be a qualifying change. That is because the operation is probably relatively simple assembly without much value added. But, a change from a raw material of one heading to a finished good of another heading is indicative of a lot of added value. So, the materials excluded from a qualifying tariff classification are closer to the finished article and are, therefore, more likely to represent the essential character. Makes sense to me.

Second, is CBP's conclusion correct? I am on the record about this issue elsewhere in this blog. The NAFTA Marking Rules are only used to determine the country of origin of "goods of a NAFTA country." A "good of a NAFTA country" is something determined under the NAFTA Marking rules to have the country of origin of Canada, Mexico, or the United States. South Korea is not a NAFTA Country.  That means the application of the NAFTA Marking Rules spit this evaporator core out of Part 102 and back into Part 134. Right?

To my way of thinking, that means the question is whether the operation in Mexico resulted in a substantial transformation. That is an arguable point. But, this ruling did not go that extra step and the importer apparently did not make that argument.

By the way, since this and other rulings don't seem to track my thinking keep in mind my general disclaimer: this is not legal advice. It's just me talking.

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