[Federal Register: March 13, 2003 (Volume 68, Number 49)]
[Proposed Rules]
[Page 12011-12013]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13mr03-21]
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DEPARTMENT OF THE TREASURY
Customs Service
19 CFR PART 181
RIN 1515-AD23
Tariff Treatment Related to Disassembly Operations Under the
North American Free Trade Agreement
AGENCY: Customs Service, Department of the Treasury.
ACTION: Proposed rule.
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SUMMARY: This document proposes to amend the Customs Regulations
concerning the North American Free Trade Agreement (the NAFTA).
Specifically, the proposed rule would allow components which are
recovered from the disassembly of used goods in a NAFTA country to be
entitled to NAFTA originating status when imported into the United
States, provided that: The recovered components satisfy the applicable
NAFTA rule of origin requirements; and if the applicable rule of origin
does not include a regional value content requirement, the components
are subject to further processing in the NAFTA country beyond certain
minor operations.
The proposed rule is intended to promote economic activity and the
protection of the environment in North America, both of which are goals
of the NAFTA. To this end, the recovery and recycling of used goods is
a critical element in both the economic activity and the environmental
goals of the nation, and disassembly for the recovery of used goods is
a key process in many such recycling operations.
DATES: Comments must be received on or before May 12, 2003.
ADDRESSES: Written comments are to be addressed to the U.S. Customs
Service, Office of Regulations and Rulings, Attention: Regulations
Branch, 1300 Pennsylvania Avenue, NW., Washington, DC 20229. Submitted
comments may be inspected at U.S. Customs Service, 799 9th Street, NW.,
Washington, DC during regular business hours. Arrangements to inspect
submitted comments should be made in advance by calling Mr. Joseph
Clark at (202) 572-8768.
FOR FURTHER INFORMATION CONTACT: Edward M. Leigh, Office of Regulations
and Rulings, (202) 572-8827.
SUPPLEMENTARY INFORMATION:
Background
On December 17, 1992, the United States, Canada and Mexico (the
parties) entered into an agreement, the North American Free Trade
Agreement (the NAFTA). The provisions of the NAFTA were adopted by the
United States with the enactment of the North American Free Trade
Agreement Implementation Act, Public Law 103-182, 107 Stat. 2057
(December 8, 1993).
The question has arisen, in the context of recycling or re-
manufacturing operations, whether disassembly occurring in a NAFTA
country may be considered NAFTA origin conferring ``production'' where
the components recovered by disassembly satisfy the Annex 401 rules of
origin for the NAFTA and there is some form of substantial processing
performed on the recovered components.
The NAFTA does not explicitly address whether parts or components,
whose origin is non-NAFTA or unknown, that are recovered by disassembly
in a NAFTA country from a non-originating good, may qualify as NAFTA
originating goods if, as a result of the disassembly, they satisfy the
rules of origin set out in Article 401 and Annex 401 of the NAFTA and
are themselves subjected to some form of substantial further
processing.
The recovery and recycling of used goods is an increasingly
important element in the economic activity as well as the environmental
goals of the nation, and disassembly, for the recovery of parts or for
the re-manufacturing of a good, is a key process in many recycling
operations.
The goals of the North American Free Trade Agreement (NAFTA)
include elimination of barriers to trade, facilitation of cross-border
movement of goods, promotion of economic activity in North America, and
protection of the environment. The Department of the Treasury and
Customs Service have examined NAFTA's rules of origin as applied to
both recovered and recycled goods. Allowing disassembly to confer
origin under certain circumstances promotes recycling and re-
manufacturing in North America and would advance these economic and
environmental objectives.
Proposed Rule
To this end, accordingly, this document proposes to amend the
Customs Regulations to allow components which are recovered from the
disassembly of used goods in a NAFTA country to be entitled to NAFTA
originating status upon importation to the United States, provided
that: (1) The recovered components satisfy the applicable NAFTA rule of
origin requirements in Annex 401; and (2) if the rule of origin in
Annex 401 applicable to the components does not include a regional
value content requirement, the components are subject to further
processing in the NAFTA country beyond certain specified minor
operations.
Treatment of Disassembly as a Production Consistent with the Intent of
NAFTA
Under the proposal, treatment of disassembly as potentially
conferring NAFTA originating status must, of course, be consistent with
the terms and objectives of the NAFTA Implementation Act of 1993.
Within that framework, the most important question which must be
answered is does ``disassembly'' constitute origin conferring
``production'' within the meaning of that term as defined in Article
415 of the NAFTA, as implemented in 19 U.S.C. 3332(a)(1)(B)(i) and
3332(p)(22) and in section 2(1) of the NAFTA Rules of Origin
Regulations (Uniform Regulations) (19 CFR part 181, Appendix, section
2(1))?
A Change in Tariff Classification Resulting from a Production
Under NAFTA Article 401(b) and 19 U.S.C. 3332(a)(1)(B)(i), a good
shall originate in the territory of a party where each of the non-
originating materials used in the production of the good undergoes an
applicable change in tariff classification set out in Annex 401 as a
result of production occurring entirely in the territory of one or more
of the parties. It is therefore understood that unless it results from
an activity
[[Page 12012]]
that qualifies as ``production'', the mere fact that there is a
prescribed change in tariff classification will not be considered as
meeting a rule of origin.
The term ``production'' is defined in Article 415 of the NAFTA and
in 19 U.S.C. 3332(p)(22) and is implemented in section 2(1) of the
Uniform Regulations (19 CFR part 181, Appendix, section 2(1)). As
noted, the term, in relevant part, requires a manufacturing, processing
or assembling of a good. Of course, the processes listed here are
illustrative, not exhaustive, and the absence of the term
``disassembly'' is not dispositive of whether or not a disassembly
operation is a production process for NAFTA purposes.
A disassembly operation will result in one or more articles being
taken or separated from a manufactured good. Assuming no further
production, these various articles are typically classifiable under
tariff provisions (often those for ``parts'' of goods) other than the
classification of the original good from which the articles were
disassembled. Consequently, if disassembly is treated as production and
any other requirements are satisfied, the recovered component may
satisfy the NAFTA rules of origin.
Disassembly as a Production Process
Upon review, we find no evidence (beyond the failure to explicitly
include disassembly in the illustrative list of ``production''
activities in NAFTA Article 415) showing that the NAFTA intended not to
treat ``disassembly'' as a production process. Use of the term
``processing'' includes a broad range of economic activity within
production. Recycling operations for the recovery by disassembly of
reusable components such as automotive parts and photocopier or
computer parts constitute identifiable business operations within the
NAFTA territories and the free trade purposes of NAFTA (discussed
above) would be satisfied by establishing rules under which substantial
``production'' consistent with those purposes will be deemed to occur.
Recycling operations based on certain repair or alteration operations
already have been given appropriate recognition under NAFTA Article
307. Equally, operations based on the recovery of certain waste or
scrap materials have been designated in the NAFTA rules of origin as
conferring origin where such operations take place (NAFTA Article 415).
It is thus consistent with the NAFTA to treat the recovery of useable
goods by disassembly as ``production'' under the NAFTA rules of origin.
Circumvention of NAFTA's Rules of Origin; Disassembly of New Products
Moreover, to ensure that disassembly is not used to circumvent the
intent of NAFTA, the proposed rule provides that, under certain
circumstances, additional operations beyond disassembly are required
for the recovered component to acquire NAFTA originating status.
Specifically, as previously outlined, the recovered component must meet
the requirement of the applicable rule of origin in Annex 401,
including any pertinent regional value content requirement; and, if the
applicable rule of origin in Annex 401 does not include a regional
value content requirement, the recovered component must be subject to
additional processing beyond certain minor operations.
Where there is no regional value content requirement applicable to
the recovered components, the additional processing operations
necessary to confer NAFTA originating status must involve more than
certain minor operations which are enumerated as follows: (1) Cleaning
or sterilizing, including removal of rust, grease, paint, or other
coatings; (2) Application of preservative or decorative coatings,
including lubricants, protective encapsulation, preservative or
decorative paint, or metallic coatings; (3) Trimming, filing or cutting
off small amounts of excess materials (precision machining, however, is
not to be considered a minor operation); (4) Unloading, reloading or
any other operation necessary to maintain the good in good condition;
(5) Packing, re-packing, packaging or repackaging; or (6) Testing,
marking, sorting, or grading.
Customs has also examined whether a producer might use disassembly
of new goods to circumvent the intent of the NAFTA. A new non-NAFTA
product could be imported into Mexico or Canada, disassembled, and the
disassembled parts could then be imported into the United States and
either re-assembled or used as parts. Customs believes that a change in
tariff classification resulting from the disassembly of new, non-
originating goods should not make the resulting goods eligible for
originating status. Because the disassembly of new goods may
potentially be treated as a circumvention activity within the meaning
of section 17 of the Uniform Regulations (19 CFR part 181, Appendix,
section 17), the proposed rule provides that the disassembly of new
goods shall not be considered to be ``production'' for the purposes of
NAFTA Article 415 and the NAFTA rules of origin. Notwithstanding this
proposal, Customs is particularly interested in receiving comments on
the contrary view that an applicable value content rule or alternative
requirement for substantial processing suffice to permit ``production''
to be considered to have occurred in this case as well. After reviewing
the comments, Customs will issue a final rule that will resolve the
question definitively.
To reflect the above-described interpretations of law and
substantive considerations, this document proposes to add a new Sec.
181.132 to the Customs Regulations (19 CFR 181.132).
Comments
Before adopting the proposed regulation, consideration will be
given to any written comments that are timely submitted to Customs.
Customs specifically requests comments on the clarity of the proposed
rule and how it may be made easier to understand. Comments submitted
will be available for public inspection in accordance with the Freedom
of Information Act (5 U.S.C. 552), Sec. 1.5, Treasury Department
Regulations (31 CFR 1.5) and Sec. 103.11(b), Customs Regulations (19
CFR 103.11(b)), at the U.S. Customs Service, 799 9th Street, NW.,
Washington, DC during regular business hours. Arrangements to inspect
submitted comments should be made in advance by calling Mr. Joseph
Clark at (202) 572-8768.
Regulatory Flexibility Act and Executive Order 12866
The proposed rule is intended to promote economic activity as well
as the protection of the environment in North America, both of which
are goals of the NAFTA. Specifically, the recovery and recycling of
used goods is a critical element in both the economic activity and the
environmental goals of the nation, and disassembly, for the recovery or
re-manufacturing of used goods, is a key process in many such
operations. Hence, pursuant to the provisions of the Regulatory
Flexibility Act (5 U.S.C. 601 et seq.), it is certified that the
proposed rule, if adopted, will not have a significant economic impact
on a substantial number of small entities. Accordingly, it is not
subject to the regulatory analysis or other requirements of 5 U.S.C.
603 and 604. Nor does the proposed rule result in a ``significant
regulatory action'' under E.O. 12866.
List of Subjects in 19 CFR Part 181
Administrative practice and procedure, Canada, Customs duties and
inspection, Imports, Mexico, Trade
[[Page 12013]]
agreements (North American Free-Trade Agreement).
Proposed Amendments to the Regulations
It is proposed to amend part 181, Customs Regulations (19 CFR part
181), as set forth below.
PART 181--NORTH AMERICAN FREE TRADE AGREEMENT
1. The authority citation for part 181 would continue to read as
follows:
Authority: 19 U.S.C. 66, 1202 (General Note 23, Harmonized
Tariff Schedule of the United States), 1624, 3314.
2. Subpart L of part 181 is amended by adding a new Sec. 181.132
to read as follows:
Sec. 181.132 Disassembly.
(a) Treated as a production. For purposes of implementing the rules
of origin provisions of General Note 12, HTSUS, and Chapter Four of the
NAFTA, except as provided in paragraph (b) of this section, disassembly
is considered to be production, and a component recovered from a good
disassembled in the territory of a Party will be considered to be
originating as the result of such disassembly provided that:
(1) The recovered component satisfies all applicable requirements
of Annex 401 and this part; and
(2) Where the rule in Annex 401 applicable to the recovered
component does not include a regional value content requirement, the
recovered component is thereafter advanced in value or improved in
condition by means of additional processing operations other than those
listed below. Merely processing by performing any or all of the
following minor operations would not be sufficient to be considered
production:
(i) Cleaning or sterilizing, including removal of rust, grease,
paint, or other coatings;
(ii) Application of preservative or decorative coatings, including
lubricants, protective encapsulation, preservative or decorative paint,
or metallic coatings;
(iii) Trimming, filing or cutting off small amounts of excess
materials (precision machining, however, is not considered a minor
operation);
(iv) Unloading, reloading or any other operation necessary to
maintain the good in good condition;
(v) Packing, re-packing, packaging or repackaging; or
(vi) Testing, marking, sorting, or grading.
(b) Exception; new goods. Disassembly as provided in paragraph (a)
of this section will not be considered a production in the case of
components that are recovered from new goods.
(c) Automotive components/goods. Notwithstanding the provisions of
Schedule V (Automotive Goods) of the Appendix to this part, the rule
set forth in this section applies for purposes of determining whether
goods of that Schedule are originating.
Robert C. Bonner,
Commissioner of Customs.
Approved: February 18, 2003.
Timothy E. Skud,
Deputy Assistant Secretary of the Treasury.
[FR Doc. 03-6051 Filed 3-12-03; 8:45 am]
BILLING CODE 4820-02-P