Ruling of the Week 2017.3: Indirect Materials

I do a lot of NAFTA-related work. At least I do this week. It remains to be seen whether that changes soon. Secretary of Commerce designee Wilbur Ross told the Senate committee considering his nomination that his top priority would be renegotiating NAFTA. So, this may all change. As we sometimes have to tell clients, the situation is fluid.

In the meantime, the NAFTA rules of origin continue in place. Often, for a product to qualify as originating, it must have a Regional Value Content of 50% when calculated with the net cost methodology or 60% when calculated with the transaction value methodology. There are exceptions, especially for automotive products. You need to check the rule applicable to your product in HTSUS General Note 12.

Sometimes, producers are close but cannot hit the required RVC. There are a few means provided in the regulation for adding to the RVC. One of the best is the designation of a self produced material as an intermediate material. HQ H273100 (Jan. 6, 2016) is a good example of how that works.

The producer was making starter motors for lawn tractors in Mexico. As part of that process, it also made the DC motor at the heart of the starter motor assembly. The starter motor is classified in 8511.40.00 and is subject to an RVC requirement because not all of the non-originating materials make a required tariff shift under the applicable rule.

The DC motor is classified in 8501.32. If the producer thinks just about the finished motor assembly, all of the non-originating materials in it make a qualifying change in tariff classification. That means the motor would, if certified separately, qualify as originating.

The useful thing to know here is that Part III, Section 6(4) of the NAFTA Rules of Origin Regulations provides (in relevant part):

Except as otherwise provided in section 9 and section 10(1)(d), for purposes of calculating the regional value content of a good under subsection (2) or (3), the value of non-originating materials used by a producer in the production of the good shall not include

the value of any non-originating materials used by the producer in the production of a self-produced material that is an originating material and is designated as an intermediate material.

As a result, and as Customs and Border Protection confirmed in this ruling, the value of non-originating materials used in the production of the motor are not counted toward the value of non-originating materials when doing the RVC calculation for the starter motor. It does go in the net cost. That means, the total value of the motor is treated as originating, despite containing non-originating materials.

This rule makes perfect sense. The motor sub-assembly could have been purchased from a third party. If that third party used exactly the same supply chain and production process, it would have been able to certify the motor as originating. The purchaser of the DC motor would not have been penalized for any non-originating material in the motor. The intermediate material rule recognizes that a vertically integrated manufacturer should not be at a disadvantage.

The wrinkle here is for automotive goods. The references in the regulation to section 9 and section 10(1)(d) cover that. For light-duty automotive goods, the net cost methodology is modified to require a higher RVC and "tracing." Tracing means that the value of non-originating materials includes the value of certain designated materials, even if they are in a sub-assembly. That non-originating value must be captured and brought forward for the RVC calculation. A similar limitation applies to heavy-duty automotive components, component-assemblies, and sub-components.

If you are having trouble getting to the required RVC, look for self-produced sub-assemblies in your bill of materials. There may be enough value there to get your product over the hump.

Ruling of the Week 2017.2: Emergency War Material Covers Failed NAFTA Claim

I like this ruling. It is HQ H273101 (Nov. 4, 2016).

This is a case where the importer made a NAFTA claim. When asked by Customs and Border Protection, the importer either could not or just did not support the claim. It happens. Sometimes, subsequent review turns up a problem with the NAFTA documentation. Sometimes, the broker should not have made the claim to start with. Lots of things happen in the real world.

This particular product is a multi-sensor electro-optical surveillance and targeting turret from Canada. As you might imagine, a multi-sensor electro-optical surveillance and targeting turret is a piece of military equipment. When the NAFTA claim failed, the importer asserted that the merchandise is entitled to duty-free entry as war material certified as such by a military procuring agency under HTSUS item 9808.00.30. It submitted the necessary certificates.

Customs liquidated the entry at the applicable 4.5% rate of duty and the importer protested. Customs granted the protest. It noted that in the absence of willful negligence or fraudulent intent, the importer can, prior to liquidation, submit documents to support a claim for free or reduced duties. The regulation that supports this is 19 CFR 10.112. Note that the regulation allows for the documents to be submitted even after liquidation but before the liquidation is final. That is a narrow window of 90 days following liquidation. See 19 USC 1501.

Why do I like this rulings? It is not just because the importer won. It is also because the importer, or its counsel, took a step back from a problem, surveyed its options, and found a creative solution. I also like it because it reaffirms for importers and brokers that the filing of the entry is not necessarily the end of the process. If there is a better option or a way to reduce duties after the entry summary has been filed, go ahead and submit the appropriate documents. There is money to be saved, go save it.

Anyone Curious About Withdrawing from NAFTA?

For some reason, I have been asked what it would take for the U.S. to withdraw from NAFTA or another trade agreement. Funny how that comes up today, the day after the U.S. presidential election.

The answer is not 100% clear.

In Article 2205, the NAFTA says the US can withdraw with 6-months written notice. If that happens, the agreement stays in place between Mexico and Canada. How that happens is a question.

The US would certainly be out of the agreement going forward, but most of the implementation of NAFTA was through legislation. That legislation might still be in place until Congress removes it.

Arguably, the legislation might automatically repeal itself. 19 USC 3451 says that if a country withdraws, the amendments made to implement NAFTA “cease to have effect with respect to that country.” It is not clear whether “that country” can be the US or whether that implies that Canada or Mexico has left NAFTA. There would be much litigation. Other trade agreements likely work the same way, but I have not looked.

Also, should the US pull out of NAFTA, the pre-existing US-Canada Free-Trade Agreement comes back from the dead. We would need to brush up on those rules.

Also, if the President tries to impose new duties, he runs up against WTO tariff bindings. US law, specifically so-called Section 301, lets the US increase duties or take other actions to address violations of trade agreements or unfair practices by our trading partners. Countries that feel increased duties are not consistent with WTO obligations can seek relief through the WTO dispute settlement process and, of authorized, retaliate. The potential for serial grievances and retaliation is what we call a "trade war."

Zombie Protests and GSP

There have been a few cases of note that I have not yet reviewed. Call it Olympic Distraction Syndrome or Summer is Rapidly Ending Depression. Either way, I've read the cases so you don't have to.

First up, Zojirushi America Corp. v. United States, from the U.S. Court of International Trade. This case will go down in legal history as the genesis of Zombie Protests. You heard it here first.

Zojirushi is an importer of vacuum bottles and jars, home appliances, and housewares. It made several entries that Customs and Border Protection liquidated as entered. Zojirushi then protested the liquidation and asserted a claim for duty-free treatment under the Generalized System of Preferences. Customs, following its internal policy, "rejected" the protest as asserting a non-protestable claim.

This case is important and complicated enough to merit bold-face headings, a rarity in this blog.

Jurisdiction: 1581(a) or 1581(i)?

Usually, Customs will either approve or deny a protest. When it denies a protest, the protestant can bring an action to the Court of International Trade under 28 USC 1581(a). Absent a denied protest, the Court of International Trade will not be able to hear the case pursuant to 1581(a).

The alternative is to bring the case pursuant to 1581(i), which is the so-called residual jurisdiction of the CIT. It is applicable to cases involving the collection, administration, and enforcement of customs duties that are not properly the subject of a denied protest.  Because Customs rejected the protest rather than denying it, Zojurushi filed its case under (i). The problem for Zojirushi is that (a) and (i) are mutually exclusive and if it could have filed a case under 1581(a), then it cannot proceed under 1581(i).

The Court framed the issue as whether the GSP claim was properly protestable. If so, then jurisdiction is proper under 1581(a). If not, then (i) may be the proper avenue for the plaintiff. This is an important question because it goes to the heart of whether an importer can protest a no-change liquidation. After all, CBP liquidated the entry without GSP benefits because that is what the importer requested. If CBP did what the importer asked, why allow the importer to challenge Customs' decision? Is it fair to say that CBP made no decisions that can be protested?

Let's look at the law. Protestable decisions are defined in 19 USC 1514, which permits a challenge to "any clerical error, mistake of fact, or other inadvertence . . . adverse to the importer, in any entry, liquidation, or reliquidation, and, decisions of [Customs and Border Protection] . . . as to . . . the liquidation . . . of an entry . . . pursuant to . . . section 1500 of this title." According to the CIT, the protest in this case involved an inadvertence that is adverse to the importer. That would be the failure to assert the GSP claim. Furthermore, the inadvertence related to the entry and was reflected in the liquidation. On its face, the statute seems to make this a protestable decision.

The Department of Justice was not without arguments. Relying on Customs' regulation 19 CFR 10.172, Justice argued that a claim for GSP is only protestable if made at the time of entry. The Court disagreed. The regulation states, in part, that "If duty-free treatment is claimed at the time of entry" the claim is to be noted noted by appending the letter A to the HTSUS number. The "if" clearly implies that there are circumstances where the claim is not made at the time of entry. The regulation makes this explicit when it later says, "If duty-free treatment is claimed subsequent to the time of entry . . . ", other documentary requirements apply. This language was added in 1977 precisely to permit post-entry claims. Similar language is in a 1994 Treasury Decision.

Is there a Decision?

Getting to what I see as the meat of the debate, Justice argued that because there was no claim at the time of entry, Customs made no decision regarding GSP when it liquidated the entry. Without a decision to challenge, there can be no valid protest. To support this proposition, Customs relied on a ruling, HQ H193959 (Jul. 30, 2012). The ruling, while not a formal regulation, is entitled to judicial deference proportional to its "power to persuade."

The CBP ruling was based on two prior decision of the Court of Appeals for the Federal Circuit. In Xerox and Corrpro, the Federal Circuit said that under the applicable statutes and regulations, an importer cannot first assert a NAFTA claim in a protest. The question before the CIT is whether that principle applies to GSP claims. According to the CIT, the Federal Circuit did not go that far. In fact, the Federal Circuit explicitly said it was not suggesting that an as-entered liquidation can never give rise to a protest. The decision was limited to preferential claims under NAFTA. The ruling, therefore, was not persuasive.

Form this, the CIT concluded that the post-entry GSP claim can be first asserted in a protest. In other words, there is a protestable decision.

But, is there a Denied Protest?

Customs did not affirmatively deny the protest; it rejected the protest as invalid. Since 1581(a) requires a denied protest as the basis for jurisdiction, there is an issue of whether CBP's action constitutes a denial.

It is easy enough to conclude that what CBP did was not an allowance of the protest. Was it a denial?

This is where things turn ugly for the importer.

Let's assume it was a denial. In that case, the summons to the Court of International Trade would be due 180 days from the date of denial. In this case, the summons was filed beyond that date, but within the 2-year period allowed under 1581(i). If 1581(a) is the proper basis for jurisdiction the case is time barred.

But, CBP did not deny the protest. If it had, Customs would have followed the required procedures including providing a reason for the denial and notifying Zojirushi of its right to seek judicial review. Everything CBP did appears to have been calculated to communicate that no denial had occurred because the protests was simply rejected as not properly filed. Consequently, the rejection cannot be interpreted as a denial.

Where does that leave Zojirushi? Not without recourse. It turns out that a rejected protest is not exactly dead. But it is not quite alive either. It has not been denied but is not exactly pending either. I am certain that as far as CBP is concerned, the issue is decided and over. What we have here is The Walking Dead of Protests. But, unlike the walkers on TV, this one can be cured.

The law provides that whenever "a protest has not been allowed or denied in whole or in part," the protestant can force a decision by seeking accelerated disposition under 19 USC 1515(b). Under the much maligned decision in Hitachi, the protestant can do this any time, even after the 2-year period in which CBP was supposed to act.  Here, Customs has neither allowed nor denied the protest, that makes it open to accelerated disposition. If the protestant takes that route, it will likely have a denied protest after 30 days, and a ticket back to Court.

Because Zojirushi can get adequate relief under 1581(a), it cannot proceed under 1581(i). That means the case is dismissed but very much alive if Zojirushi demands accelerated disposition.

I am not a fan of the result in Hitachi, though I think it is legally correct. As a matter of policy, I think CBP should required to act on a protest within the 2-year period. If it can't do that, I think the importer deserves finality and the protest should be deemed granted. At a minimum, it should be deemed denied and open to judicial review. But, I am not Congress and that is not the law. The nice thing about this decision, is that it makes lemonade out of what I think of legislative lemons by finding a means for the protestant to get to Court when CBP. That is a good result.

Ruling of the Week 2016.10: Share-A-Dram and NAFTA Marking

I've been at this a long time. Nevertheless, I am still sometimes surprised. That happened when I read N272495 (Mar. 1, 2016).

There are two "travel kits" at issue in this ruling. These are travel kits of the kind used by Victorian gentlemen tromping around the Amazon or Africa trailing a line of porters carrying their necessities. In this case, the necessities include six glass bottles with caps, two pipets, a funnel, coasters, a whisky taking journal, some other stuff, and a leather case for all of it. There is also a Share-A-Dram kit consisting of 12 glass bottles, a funnel, paper neck tags, and sample tasting ledger.

Customs and Border Protection decided that these kits are to be classified as retail sets based on the single item that imparts their essential character. For the travel kits and the Share-A-Dram, that is the glassware, specifically the drinking glasses, which are the most expensive glass items.

Here's the more interesting point. The drinking glasses are made in Germany and etched in the UK. There are pipettes in the kits, which are products of the United States. Everything else appears to be from China. The leather case includes a Japanese zipper. So, how should the importer determine the country of origin of the set and how should it be marked?

Interestingly, and without discussion, Customs used the NAFTA marking rules of 19 CFR Part 102 to determine whether the glass etching produced a tariff shift in the UK (it did not). Similarly, Customs used the NAFTA rules to determine that the zipper form Japan made a sufficient tariff shift to make the leather case a product of China. Chinese pencils embossed in the US do not change tariff classification and remain products of China.

Why is Customs doing this? It gives me a headache and this kind of analysis has given me a headache for years.  The only clue I can find is that the party requesting the ruling is in British Columbia, which is in Canada, which is a NAFTA country. The NAFTA marking rules are applicable to goods of a NAFTA country, so maybe that's the connection.

Let's assume that the goods are actually shipped from Canada, is this analysis correct? 19 CFR 134.1(b) says this:

Country of origin. “Country of origin” means the country of manufacture, production, or growth of any article of foreign origin entering the United States. Further work or material added to an article in another country must effect a substantial transformation in order to render such other country the “country of origin” within the meaning of this part; however, for a good of a NAFTA country, the NAFTA Marking Rules will determine the country of origin. 

So let's say, hypothetically, I import a German glass, etched in the UK from Canada. How do I determine the country of origin? Well, it comes from Canada, so for laughs we can check the NAFTA rules. We do that, and we determine that the glass is from Germany. It is not a good of a NAFTA country. Are we done? I don't think so. We next have to ask whether the etching is a substantial transformation. It's not, so we end up at the same place, but this is not a trivial matter.

The reason we have NAFTA tariff shift rules is to replace the substantial transformation test. That means the two test might produce different results. The NAFTA rules apply to goods of a NAFTA country. That means the NAFTA rules do not apply to goods for which the NAFTA marking rules indicate that the country of origin is other than Canada, Mexico, or the United States.

When a product is not the good of a NAFTA country, Customs needs to revert to substantial transformation. Or, am I wrong? Someone talk me out of this.

Reconciliation and NAFTA Post-Entry Claims

No one likes it when a pet theory dies. It is even worse when the theory was smart and creative. Unfortunately, this one seems to have finally been put out of its misery.

I am talking about the notion pursued with vigor and righteousness by Ford Motor Company concerning post-entry NAFTA claims. There is useful background here and here. I'm not going to go into detail again, so take the time to read those previous posts. It's OK, I am not going anywhere.

The single salient fact here is that Ford made a timely post-entry NAFTA claim but failed to provide Customs with the NAFTA certificate of origin until after the running of the one-year period for a claim. Customs denied the claim on that basis, not on the merits. Ford smartly pointed out that while a post-entry NAFTA claim under 19 USC 1520(d) requires a certificate of origin, an equally post-entry claim made via the ACS Reconciliation Prototype does not. Customs specifically and affirmatively waived the requirement for the presentation of a NAFTA CO for claims made under Reconciliation. I know because Customs said so in this Federal Register notice (scroll down to page 6259, top right).

Ford argued that Customs' waiver of the CO in the Reconciliation context and refusal to waive or accept a late CO in the "normal" § 1520(d) process was arbitrary and capricious, and, therefore, unenforceable. The Federal Circuit previously remanded this issue to Customs for a better explanation of why the disparate treatment is reasonable. Now, the issue is back at the Federal Circuit with a shiny new explanation.

First, the Court notes that § 1520(d) is not the sole authority on which a post-entry NAFTA claim may be based. To start, that section requires Customs and Border Protection to promulgate regulations to implement the statute. The regulations, therefore, are relevant. In addition, 19 USC § 1484 governs entry and Reconciliation. That means that a single law is not being given two different interpretations.

Next, the Court agreed with Customs that Reconciliation includes additional safeguards that warrant waiving the CO as part of the claim. In particular, the Court points to the continuous bond required for Reconciliation.

Thus, with an apparently reasonable explanation in hand, the Federal Circuit accepted the remand explanation for the different filing requirements. That means Ford will not be getting its refunds. It also means we can't as easily argue that Reconciliation is a blanket waiver of the requirement for a NAFTA CO in the post-entry claim context.

But, there is a vigorous dissent. I love a good dissent. This one, by Circuit Judge Reyna, starts:

I find no principled explanation for Customs’ decision in this case to treat duty refund claims under NAFTA differently depending on whether those claims were filed traditionally or through an electronic process known as “reconciliation.”  I dissent. 

Judge Reyna sees several issue. The first is very administrative law-wonky. It has to do with whether Customs' explanation that the authority for the waiver does not come exclusively from § 1520 is entitle to deference from the Court. The majority of the panel found deference appropriate because Congress had not addressed the issue, leaving it to the judgment of Customs. But, Judge Reyna sees the explanation as having been "crafted for the purpose of this litigation." That would make it a post-hoc rationalization that is not entitled to deference.

Looking at the original source material, Judge Reyna finds that the authority to waive a NAFTA CO stems from Article 503(c) of the Agreement itself. That provision apparently covers waivers for purposes of claims made at the time of entry and post-entry claims. When NAFTA was negotiated, Reconciliation was not a thing. Consequently, there is no reason to assume or conclude that the waiver requirement would be any different for a post-entry claim implemented under Reconciliation. Further, the law authorizing Reconciliation did not directly address NAFTA claims. Thus, it seems there is only one source for the waiver authority and one law should be interpreted in a consistent manner.

Regarding procedural protections inherent to Reconciliation, Judge Reyna finds the differences less than compelling. To the extent Reconciliation claims are subject to record keeping requirements and to audit, traditional post-entry claims have similar requirements. With respect to the bond required for Reconciliation, the dissent notes that in a traditional post-entry claim the importer has already paid the duties, making Customs pretty secure that it will not lose any money. If it does improperly pay a post-entry claim, it can seek to recover the duties and potentially penalties through other enforcement options.

Despite the interesting dissent, the majority carried the day (as it should). The upshot being that Customs' refusal to grant Ford a waiver of the requirement to present a NAFTA CO with its post-entry claims is not arbitrary and capricious and is, therefore, affirmed.

The truly sad part of this is that I only recently added the prior Ford case to my textbook. Now, I need to make a quick update before the second edition comes out.

Ruling of the Week 30: Tapenade and the Chutney Problem

It is apparent that I did not succeed in my goal of getting 52 Rulings of the Week into the Blog. Despite, that, I think this has been a pretty productive blog year. This will be my 71st post of the year, with one to follow. That will probably cap 2015. Next year, I hope to pick up the pace somewhat. I'll continue trying to post the Ruling of the Week and court cases. I'll also make an effort at other administrative news.

You know what I miss? Posts about animal smuggling. Keep an eye on my Twitter feed for news, mostly in the form or retweets from other bloggers.

For now, consider the chutney problem.

Headquarters Ruling H259324 (Sep. 3, 2015) involved the tariff classification and NAFTA status of green olive tapenade from Canada. This ruling is from a protest with an application for further review. That means that Customs and Border Protection denied the NAFTA claim made on this merchandise and the importer protested. In what appears to have been an effort to make the product satisfy the applicable NAFTA rule of origin, the importer suggested that its original classification as prepared or preserved vegetables of Heading 2005 was incorrect and the tapenade was classifiable as a sauce or a preparation for a sauce in Heading 2103.

Tapenade via Wiki Media

If you have been to a snooty restaurant serving Mediterranean-inspired New American California farm to table cuisine (and who hasn't?), you have had tapenade. It is, in my experience, a spread of mashed olives (usually black ones) with other flavorings. In this case, it was made form non-NAFTA olives, diced tomatoes, red peppers, carrots, onions, vegetable oil, garlic, and lemon juice. Not all of those ingredients originated in the territory of a NAFTA country. As a result, to qualify for the NAFTA preference, the production of the product must produce a qualifying change in tariff classification for all of the non-originating materials. The qualifying change depends on the classification of the finished product.

The importer asserted that the tapenade was properly classified as a sauce or sauce preparation. But, CBP and the Court of International Trade have been down that road before. A sauce is defined as a homogenous preparation that it is not intended to be eaten on its own. Rather, a sauce is to be added to food as a condiment, usually in liquid form, to make the food more palatable. And, dipping a piece of bread still counts as eating it alone.

Here, the tapenade appears to have been chunks of vegetables mixed with oil. It also appeared based on marketing information that it was both intended and actually eaten alone.

The importer did a fantastic piece of lawyering by introducing into the record recipes by which the tapenade could be added to broth and other ingredients to make a sauce. I hope Customs has a test kitchen and tried out the preparations. [GaK, please let me know if you did!] The importer argued this showed that the tapenade is a sauce preparation. Customs did not buy that argument. If it did, I suspect every tomato would also be a sauce preparation.

As I read this, it appeared to me that Customs was doing a fine analysis. But, then we hit the chutney wall. Chutney is a delicious combination of sliced fruit sweetened with sugar and flavored with lemon and mustard. It is a thick, globulous  preparation that does not readily pour over food. It is, however, used as a condiment for meat and other dishes. Personally, I like mango chutney on a turkey sandwich, but that's just me.

Muffuletta from Wiki Media

In HQ 962419, Customs held that chutney is a sauce of 2103 rather than a preparation of fruit. To distinguish the tapenade from chutney, Customs pointed out that the solid portion of the tapenade is suspended is a semi-transparent red liquid. Customs noted that unlike chutney, this tapenade is not gelatinous, not creamy, and not a spreadable paste. It sounds to me that this was a runny form of tapenade, possibly more like an olive giardiniera or even a muffuletta, either of which is delicious but not a tapenade.

You know what a runny liquid with suspended vegetables is? A sauce. If this stuff was runny enough to be poured over meat and if there was evidence of that use, it seems to me that it might be properly classified as a sauce. If, on the other hand, it looks like the muffuletta in the picture above, it is really not much more than chopped olives and other vegetables in oil, which seem not very homogenous and sauce-like to me.

Customs classified the tapenade in Heading 2005.

On the NAFTA front, once CBP determined the correct classification to be in Heading 2005, the applicable rule of origin requires that the non-originating green olives make a change from another tariff heading. Unfortunately, the olives are also classifiable in Heading 2005. That is not a qualifying shift and the goods are non-NAFTA originating. Tasty, but non-originating.

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.