(Investigation No. 332-360)

International Harmonization of Customs Rules of Origin

AGENCY: United States International Trade Commission

ACTION: Request for public comment on draft proposal concerning certain goods of Chapters 82, 84, 85, and 90

EFFECTIVE DATE: February 5, 1998

FOR FURTHER INFORMATION CONTACT: Eugene A. Rosengarden, Director, Office of Tariff Affairs and Trade Agreements (O/TA&TA) (202-205-2595), Chapter 82--Lawrence A. DiRicco (202-205-2606), Chapters 84-85, 90--Craig Houser (202-205-2597).

Hearing impaired persons are advised that information on this matter can be obtained by contacting the Commission's TDD terminal on 202-205-1810. The media should contact Margaret O'Laughlin, Office of External Relations (202-205-1819).

BACKGROUND: Following receipt of a letter from the United States Trade Representative (USTR) on January 25, 1995, the Commission instituted Investigation No. 332-360, International Harmonization of Customs Rules of Origin, under section 332(g) of the Tariff Act of 1930 (60 FR 19605, April 19, 1995).

The investigation is intended to provide the basis for Commission participation in work pertaining to the Uruguay Round Agreement on Rules of Origin (ARO), under the General Agreement on Tariffs and Trade (GATT) 1994 and adopted along with the Agreement Establishing the World Trade Organization (WTO).

The ARO is designed to harmonize and clarify nonpreferential rules of origin for goods in trade on the basis of the substantial transformation test; achieve discipline in the rules' administration; and provide a framework for notification, review, consultation, and dispute settlement. These harmonized rules are intended to make country-of-origin determinations impartial, predictable, transparent, consistent, and neutral, and to avoid restrictive or distortive effects on international trade. The ARO provides that technical work to those ends will be undertaken by the Customs Cooperation Council (CCC) (now informally known as the World Customs Organization or WCO), which must report on specified matters relating to such rules for further action by parties to the ARO. Eventually, the WTO Ministerial Conference is to "establish the results of the harmonization work program in an annex as an integral part" of the ARO.

The ARO called for the establishment of a Committee on Rules of Origin of the WTO and a Technical Committee on Rules of Origin (TCRO) of the CCC. These Committees bear the primary responsibility for developing rules that achieve the objectives of the ARO.

A major component of the work program is the harmonization of origin rules for the purpose of providing more certainty in the conduct of world trade. Under the ARO, the TCRO is to undertake (1) to develop harmonized definitions of goods considered wholly obtained in one country, and of minimal processes or operations deemed not to confer origin, (2) to consider the use of change in Harmonized System classification as a means of reflecting substantial transformation, and (3) for those products or sectors where a change of tariff classification does not allow for the reflection of substantial transformation, to develop supplementary or exclusive origin criteria based on value, manufacturing or processing operations or on other standards.

In March, 1997 (62 F.R. 11464, March 12, 1997), the Commission solicited comments on its draft proposed rules of origin for Chapter 82 and Chapter 84. In July 1997 (62 F.R. 35834, July 2, 1997), the Commission solicited comments on its draft proposed rules of origin for Chapter 85 and Chapter 90.

During its review of the comments submitted in response to those notices, the Commission has identified certain cases where application of the proposed general rules, i.e., those based on a change-of-classification of the goods, does not appear to satisfactorily attribute origin to the country in which the goods were substantially transformed. It was recognized at the outset of this investigation that situations would arise in which application of change-of-classification rules would cause anomolous or ambiguous origin determinations, and that supplementary or residual rules would need to be developed to account for those cases.

The Commission is therefore making available for public comment, the following draft proposed supplemental rules affecting certain goods of Chapter 82, e.g., tools of heading 82.04; Chapters 84, 85 and 90, e.g., goods of headings or subheadings which specifically provide for parts or parts and accessories and goods which undergo a change of classification which results merely from the form in which they are presented to Customs.

DRAFT RULES:

Draft supplemental rule for chapter 82:

1.   When the product specific rules provided in the 
	matrix are not determinant of origin, the following 
	shall apply:

     A. Goods produced from blanks. Where a goods is 
	produced from a blank:

          (1)  Provided all the following criteria are met, 
	the country of origin of the good shall be the 
	country in which the blank was processed into a 
	finished good:

               (a)  In its imported prefinished condition, 
		    the blank was not capable of functioning 
		    for its ultimate use and was not advanced 
		    beyond cleaning or working to remove flash, 
		    sprues, burrs or similar excess material, and

               (b)  In the country in which the goods is finished:

                    (i)  The blank was configured to final shape 
			 by the removal of material  
			 (other than by honing or polishing), 
			 or by bending, hammering, pressing, 
			 stamping or similar forming process; and

                    (ii) The blank underwent one or more of the 
			 following processes:

                         1.   Hardening to a minimum hardness of 
			      38 degrees Rockwell C or equivalent 
			      standard of hardness; or

                         2.   Assembly with five or more parts 
			      (other than parts of general use 
			      as defined in Note 2 to Section XV).

          (2)  If the criteria of subparagraph 1(A)(1) above are 
	       not satisfied, the country of origin of the good 
	       shall be the country of origin of the blank.

     B.   Other Goods of This Chapter. When paragraph 1(A) is 
	  not applicable, the country of origin shall be 
	  determined as follows:

          (1)  Goods obtained by assembly of components. Goods 
	       obtained by assembly of components which are 
	       classified as parts of goods of this chapter 
	       (but not as unfinished goods), shall originate 
	       in the country in which the parts were assembled 
	       into the finished good, provided that the assembly 
	       used five or more parts (other than parts of 
	       general use as defined in Note 2 to Section XV).

          (2)  Other. If the requirements of subparagraph 1(B)(1) 
	       are not met, the country of origin of the goods 
	       shall be the country in which the working edge, 
	       working surface or working part underwent a change 
	       of classification to a heading of this chapter 
	       from any other chapter (e.g., from a bar or rod 
	       of Chapter 72 to a chisel of Heading 82.05).

Purpose of draft supplemental rule for chapter 82:

The rule provides a determination of origin in situations in which 
the change of classification rules fail to confer origin because 
the processing of the one or more of the input goods did not result 
in a change classification even though there was a substantial 
transformation.  This occurs when the input is an incomplete or 
unfinished article classifiable in the same heading or subheading 
as a blank. It can also occur when goods are assembled from parts 
classified in the same heading or subheading.  Rule 1(A) applies in 
the former instance and Rule 1(B) applies in the latter.

Draft supplemental rules for chapters 84 and 85:

1.   Limitations on change of classification rules. Notwithstanding 
     the product specific rules in the matrix, where a change of 
     classification (i.e., change of heading, subheading, split 
     heading or split subheading) results from one of the following
     circumstances, origin shall be determined as indicated:

     A.   Disassembly. Where a change in classification results from 
	  disassembly of a previously assembled good, the origin of 
	  the good shall be the origin prior to disassembly.

     B.   Packaging. Where a change in classification results from 
	  packaging or repackaging, the origin of the good shall be 
	  the origin prior to such packaging or repackaging.

     C.   Collection of parts into kits. Where a change in 
	  classification results from the application of 
	  General Rule of Interpretation 2(a) with respect to 
	  collections of parts that are presented as 
	  unassembled articles of another heading or subheading, 
	  the individual parts shall retain their origin prior 
	  to such collection.

     D.   Multi-function machines and composite machines. Where 
	  a change in classification results from application 
	  of note 3 to Section XVI, the origin of the good shall 
	  be the origin of the machine or component which 
	  determines the classification of the good under note 
	  3 to section XVI.

     E.   Functional units. Where a change in classification 
	  results from the application of note 4 to Section XVI 
	  to separately packaged goods presented together in a
          single shipment, the separately packaged goods shall 
	  retain their origin prior to such presentation.

2.   Residual rules. When neither the product specific rules 
     provided in the matrix nor legal note 1 above are 
     determinant of origin, the following shall apply:

     A.   Goods produced from incomplete or unfinished 
	  articles classifiable in the same heading or 
	  subheading by application of GRI 2(a). Where 
	  a good is produced from an incomplete or 
	  unfinished (other than unassembled or 
	  disassembled) article which had the 
	  essential character of the complete or 
	  finished good and was classifiable, by 
	  application of GRI 2(a), in the  same heading 
	  or subheading as the complete or finished 
	  goods, origin of the presented good shall be
          determined as follows:

          (1)  Goods produced from blanks. Where a good 
	       is produced from a blank:

               (a)  Provided all the following criteria 
		    are met, the country of origin of the 
		    good shall be the country in which the 
		    blank was processed into a finished good:

                    (i)  In its imported prefinished condition, 
			 the blank was not capable of 
			 functioning for its ultimate use and 
			 was not advanced beyond cleaning or 
			 working to remove flash, sprues, 
			 burrs or similar excess material, and

                    (ii) In the country in which the good is 
			 finished:

                         1.   The blank was configured to final 
			      shape by the removal of material  
			      (other than by honing or polishing), 
			      or by bending, hammering, pressing,
                              stamping or similar forming process; 
			      and

                         2.   The blank underwent one or more of 
			      the following processes:

                              A.   Hardening to a minimum hardness 
				   of 38 degrees Rockwell C or 
				   equivalent standard of hardness; or

                              B.   Assembly with five or more parts 
				   (other than parts of general use 
				   as defined in Note 1(g) to 
				   Section XVI).

               (b)  If the criteria of subparagraph (a) above are 
		    not satisfied, the country of origin of the 
		    good shall be the country of origin of the blank.

          (2)  Goods produced from incomplete or unfinished articles, 
	       other than blanks. Where the good is produced from an 
	       incomplete or unfinished article, other than a blank, 
	       the origin of presented goods shall be the country of 
	       origin of the incomplete or unfinished article from 
	       which it was produced.

     B.   Other rules for assembled goods. Where neither the product 
	  specific rules in the matrix nor the preceding legal notes 
	  are determinant of origin, the following shall apply:

          (1)  Origin in the country of assembly. Provided the 
	       following criteria are met, the goods shall 
	       originate in the country of assembly:

               (a)  The assembly resulted in a device or 
		    apparatus capable of performing one or more 
		    new mechanical or electrical function(s), 
		    and either:

                    (i)  The assembly involved 5 or more parts 
			 (other than parts of general use, as 
			 defined in Note 1(g) to Section XVI),
                         or

                    (ii) The assembly involved  less than 5 
			 parts (other than parts of general use, 
			 as defined in Note 1(g) to Section XVI),
                         and one or more of the parts (other than 
			 parts of general use, as defined in 
			 Note 1(g) to Section XVI),  satisfies the
                         product specific rules provided in the 
			 matrix as having origin in the  country 
			 of assembly.

               (b)  For purposes of the subparagraph (a) above, the 
		    following shall not be considered assembly 
		    operations:

                    (i)  the attachment of machinery to a base,
 
                    (ii) the installation of machinery or apparatus 
			 into cabinets or similar encasements,
 
                    (iii)the attachment of dials, knobs, hand cranks, 
			 and other consumer-operated controls,

                    (iv) the attachment of a power cord, or

                    (v)  installation of batteries, accumulators or 
			 other articles not designed to become a 
			 permanent part of the good. 
 
          (2)  Other. If the requirements of subparagraph (1) above are 
	       not met, the following shall apply:

               (a)  If the principal rule applicable to the goods in 
		    the product specific matrix includes an exception 
		    to a change of classification from a particular 
		    heading or subheading and a non-originating
                    part classifiable in such heading or subheading 
		    was used in the assembly of the good, the country 
		    of origin of the good shall be the country of 
		    origin of such excepted part.

               (b)  In all other cases, the country of origin shall 
		    be the country in which the majority of the 
		    parts originated.  If there is no majority, the
		    country of origin shall be the country of origin 
		    of the part which appears last in the 
		    Nomenclature.

Purpose of draft supplemental rules for chapters 84 and 85:

Rule 1 supercedes the change of classification rules for those situations 
in which a change of classification occurs, either by virtue of the 
presentation of the goods or by application of one of the legal notes to the 
Harmonized System, but the change of classification does not necessarily 
reflect a substantial transformation of the goods.  For each of the 
situations specified, the change of classification rules are superceded by 
the rule provided therein. 

On the other hand, Rule 2 provides a determination of origin in situations 
in which the change of classification rules fail to confer origin because 
the processing of the one or more of the input goods did not result in a 
change classification even though there was a substantial transformation.  
This occurs when the input is an incomplete or unfinished article 
classifiable in the same heading or subheading as the complete or finished 
article, by application of General Rule of Interpretation 2(a).  In 
particular, this applies to the processing of blanks into finished goods.  
It can also occur when "major" parts of goods, i.e. subassemblies, are
assembled from "minor" parts classified in the same parts heading or 
subheading.  Rule 2(A) applies in the former instance and Rule 2(A) applies 
in the latter.

Draft supplemental rules for chapter 90:

1.   Limitations on change of classification rules. Notwithstanding the
     product specific rules in the matrix, where a change of 
     classification (i.e., change of heading, subheading, split heading 
     or split subheading) results from one of the following
     circumstances, origin shall be determined as indicated:

     A.   Disassembly. Where a change in classification results 
	  from disassembly of a previously assembled good, the origin 
	  of the good shall be the origin prior to disassembly.

     B.   Packaging. Where a change in classification results from 
	  packaging or repackaging, the origin of the good shall be 
	  the origin prior to such packaging or repackaging.

     C.   Collection of parts into kits. Where a change in 
	  classification results from the application of General 
	  Rule of Interpretation 2(a) with respect to collections of
          parts that are presented as unassembled articles of another 
	  heading or subheading, the individual parts shall retain 
	  their origin prior to such collection.

     D.   Functional units. Where a change in classification results 
	  from the application of note 4 to Section XVI to separately 
	  packaged goods presented together in a single shipment, the 
	  separately packaged goods shall retain their origin prior to
          such presentation.

2.   Residual rules. When neither the product specific rules provided 
     in the matrix nor legal note 1 above are determinant of origin, the 
     following shall apply:

     A.   Goods produced from incomplete or unfinished articles 
	  classifiable in the same heading or subheading by 
	  application of GRI 2(a). Where a good is produced from an 
	  incomplete or unfinished (other than unassembled or 
	  disassembled) article which had the essential character of 
	  the complete or finished good and was classifiable, by 
	  application of GRI 2(a), in the  same heading or subheading
          as the complete or finished goods, origin of the presented 
	  good shall be determined as follows:

          (1)  Goods produced from blanks. Where a good is produced 
	       from a blank:

               (a)  Provided all the following criteria are met, 
		    the country of origin of the good shall be 
		    the country in which the blank was processed
                    into a finished good:

                    (i)  In its imported prefinished condition, 
			 the blank was not capable of functioning 
			 for its ultimate use and was not advanced 
			 beyond cleaning or working to remove flash,
                         sprues, burrs or similar excess material, and

                    (ii) In the country in which the good is finished:

                         1.   The blank was configured to final shape by 
			      the removal of material  (other than by 
			      honing or polishing), or by bending,
			      hammering, pressing, stamping or similar 
			      forming process; and

                         2.   The blank underwent one or more of the 
			      following processes:

                              A.   Hardening to a minimum hardness 
				   of 38 degrees Rockwell C or 
				   equivalent standard of hardness; or

                              B.   Assembly with five or more parts 
				   (other than parts of general use 
				   as defined in Note 1(g) to 
				   Section XVI).

               (b)  If the criteria of subparagraph (a) above are not 
		    satisfied, the country of origin of the good shall 
		    be the country of origin of the blank.

          (2)  Goods produced from incomplete or unfinished articles, 
	       other than blanks. Where a good is produced from an 
	       incomplete or unfinished article, other than a blank, 
	       the origin of presented goods shall be the country of 
	       origin of the incomplete or unfinished article from 
	       which it was produced.

     B.   Other rules for assembled goods. Where neither the product 
	  specific rules in the matrix nor the preceding legal notes 
	  are determinant of origin, the following shall apply:

          (1)  Origin in the country of assembly. Provided the 
	       following criteria are met, the good shall originate 
	       in the country of assembly:

               (a)  The assembly resulted in a device or apparatus 
		    capable of performing one or more new mechanical 
		    or electrical function(s), and either:

                    (i)  The assembly involved  5 or more parts 
			 (other than parts of general use, as 
			 defined in Note 1(g) to Section XVI),
                         or

                    (ii) The assembly involved  less than 5 parts 
			 (other than parts of general use, as 
			 defined in Note 1(g) to Section XVI),
                         and one or more of the parts (other than 
			 parts of general use, as defined in Note 
			 1(g) to Section XVI),  satisfies the
                         product specific rules provided in the
			 matrix as having origin in the  country 
			 of assembly.

               (b)  For purposes of the subparagraph (a) above, 
		    the following shall not be considered assembly
		    operations:

                    (i)  the attachment of machinery to a base,
 
                    (ii) the installation of machinery or apparatus 
			 into cabinets or similar encasements, 

                    (iii)the attachment of dials, knobs, hand cranks,
			 and other consumer-operated controls,

                    (iv) the attachment of a power cord, or

                    (v)  installation of batteries, accumulators or 
			 other articles not designed to become a 
			 permanent part of the good. 
 
          (2)  Other. If the requirements of subparagraph (1) above are 
	       not met, the following shall apply:

               (a)  If the principal rule applicable to the goods 
		    in the product specific matrix includes an 
		    exception to a change of classification
                    from a particular heading or subheading and a 
		    non-originating part classifiable in such 
		    heading or subheading was used in the assembly 
		    of the good, the country of origin of the good 
		    shall be the country of origin of such 
		    excepted part.

               (b)  In all other cases, the country of origin shall 
		    be the country in which the majority of the 
		    parts originated.  If there is no majority, the 
		    country of origin shall be the country of origin 
		    of the part which appears last in the Nomenclature.

Purpose of draft supplemental rules for chapter 90:

Rule 1 supercedes the change of classification rules for those situations in which a change of classification occurs, either by virtue of the presentation of the goods or by application of one of the legal notes to the Harmonized System, but the change of classification does not necessarily reflect a substantial transformation of the goods. For each of the situations specified, the change of classification rules are superceded by the rule provided therein.

On the other hand, Rule 2 provides a determination of origin in situations in which the change of classification rules fail to confer origin because the processing of the one or more of the input goods did not result in a change classification even though there was a substantial transformation. This occurs when the input is an incomplete or unfinished article classifiable in the same heading or subheading as the complete or finished article, by application of General Rule of Interpretation 2(a). In particular, this applies to the processing of blanks into finished goods. It can also occur when "major" parts of goods, i.e. subassemblies, are assembled from "minor" parts classified in the same parts heading or subheading. Rule 2(A) applies in the former instance and Rule 2(B) applies in the latter.

These proposals have been reviewed by interested government agencies and are intended to serve as the basis for the U.S. proposal to the Technical Committee on Rules of Origin of theWorld Customs Organization or to the Technical Committee of the World Trade Organization. The proposals do not necessarily reflect or restate existing Customs treatment with respect to country of origin applications for all current non-preferential purposes. Based upon a decision of the Trade Policy Staff Committee, the proposals are intended for future harmonization for the nonpreferential purposes indicated in the ARO for application on a global basis. They seekto take into account not only U.S. Customs current positions on substantial transformation but additionally seek to consider the views of the business community and practices of our major trading partners as well. As such they represent an attempt at reaching a basis for agreement among the contracting parties. The proposals may undergo change as proposals from other government administrations and the private sector are received and considered. Under the circumstances, the proposals should not be cited as authority for the application of current domestic law.

WRITTEN SUBMISSIONS: Interested persons are invited to submit written statements concerning this phase of the Commission's investigation. Written statements should be submitted as quickly as possible, and follow-up statements are permitted; but all statements must be received at the Commission by the close of business on March 18, 1998, in order to be considered. The Commission notes that it is particularly interested in receiving input from the private sector on the effects of the various proposed rules and definitions on U.S. exports. Commercial or financial information which a submitter desires the Commission to treat as confidential must be submitted on separate sheets of paper, each marked "Confidential Business Information" at the top. All submissions requesting confidential treatment must conform with the requirements of section 201.6 of the Commission's Rules of Practice and Procedure (19 CFR 201.6). All written submissions, except for confidential business information, will be available for inspection by interested persons. All submissions should be addressed to the Office of the Secretary, United States International Trade Commission, 500 E Street SW., Washington, DC 20436.

World Wide Web Access: This notice may be obtained from the ITC Internet web server: http://www.usitc.gov.

By order of the Commission.

Donna R. Koehnke
Secretary

Issued: February 25, 1998