CLA-2 CO:R:C:S 556564 RAH
Mr. John J. Scanlon, Jr.
Kemp, Smith, Duncan & Hammond, P.C.
2000 MBank Plaza
P.O. Drawer 2800
El Paso, Texas 79999-2800
RE: GSP; Substantial Transformation; Wire; Extrusion
Dear Mr. Scanlon:
This is in response to your letter of October 20, 1992,
which modified your letters of March 6, 1992, and July 15, 1992,
requesting a binding ruling on behalf of El Paso Wire, Inc.
("EPW"), regarding the eligibility of certain wire from Mexico
for duty-free treatment under the Generalized System of
Preferences (GSP). A meeting between you and members of my staff
was held on May 26, 1992.
FACTS:
Your client will export to Mexico reels of bare, stranded
wire varying in size from 10 to 22 American wire gauge ("AWG")
and from 5,000 to 75,000 feet in length. EPW will extrude both
general purpose thermoplastic thin wall wire and general purpose
thermoplastic regular wall wire. In Mexico, the reels of wire
will be subjected to a process of extrusion (a process which will
deposit a uniform thickness of plastic insulation upon the entire
length of the reels of bare, stranded wire). The extrusion
process provides corrosion protection and heat protection and the
wire is also color-coded and given an abrasion protection by
means of the extrusion process.
You state that by means of a vacuum device, PVC pellets will
be transferred to a pre-heated extruder. As a screw slowly moves
the PVC along, it is melted by means of heating, shearing, and
compressing. This process results in a homogenous and uniform
viscosity for the melted plastic. Thereafter, utilizing reel
lifters, payoffs and a tension stand, bare, stranded wire of a
selected gauge is fed into a cross head. The bare wire is run
through the centering tips of the cross head to ensure uniform
concentricity. Concurrent with the movement of the bare wire
through the centering tips, melted PVC is applied in a uniform
thickness, thereby placing a uniform coating of plastic
insulation around the wire. As the now insulated wire proceeds
through the centering tips, it is run through an outside diameter
die, in order to ensure the proper and uniform application of the
insulating material around the bare wire.
The die determines the thickness of the insulation and the
overall dimensions of the outside diameter of the cable after the
application of the insulation. The diameter guide used in the
process, and described more fully in the ruling request, is no
more than .002 inch wider than the wire being extruded. This
permits the wire to move through the diameter guide freely and
without wavering.
The PVC is extruded onto the wire by being forced through
the diameter guide. When the extrusion size is increased, the
revolutions per minute of the screw that forces the PVC out of
the extruder and through the diameter guide increases and forces
out more PVC. The extruder and the associated equipment are
complex and precise pieces of machinery.
When the extruded wire passes through the diameter guide, it
is examined by a laser micrometer. By inspecting the outside
diameter of the extruded wire with a laser beam, this device
ensures that the wire passing out of the diameter guide is within
plus or minus .002 inch of specification. The laser micrometer
controls the outside diameter of the wire being examined. If
that outside diameter becomes too thick or too thin, the laser
micrometer directs the capstan at the end of the cooling trough
to speed up or to slow down instantaneously. In the EPW
extrusion method used in Mexico, the capstan pulls the wire an
average of five passes through the water-cooling bath before
bringing the wire past the drying station, where water is removed
by means of high pressure wipes.
Following the air wiping, the insulated wire enters a sine
wave charges box that ensures that no part of the wire remains
uninsulated or underinsulated. If any part of a reel of wire did
remain uninsulated or underinsulated after the extrusion process,
the sine wave charged box would produce a spark, and an alarm
would sound to notify the operator of a process failure.
You contend that this is a very precise and technically
complex process to achieve the uniformity and concentricity of
outside diameters demanded by EPW's customers.
After the insulated wire has been examined to assure correct
and uniform insulation, the insulated wire is packed in
drumpacks, using a tension compensator. The drumpacks contain
from 5,000 to 75,000 feet of insulated wire, depending upon the
gauge size of the wire, and the requirement of the particular
customer.
Following the packing of the insulated wire into the
drumpacks, a bar code labeler is connected to the manufacturing
computers, and, as each size wire is run through the extrusion
process, a label reflecting the quantity of the wire, the country
of origin, the product number, the customer designation, and the
destination of the wire is printed and attached to the drumpack.
ISSUE:
Whether the bare stranded wire is substantially transformed
in Mexico into a "product of" Mexico for purposes of the GSP as a
result the extrusion process in that country.
LAW AND ANALYSIS:
Under the GSP, eligible products which are the growth,
product, or manufacture of a designated beneficiary developing
country (BDC), may enter the U.S. duty-free if such products are
imported directly into the U.S. and the sum of 1) the cost or
value of the materials produced in the BDC, plus 2) the direct
costs involved in processing the eligible article in the BDC, is
equivalent to at least 35 percent of the appraised value of the
article upon its entry into the United States. 19 U.S.C.
2463(b).
Mexico is a designated BDC. See, General Note 3(c)(ii)(A),
HTSUS. Therefore, the extruded wire will receive duty-free
treatment if it is classified under a tariff provision which
provides for a GSP free rate of duty, it is considered to be a
"products of" Mexico, the 35 percent GSP value-content minimum is
met, and it is "imported directly" into the United States.
If, as in this case, the article is not wholly the growth,
product or manufacture of the BDC, but is comprised of materials
that are imported into the BDC, it must be substantially
transformed into a new and different article of commerce in that
country to qualify as a "product of" the BDC for purposes of the
GSP. A substantial transformation occurs "when an article
emerges from a manufacturing process with a new name, character,
or use which differs from that of the original material subjected
to the process." The Torrington Company v. United States, 764
F.2d 1563, 1568 (Fed. Cir. 1985). An "article of commerce" is
one that is readily susceptible of trade, and is an item that
persons might well wish to acquire for their own purposes of
consumption or production. Id. at 1570.
In the instant case, you contend that the extrusion process
gives the wire a new name, new characteristics and many more
commercial uses (i.e., it is a new commercial product, insulated,
shock-proof, irreversibly corrosion protected, color coded, and
ready for its final use by the customer).
In Superior Wire v. United States, 669 F. Supp. 472 (CIT
1987), aff'd 867 F.2d 1409 (Fed. Cir. 1989), the court held that
the drawing of wire rod into wire through a multi-stage process
did not constitute a substantial transformation of the wire rod.
The court found that there was no significant change in the use
or character of the wire, and only a relatively insignificant
change in name. In examining whether there was a change in
character or use, and, therefore, a substantial transformation,
the court looked to whether the articles underwent a transition
from producer goods to consumer goods.
Applying the test in Superior Wire to the facts of the
instant case, we are not persuaded that the extrusion process
results in a change from producers' to consumers' goods. In the
meeting on May 26, 1992, you stated that the bare stranded wire
is by nature intended as a conductor and that it is not
commercially usable before the encapsulation, or has a very
limited market. However, after that process the insulated wire
has a variety of markets and uses, i.e., automotive, household
appliances, etc. In that regard, we find that the encapsulated
wire is not a consumer good but rather is a product which is sold
for further manufacture into a finished product.
Furthermore, we have found that encapsulation of 28 AWG
stranded copper wire with a colored polypropylene insulation to
make it useful as telephone cordage (to carry low voltage and
high speed signals, insulate the wire and keep it from short-
circuiting) did not, in and of itself, result in a substantial
transformation of the wire, but the combination of drawing,
bunching, twisting, annealing and encapsulation with a colored
polypropylene to form an insulated wire strand does constitute a
single substantial transformation. HRL 556301 dated May 4, 1992,
citing, HRL 555170 dated May 30, 1989 (encapsulating bulk etched
sheets in tape or foil as one of the steps involved in the
production of foil strain gages, does not constitute a
substantial transformation).
Thus, we conclude that although new features are added to
the wire (insulation, color-coding, corrosion resistance) the
essence of the wire has not changed. It is, therefore, not
eligible for duty-free treatment under the GSP.
HOLDING:
The encapsulation of bare stranded wire with a plastic
coating does not substantially transform the wire into a new or
different article of commerce for purposes of the GSP.
Therefore, the insulated wire will not be entitled to receive
duty-free treatment under the GSP, upon entry into the United
States.
Sincerely,
John Durant, Director
Commercial Rulings Division