Draft Comment on Proposed Uniform Rules of Origin for Imported Merchandise

Draft Comment on Proposed Uniform Rules of Origin for Imported Merchandise

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Peter M. Robinson President & CEO October 22, 2008 Via eRulemaking Portal: http://www. regulations.gov Trade and Commercial Regulations Branch Customs and Border Protection 1300 Pennsylvania Avenue, NW (Mint Annex) Washington, D.C. 20229 Comment on Proposed Uniform Rules of Origin for Imported Merchandise Docket No. USCBP-2007-0100 Federal Register Vol. 73, No. 144, page 43385 et. seq. (July 25, 2008) Gentlemen: This comment is filed on behalf of the Customs Committee of the United States Council for International Business (“USCIB”) in response to the above-referenced Proposed Rule (“The Notice”). USCIB was established in 1945 to promote an open world trading system and is now among the premier pro-trade, pro-market liberalization organizations in the United States. It has an active membership base of over 300 multinational corporations, law firms and business associations that address issues through over 50 specialized policy committees and working groups, including a Customs and Trade Facilitation Committee. USCIB is the U.S. affiliate of the International Chamber of Commerce (ICC), which has a consultative relationship with the World Customs Organization (WCO), and of the Business and Industry Advisory Committee (BIAC) to the OECD. Both ICC and BIAC have active Trade Policy Committees that deal with World Trade Organization (WTO) issues. In short, USCIB and its members have depth of experience with and vital ...

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Peter M. Robinson
President & CEO
October 22, 2008
Via eRulemaking Portal:
http://www
. regulations.gov
Trade and Commercial Regulations Branch
Customs and Border Protection
1300 Pennsylvania Avenue, NW (Mint Annex)
Washington, D.C. 20229
Comment on Proposed Uniform Rules of Origin for Imported Merchandise
Docket No. USCBP-2007-0100
Federal Register Vol. 73, No. 144, page 43385 et. seq. (July 25, 2008)
Gentlemen:
This comment is filed on behalf of the Customs Committee of the United States
Council for International Business (“USCIB”) in response to the above-referenced
Proposed Rule (“The Notice”).
USCIB was established in 1945 to promote an open world trading system and is now
among the premier pro-trade, pro-market liberalization organizations in the United States.
It has an active membership base of over 300 multinational corporations, law firms and
business associations that address issues through over 50 specialized policy committees
and working groups, including a Customs and Trade Facilitation Committee.
USCIB is the U.S. affiliate of the International Chamber of Commerce (ICC), which has
a consultative relationship with the World Customs Organization (WCO), and of the
Business and Industry Advisory Committee (BIAC) to the OECD. Both ICC and BIAC
have active Trade Policy Committees that deal with World Trade Organization (WTO)
issues. In short, USCIB and its members have depth of experience with and vital interest
in uniform rules of origin.
A Proposal with Unintended Consequences
Harming Efforts toward Global Harmonization
The World Trade Organization (WTO) has engaged in efforts to harmonize non-
preferential rules of origin since 1994. Although CBP initially proposed applying the
NAFTA marking rules to all non-preferential trade in the mid-1990’s, it suspended this
proposal after seeking public comment. The timeline suggests that CBP withdrew its
proposal to unilaterally implement non-preferential rules of origin so as not to undermine
the WTO negotiations. Implementation of conflicting non-preferential rules by major
economies such as the US would have imposed a heavy burden on industry. The WTO
negotiations are intended to resolve these difficulties.
Regrettably, the WTO process has not yet yielded an agreement on non-preferential rules
of origin. In its notice of proposed rulemaking, CBP acknowledges that it is proposing to
implement the NAFTA marking rules even though negotiations at the WTO continue.
Industry is concerned that countries will abandon the WTO process if the United States
implements its own rules of origin. In that event, it seems likely that other countries will
respond by moving forward with their own rules. A complex web of non-preferential
rules of origin, layered over similarly inconsistent preferential rules of origin, presents
overwhelming administrative difficulties for industry. Rather than forcing the issue, we
urge the US to re-focus on harmonization of the rules through the WTO.
Overlooking Longstanding Substantial Transformation Precedents
In issuing this proposal CBP seeks to create a codified method that results in more
predictable, objective origin determinations while staying true to the concept of
substantial transformation. While CBP has worked hard to develop tariff shift rules that
are consistent with the substantial transformation concept, it is evident that the rules
under Part 102 fail to achieve this stated objective. Origin determinations based on
longstanding administrative and legal precedent will be changed as a result of these rules.
For example, CBP has issued several rulings that note the importance of software
programming in assessing substantial transformation. These rulings are based in part on
Data General Corp v. United States, 4 C.I.T. 182 (1982). While the tariff shift rule under
HTS 8541-42 accommodates the outcome of Data General for some products, it appears
this rule was drafted specifically to accommodate the Data General decision. The rules
under Part 102 fail to accommodate other products in Chapters 84 and 85 to which CBP
has extended the Data General rationale subsequent to drafting of the NAFTA marking
rules. CBP should not implement these rules unless they are updated to reflect origin
determinations made under longstanding judicial and administrative precedent.
In many cases the essential character item identified through application of the 102 rules
does not comport with country of origin determinations made under the current rules. A
concrete example can be found in Headquarters Ruling Letter 563013 where Customs
addressed the country of origin of a telecommunications switch. The imported chassis
containing the PCA of Chinese origin (typically classified under 8517.50.9000) was
considered substantially transformed as a result of further manufacture including the
assembly of several components. As a result the finished switch was a product of Hong
Kong or the United States. Under the NAFTA marking rules, the imported chassis
containing the PCA would be identified as the essential character item by virtue of the
fact it is classified in the same provision as the finished good. Under these rules the origin
of the switch would be China.
Also, companies would have to classify many more articles to apply the proposed tariff
shift rules. In many cases they would have to rely on suppliers of finished goods and
components to apply the US HTS classifications and the 102 tariff shift rules to
determine the origin of the product so that the U.S. importer could make an accurate
declaration.
Impacting Government Procurement
Many companies that participate in government procurement will be negatively impacted
by this proposal. Currently, products substantially transformed in designated end-
countries are eligible for sale to the US government. If the NAFTA marking rules are
adopted, the country of origin of many products currently considered qualifying would be
altered. Many US companies with global supply chains will be unable to compete in
government contracts without incurring significant costs to restructure supply chains.
Impacting Trade Neutrality
The proposal to extend the application of Part 102 rules is intended to be a trade-neutral
change that would not increase the imported tariffs on products or components for U.S.
importers and companies, or increase costs to consumers.
In fact, for products that incorporate inputs from multiple countries, a switch from ad hoc
rulings on substantial transformation to tariff shift criteria can result in a classification
subject to higher duties. The frequency of this problem varies by sector but even occurs
in the textiles and apparel sectors, which have already been subject to Part 102 rules.
The Part 102 rules can also result in less favorable treatment for new, high tech products.
Because of the delay in getting new products classified in the WCO HS, they tend to be
classified with items they are “most like” or by the materials they are made of. When a
Part 102 rule of origin is applied to that classification it often does not fit well and favors
the country in which the raw materials or semifinished goods are made. The end result is
a less favorable origin rule for the country that is performing the high tech
manufacturing.
Regardless of sector, companies are forced to invest resources and time to determine the
tariff impact of this proposed change on a product-by-product basis. This is a particularly
demanding activity for sectors that have complicated global supply chains and many
components in products imported to the U.S., for example, the high tech sector.
Therefore companies need adequate time to assess the proposed change on all their
products, and they need reasonable and timely procedures to address instances in which
products are exposed to higher tariff duties.
Need to Incorporate HS-2007
Another consideration is that the Part 102 rules do not incorporate the HS-2007. If
companies are asked to apply Part 102 rules before this incorporation they will have to
maintain two databases, with significant costs that could be avoided if application is
postponed until that integration is completed. Many importers would require time to
review and assess impacts if updates to Part 102 rules are issued. For this reason, if CBP
chooses to push forward with these rules despite broad opposition, we strongly suggest
that CBP consider creating a working group to develop updated rules. This would allow
for development of rules consistent with existing substantial transformation precedent
and would provide the trade community the opportunity to comment on the updated Part
102 rules before application.
Overall Costs and Priorities of Implementation
In addition to the costs of product- by- product assessments mentioned above, and the
potential cost of running two different HS data bases, companies are committing
considerable resources at this time to the implementation of high priority security
requirements. Companies are already anticipating another layer of requirements with the
prospective implementation of the Importer Security Filing (“10 plus 2 data”) initiative,
and the costs of this adjustment are unknown, in part, because business has not seen the
final rule. During this global economic crisis US companies are struggling to remain
competitive. It is not the time to implement high cost compliance programs that do little
or nothing to facilitate trade or ease administrative burdens.
Conclusion
CBP’s proposal to unilaterally implement the NAFTA marking rules will undermine
efforts to achieve consensus at the WTO on non-preferential rules of origin and may
subject industry to conflicting rules. The proposed rules do not adequately reflect
outcomes under the traditional substantial transformation analysis and will have the
unintended consequence of changing the country of origin for many products. These
changes will seriously impact the ability of companies to qualify for government
procurement contracts and will result in the application of higher duties on certain
products. The costs of implementing the Part 102 rules at this time outweigh the benefits
since, for many companies, the whole process will have to be repeated once the rules are
expressed in terms of the 2007 version of the HS. For these reasons, we respectfully
request that the proposal to implement the NAFTA marking rules be withdrawn.
Respectfully submitted,
Peter M. Robinson