CLA-02 RR:CR:SM 561245 MFC
Elizabeth J. Vann, Esq.
Law Offices of Elizabeth Janie Vann, P.C.
600 Sunland Park Drive, Suite 2-100
El Paso, Texas 79912
RE: Generalized System of Preferences; double substantial transformation; copper wire; wire harnesses
Dear Ms. Vann:
This is in response to your letter dated December 17, 1998, and subsequent telephone conversations with Marjorie Cole, on behalf of United Technologies Automotive, Inc. (“UTA”), which requests a binding ruling regarding the eligibility of certain wire harnesses manufactured in the Philippines for duty-free entry into the United States under the Generalized System of Preferences (“GSP”). You have submitted samples of the 8 mm. copper rod, the PVC and XLPE pellets, and the finished, multi-stranded insulated wire used in manufacturing the wire harnesses.
FACTS:
Copper rod with an 8 mm. diameter and either Polyvinyl Chloride (“PVC”) or Cross-Link Polyethylene (“XLPE”) compounds in pellet form are purchased by IWG-Philippines, Inc. The copper rod is of Japanese origin while the PVC/XLPE pellets are of U.S. origin. In the Philippines, the copper rod and the PVC/XLPE pellets undergo the following processing:
1) Drawing of Rod through Rod Mill Drawing Machine. The copper rod is welded together to provide one continuous copper rod. The first drawing is through the Rod Mill Machine which compresses and elongates the copper while pulling it through the machine. After completion of the first drawing, a 6,500 pound coil of 8 mm. diameter copper rod is drawn down to a 2.05 mm. diameter (12 AWG) copper strand. The 2.05 mm. diameter copper strand is then packaged into 3,000 pound stem packs that become the feed stock for the multi-wire drawing process.
2) Drawing through the Multi-Draw Machine. Fourteen baskets of the 2.05 mm. diameter copper strand are fed into the multi-draw machine. The strands are fed through a series of dies which draw the strands down to the final size (23 AWG - 31 AWG, .18 mm.- .58 .mm, depending on specifications) in incremental steps.
3) Annealing of Stranded Wire. In the final phase of the multi-draw machine, the strands are passed through an oxygen-free zone. While passing through the zone, the strands are electronically heated. This process, called annealing, relieves the stresses caused by the drawing process, and restores the copper’s flexibility and “memory.”
4) Bunching of Stranded Wire to Form Multi-Stranded Wire. As the strands exit the multi-draw machine, they are spooled onto 2,000 pound reels that become feed stock for the bunching process. The strands which are drawn simultaneously, are spooled onto the same reel. In the bunching process, individual wires ranging in size from .18 mm to .58 mm. in diameter are twisted together in specific geometric patterns of 7, 19, and 37 wires to form multi-stranded copper wire.
5) Insulation. The multi-stranded copper wire is coated with a plastic insulating material of either PVC or XLPE compounds by means of an extrusion process. Two different extrusion processes will be used, depending on which compound type is needed in the finished product.
In the first step of the extrusion process, the PVC or XLPE pellets are melted and pumped through a tip and die combination that forms the melted compound around the moving multi-stranded copper wire. The XLPE compound is a thermoset product and must be cured in a high pressure steam environment. The wire is cooled by use of a closed loop system of chilled water that is sprayed on the wire in the cooling trough. The PVC insulated wire is used in applications where the temperature range required is up to 105 degrees Celsius while the XLPE insulated wire is used in applications where the temperature range required is up to 125 degrees Celsius. The finished wire is then wound onto coils.
The coils are stored in a warehouse until shipped to its customers, which include United Technologies Automotive-Philippines, Inc. UTA-Philippines purchases the insulated multi-stranded copper wire from IWG-Philippines for use in the manufacture of automotive wire harnesses at UTA-Philippines’ facility.
Assembly of Wire Harness
The wire harnesses are composed primarily of wire in a variety of sizes, colors, lengths and current-carrying capacities. They may also contain grommets, clips, terminals, covers, rubber seals, connectors, relay boxes, PVC-tube, convoluted tube and lamp sockets. Depending on the particular model of wire harness, the number of components can vary widely, as well as the number of electrical circuits, which may range from a few circuits to several hundred circuits. During telephone conversations with Marjorie Cole, you stated by way of example that the simplest wire harness would consist of two circuits, four terminals, three connectors, two plastic retainers, and one spacer. You stated that the average-sized wire harness produced would consist of 53 circuits, two tubes, 11 connectors, 13 types of terminals, five retainers, three shields, six spacers and tape.
The assembly of the harnesses involves two stages: pre-assembly and assembly. In the pre-assembly stage, after the wire is inspected for defects, an automatic cutting machine cuts it to a specified length and strips the insulating vinyl. The machine then crimps the terminal onto the end of the bare copper for conduction, forming a circuit. Depending on the particular model of wire harness, one or more additional steps may be completed. These steps may include: manual termination; soldering; molding; or splicing and covering.
The assembly process is done manually, using a rotating jig. As the parts or materials are introduced to the assembly and pass each workstation, the jig attaches various wires, protectors, grounders, corrugated tubes, rubber tubes, stoppers or other components as required by the specifications.
The harnesses are subjected to electrical testing and then are packed and shipped to the U.S.
ISSUES:
1) Do the materials imported into the Philippines to produce wire harnesses undergo a substantial transformation as a result of processing in the Philippines and therefore become a product of the Philippines?
2) Do the Japanese-origin copper rod and U.S.-origin PVC/XLPE undergo a double substantial transformation in the Philippines during the production of the wire harnesses, thereby permitting the cost of these materials to be counted towards the 35% beneficiary developing country (“BDC”) value requirement for purposes of the GSP?
LAW AND ANALYSIS:
Under the GSP, eligible articles the growth, product or manufacture of a BDC which are imported directly into the customs territory of the U.S. from a BDC may receive duty free treatment if the sum of (1) the cost or value of materials produced in the BDC, plus (2) the direct costs of the processing operations performed in the BDC, is equivalent to at least 35% of the appraised value of the article at the time of entry into the U.S. See 19 U.S.C. §2463(a)(2)(A); Section 10.176(a), Customs Regulations (19 CFR §10.176(a)).
Philippines is a designated BDC for purposes of the GSP. See General Note 4(a), HTSUS. You assert that the wire harnesses at issue are classified in subheading 8544.30, Harmonized Tariff Schedule of the United States (“HTSUS”), which provides for ignition wiring sets and other wiring sets of a kind used in vehicles, aircraft or ships, which are eligible for GSP treatment. For purposes of this ruling, we assume that your classification is correct. Therefore, the wire harnesses will receive duty-free treatment if they are considered to be a “product of” the Philippines, are “imported directly” into the U.S., and the 35% value-content requirement is satisfied. Merchandise is considered the “product of” a BDC if it is wholly the growth, product or manufacture of a BDC or has been substantially transformed there into a new or different article of commerce. 19 U.S.C. §2463(a)(3); 19 CFR §10.177(a).
A substantial transformation occurs when an article emerges from a manufacturing process with a name, character, or use which differs from those of the original material subjected to the process. See Texas Instruments v. United States, 681 F.2d 778, 782 (CCPA 1982).
With respect to the circumstances under which non-BDC materials may be counted towards satisfying the 35% value content requirement, it is not enough to substantially transform the non-BDC constituent materials into the final article, as the material utilized to produce the final article would remain non-BDC material. There must first be a substantial transformation of the non-BDC material into a new and different article of commerce which must then be substantially transformed into a new and different article of commerce. Materials which do not originate in the BDC must undergo a double substantial transformation in the BDC in order for the cost or value of those materials to be counted toward the 35% value content minimum. See 19 CFR §10.177; see also Azteca Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988), aff'd, 890 F.2d 1150 (Fed. Cir. 1989). That is, the cost or value of the imported materials used to produce the automotive wiring harness assembly may be included in the GSP 35% value content computation only if they are first substantially transformed into a new and different article of commerce, which is itself substantially transformed into the final article the automotive wiring harness set.
Pre-Assembly Processes
In Superior Wire v. United States, 867 F.2d 1409 (Fed. Cir. 1989), the Court of Appeals for the Federal Circuit affirmed the finding of the Court of International Trade that wire rod which was drawn into wire was not substantially transformed as there was no significant change in use or character. The change in name was found to be the “least persuasive factor and is insufficient by itself to support a holding that there is a substantial transformation.” Id. at 1414. Customs followed this line of reasoning in Headquarters Ruling Letter (“HRL”) 555705 (August 26, 1991), where the process of drawing 14 AWG copper wire into 36 AWG wire did not constitute a substantial transformation of the copper wire.
In general, Customs has determined that laminating, coating, and encapsulating operations do not result in a substantial transformation of wire. In HRL 557201 (November 17, 1993), Customs held that, while the encapsulation process added certain qualities to the wire which did not exist prior to such operation, the essential character of the bunched wire, as a conductor of electricity, was not changed because of the enhancements attributable to the insulating material.
In HRL 556301 (May 4, 1992), Customs reconsidered its decision in HRL 555705 (August 26, 1991) based on additional facts provided about the processing of insulated copper wire. Customs confirmed its finding in HRL 555705, that drawing wire does not cause a substantial transformation, but found that the combination of drawing, bunching and twisting, and the subsequent steps of annealing and encapsulating to insulate the wire strand does constitute a substantial transformation of the wire. However, the ruling held that the cost of the wire may not be counted towards the GSP 35% value-content requirement since the subsequent operations of bundling and further encapsulation did not result in a second substantial transformation.
You assert that HRL 555705 applies to the processing in this case, which involves the drawing, annealing and bunching of the copper rod to form multi-stranded copper wire, followed by a process of extruding PVC or XLPE around the wire. We agree and find that the copper wire rods are substantially transformed into products of the Philippines.
Customs has held that the process of PVC insulation substantially transforms the PVC compound. In HRL 557201, supra, Customs found that the heating and extruding of PVC compounds onto bunched wire resulted in a substantial transformation of the PVC compounds, as its essential character has been changed by this process. See also HRL 557403 (November 22, 1993) (Customs has consistently held that molding of plastic into a specific shape for use in the production of an eligible article is considered a substantial transformation). Therefore, we agree that the extruded PVC/XLPE pellets are substantially transformed into products of the Philippines.
Assembly of Wire Harnesses
The insulated multi-stranded copper wire is sold by IWG-Philippines to UTA-Philippines for use in the manufacture of automotive wire harnesses. As noted above, the number of circuits and additional components will vary.
Customs has found a substantial transformation in the assembly of wire harnesses in several cases. In HRL 557087 (July 22, 1993), the preassembly stage involved measuring, cutting and stripping the insulating wires. The terminals were then crimped manually. The assembly involved placing the wires on automated jig tables that pass through several work stations where various components were attached. A typical wire harness involved approximately 300 circuits, 300 types of insulated wires and 850 connectors, terminals, and other parts. In HRL 557201, supra, Customs found that the assembly of a wire harness was a substantial transformation. In that case, the insulated wires were cut to length followed by a “precision application of electrical terminals.” The harness assembly involved the complex merger of 500-1500 wires which was accomplished at workstations using a rotary.
In this case, although the assembly of the simplest wire harnesses, involving the joinder of two circuits, four terminals, three connectors, two plastic retainers and one spacer, does not appear to be exceedingly complex, we find that a second substantial transformation results from the assembly of the wire harnesses. In previous GSP cases, we have stated that in situations where all of the processing is accomplished in one GSP country, the likelihood that the processing
constitutes little more than a “pass-through” operation is greatly diminished. Consequently, if the entire processing operation performed in the single BDC is significant, and the intermediate and final articles are distinct articles of commerce, then the double substantial transformation requirement will be satisfied. Such is the case even though the processing required to convert the intermediate article into the final article is relatively simple and, standing alone, probably would not be considered a substantial transformation. See, for example, HRL 557465 (December 10, 1993) and HRL 555532 (September 18, 1990).
In view of the overall processing operations performed in this case in the Philippines to create the wire harnesses, we do not believe that these constitute the minimal, “pass-through” operations that should be disqualified from receiving the benefits of the GSP. Accordingly, the cost or value of the copper rod and the PVC/XLPE pellets may be included as “materials” produced” in the BDC for purposes of satisfying the 35% value-content requirement of the GSP.
HOLDING:
Based on the information and samples provided, we are of the opinion that the copper rod and PVC/XLPE undergo a double substantial transformation in the Philippines and, therefore, their cost or value may be counted in satisfying the 35% value-content requirement of the GSP. Accordingly, the wire harnesses, which are “products of” the Philippines, will be entitled to duty-free treatment under the GSP, assuming the 35% value-content and “imported directly” requirements are satisfied.
A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the Customs officer handling the transaction.
Sincerely,
John Durant
Director
Commercial Rulings Division