VAL-2 OT:RR:CTF:VS H034617 CMR
Elise Shibles, Esq.
Sandler, Travis & Rosenberg and
Glad & Ferguson, P.C.
505 Sansome Street
Suite 1475
San Francisco, CA 94111
RE: Request for a ruling on CAFTA-DR status and application of new safeguard provision to
certain imported cotton socks
Dear Ms. Shibles:
This is in response to your letter of June 6, 2008, on behalf of your client, Hanesbrands, Inc., requesting a ruling on the treatment of certain socks which are products of the United States and qualify as originating goods under the Dominican Republic – Central America – United States Free Trade Agreement (DR-CAFTA). Specifically, you would like to know whether these socks are subject to a new provision contained in Chapter 99 of the Harmonized Tariff Schedule of the United States (HTSUS) which implements a safeguard measure on imports of Honduran origin cotton socks announced by the Committee for the Implementation of Textile Agreements (CITA) in the Federal Register on April 29, 2008 (73 Federal Register 23196) and implemented by a modification to the HTSUS announced by the Office of the United States Trade Representative in the Federal Register on May 9, 2008 (73 Federal Register 26435).
FACTS:
You submit that the prospective importations consist of various styles of socks, in chief weight of cotton, classifiable in subheading 6115.95.90, HTSUS. The socks will be knit-to-shape in the United States of yarns formed in the United States consisting of fiber from multiple sources. The toes will be closed in the United States. The socks will be shipped to Honduras for boarding, pairing, inspection, folding and packaging. The socks will then be shipped directly back to the United States for entry under the DR-CAFTA.
We note in your letter of June 6, 2008, you indicated that the socks at issue would be entered in subheading 6115.95.90, Harmonized Tariff Schedule of the United States (HTSUS), with the special program indicator “P” as a prefix to the subheading. Further, you indicated that the socks would not be entered under any of the provisions of Chapter 98, HTSUS. However, in your letter of July 28, 2008, you informed CBP that you had advised your client, based on Headquarters Ruling letter (HQ) 563374, dated October 11, 2006, that the socks, processed as described herein, are eligible for entry under heading 9802.00.50, HTSUS, which provides for “Articles returned to the United States after having been exported to be advanced in value or improved in condition by any process of manufacture or other means.” You also indicated that you had advised your client not to use the safeguard provision set forth in heading 9915.50.01, HTSUS, for entry of these socks as the tariff provision does not list this particular provision as being within its scope. Finally, you indicated that for socks knit to shape in the United States and exported to Honduras for the closing of the toes and finishing, you advised your client to enter such socks under heading 9802.00.80, HTSUS, claiming the Most Favored Nation (MFN) rate of duty (also known as the Normal Trade Relation (NTR) rate).
ISSUE:
Are socks which are manufactured and processed as described above subject to the safeguard provision on socks of Honduras which is contained in heading 9915.50.01, HTSUS?
LAW AND ANALYSIS:
Classification of goods under the Harmonized Tariff Schedule of the United States Annotated (HTSUSA) is governed by the General Rules of Interpretation (GRIs). GRI 1 provides that "classification shall be determined according to the terms of the headings and any relative section or chapter notes and, provided such headings or notes do not otherwise require, according to [the remaining GRIs taken in order]."
The provision at issue, heading 9915.50.01, HTSUS, appears in Chapter 99 of the HTSUS. U.S. Note 2, Chapter 99, provides: “Unless the context requires otherwise, the general notes and rules of interpretation, the section notes, and the notes in chapters 1 through 98 apply to the provisions of this chapter. U.S. Note 1, Subchapter XV, Chapter 99, provides in relevant part:
. . . Goods of a party to the Agreement as defined in general note 29(a) to the tariff schedule, and described in subheading 9915.50.01 (or in any subsequent subheadings of this subchapter which may hereafter be established), are subject to duty at the special rate or duty set fourth (sic) therein in lieu of the special rate of duty provided for in chapters 1 through 97 or subchapter II of chapter 98 of the tariff schedule, unless such goods are entered at the appropriate general duty rate provided for in chapters 1 through 97 of the tariff schedule. At the close of December 31, 2025, this subchapter shall be deleted from the tariff schedule and shall cease to apply to any goods entered after that date.
Heading 9915.50.01, HTSUS, reads:
Socks, stockings and other hosiery and footwear without applied soles, of cotton, knitted or crocheted (provided for in subheading 6115.95.60 or 6115.95.90, and including such goods eligible for entry under heading 9802.00.80 or 9822.05.10), the foregoing which are originating goods of Honduras under the terms of general note 29 to the tariff schedule and are entered during the period from July 1, 2008 through December 31, 2008, inclusive.
In order for the safeguard provision implemented in the HTSUS through U.S. Note 1, Subchapter XV, Chapter 99 and heading 9915.50.01 to apply to the socks at issue herein, the socks must be “originating goods of Honduras under the terms of general note 29 to the tariff schedule and . . . entered during the period from July 1, 2008 through December 31, 2008, inclusive.” In addition, the socks must be entered at a rate of duty other than the appropriate general duty rate provided for in chapters 1 through 97 of the tariff schedule. In other words, a claim for preferential treatment under the DR-CAFTA must be made for the goods. See GN 29(a) which is referenced in U.S. Note 1, Subchapter XV, Chapter 99.
The terms of general note (GN) 29 to the tariff schedule tell us whether a good qualifies as an “originating good” for purposes of preferential duty treatment under the DR-CAFTA. GN 29(a) provides that goods for which entry is claimed under the terms of the DR-CAFTA are subject to duty as set forth in the note and provides that “originating goods” imported into the customs territory of the United States are eligible for the preferential treatment under the note if entered under a provision for which a duty rate appears in the “Special” subcolumn of column 1 followed by the symbol “P” or “P+” or entered under a provision in chapter 98 or 99 of the HTSUS where rate of duty or other treatment is specified. See GN 29(a)(i). GN 29(a)(iii) identifies the countries included within the terms “party to the Agreement” and “parties to the Agreement.” Honduras and the United States are identified parties. GN 29(b) sets forth the basis for determining that a good is an “originating good” under the terms of the note and thus eligible for preferential duty treatment under the DR-CAFTA.
You submit that the socks at issue are “originating” under GN 29(b)(ii), that is, “the good was produced entirely in the territory of one or more of the parties to the Agreement, and . . . each of the nonoriginating materials used in the production of the good undergoes an applicable change in tariff classification specified in subdivision (n) of [GN 29].” Specifically, you submit that the foreign fibers meet the requisite tariff shift requirement set forth in Rule 36, Chapter 61, of GN 29 and the socks are knit to shape and sewn or otherwise assembled in the territory of one or more of the parties. For purposes of this decision, we will assume you are correct that the socks qualify as “originating” under the terms of GN 29.
Assuming the socks are originating goods under the terms of GN 29, we still must determine whether the socks are “originating goods of Honduras.” GN 29 does not aid us in this determination. CBP believes that the term “originating” modifies the phrase “goods of Honduras”, thus identifying the type of goods or products of Honduras that are subject to the safeguard provision. Additionally, the term “of” is defined in various sources as, among other things, a word to indicate origin or derivation. To determine whether a good is “of Honduras,” CBP must utilize the rules for determining the origin of textiles and textile products for purposes of the customs laws and the administration of quantitative restrictions which are set forth at 19 U.S.C. § 3592. Applying 19 U.S.C. § 3592(b)(2)(A)(ii), socks knit to shape in the United States have their origin in the United States. Therefore, based on the information you have provided, the socks at issue are not “of Honduras.”
The language of the DR-CAFTA supports the conclusion that the phrase “originating goods of Honduras under the terms of general note 29 to the tariff schedule” requires that the good be an originating good under the terms of GN 29 and that the good must have its origin in Honduras. Throughout Article 3.23, “Textile Safeguard Measures,” goods are referred to as either a “good of another Party,” or “good of the other Party.” CBP concludes that the textile safeguard measures were directed to a “good of another Party” which had its “origin” in that other Party. As socks which are knit to shape in the United States have their origin in the United States and not in the territory of another Party, the safeguard provision implemented in the tariff by heading 9915.50.01, HTSUS, cannot apply to the socks at issue.
In addition to the above language, Article 3.23 of the Agreement limits an increase in the rate of duty applied to a good under the safeguard provision to the lesser of either the MFN rate in effect at the time the safeguard measure is applied or the MFN rate in effect on the date of entry into force of the Agreement. Therefore, if a good is entered at the MFN rate, either under chapter 61 or chapter 98, no additional duty may be charged under the terms of the safeguard provision.
For example, if socks are entered under subheading 6115.95.90, HTSUS, without a claim for DR-CAFTA preferential duty treatment, the MFN rate (also known as the Normal Trade Relations rate) of 13.5 percent would apply. If the socks were entered claiming DR-CAFTA preferential duty treatment, the duty rate would be Free but for the safeguard rate of 5 percent on the full value of the imported article.
This limitation on the increase in duty set forth in the Agreement also serves to further illustrate why socks classifiable in heading 9802.00.80, HTSUS, which are knit-to-shape in the U.S. and advanced in value or improved in condition in Honduras are not subject to the safeguard provision. If socks of subheading 6115.95.90, HTSUS, were knit-to-shape in the U.S., had their toes sewn closed in Honduras and returned to the United States claiming eligibility for classification in heading 9802.00.80, HTSUS, but entered without claiming DR-CAFTA preferential duty treatment, the MFN rate of duty on those socks would be 13.5 percent on the full value of the socks less the cost or value of the unfinished socks shipped to Honduras
However, if we were to conclude that these socks were subject to the safeguard provision in heading 9915.50.01, HTSUS, because of the processing in Honduras, the safeguard rate of 5 percent duty on the full value of the imported article would be greater than the MFN rate of 13.5 percent on a significantly reduced value, in essence, the labor expended to close the toes in Honduras. For example, if the socks were valued at $5.00 a pair and the value of the U.S. components was $4.00, the duty assessment under heading 9802.00.80, HTSUS, would be 13.5 cents per pair. However, the safeguard duty assessment would be 25 cents per pair as it is based on the full value of the socks.,
It has been suggested that by application of U.S. Note 2, Subchapter II, Chapter 98, HTSUS, the socks at issue be considered “of Honduras” for application of heading 9915.50.01, HTSUS. U.S. Note 2(a), Subchapter II, Chapter 98, HTSUS, provides, in relevant part:
. . . any product of the United States which is returned after having been advanced in value or improved in condition abroad by any process of manufacture or other means, or any imported article which has been assembled abroad in whole or in part of products of the United States, shall be treated for the purposes of this Act as a foreign article, and, if subject to a duty which is wholly or partly ad valorem, shall be dutiable, except as otherwise prescribed in this part, on its full value determined in accordance with section 402 of the Tariff Act of 1930, as amended. If such product or such article is dutiable at a rate dependent upon its value, the value for the purpose of determining the rate shall be its full value under the said section 402.
The socks at issue are boarded, paired, inspected, folded and packed in Honduras. In Headquarters Ruling Letter (HQ) W563374, dated October 11, 2006, CBP held that boarding socks constitutes an advancement in value and improvement in condition of the socks. Thus, the socks at issue have been advanced in value and improved in condition in Honduras.
U.S. Note 2(a) is a statutory mechanism to treat U.S. origin goods as “foreign articles”, i.e., other than of the United States, for purposes of the Tariff Act of 1930, as amended. While U.S. Note 2(a) directs that U.S. origin goods which fall within its terms must be treated as “foreign articles,” it does not direct us as to the origin of the goods, other than that they are not of U.S. origin. Therefore, the only reasonable reading of the two provisions to give effect to both without doing harm to the language or intent of the DR-CAFTA Agreement is that for purposes of heading 9915.50.01, HTSUS, socks must have their origin in Honduras through traditional origin analysis which, in this case, is the application of the rules of origin set forth in 19 U.S.C. 3592; and, for purposes of application of U.S. Note 2(a), Subchapter II, Chapter 98, U.S. origin socks processed as described herein, i.e., advanced in value or improved in condition abroad, are “foreign articles” for purposes of assessing duty. Determining that the socks are “foreign articles” for purposes of assessing duty is not the same as determining that their country of origin is Honduras for purposes of applying heading 9915.50.01, HTSUS. See Headquarters Ruling letter (HQ) 562014, dated May 8, 2001, wherein CBP discussed the application of U.S. Note 2(a), Subchapter II, Chapter 98, in the context of sewing thread of U.S. origin exported and returned twice. In HQ 562014, CBP held that although for duty purposes the U.S. sewing thread was of Canadian origin as it was advanced in value or improved in condition by processing in Canada (after its first exportation and return to the United States), the sewing thread was a product of the United States for purposes of heading 9802.00.80, HTSUS, when exported a second time for use in the assembly of articles abroad and then returned to the United States.
As a consequence of U.S. Note 2(a), importers entering U.S. origin socks which have been advanced in value or improved in condition abroad must indicate an origin, other than the U.S., on the CBP Form 7501. In this case, the origin declared to CBP on the CBP Form 7501 would be Honduras as it is where the advancement in value or improvement in condition occurred. Assuming the socks are originating goods under the terms of GN 29, when entered they are eligible to claim DR-CAFTA preferential treatment.
In addition, it has been suggested that by application of the accumulation provision of the DR-CAFTA, the U.S. knit to shape originating socks which, in this case, are completed socks, become “originating goods of Honduras under the terms of general note 29 to the tariff schedule” and, therefore, fall within the scope of the safeguard provision set forth in heading 9915.50.01, HTSUS. CBP believes that such a conclusion is a misapplication of the accumulation provision.
Article 4.5 of the DR-CAFTA addresses “Accumulation” and is implemented in GN 29(c)(iv). GN 29(c)(iv) provides:
(A) Originating materials from the territory of one or more of the parties to the Agreement that are used in the production of a good in the territory of another party to the Agreement shall be considered to originate in the territory of that other party to the Agreement.
A good that is produced in the territory of one or more of the parties to the Agreement by one or more producers is an originating good if the good satisfies the requirements of this note.
As already stated, GN 29 provides rules for determining the eligibility of an article for preferential duty treatment under the DR-CAFTA, i.e. whether an article is “originating” under the DR-CAFTA. It is not a rule of origin, i.e. it does not tell us the origin of an article for duty, marking, or any other purpose. “Accumulation” is a concept to allow producers, if they choose to do so, to accumulate the production of materials from all sources for purposes of meeting a regional value content requirement or meeting a tariff shift requirement for establishing the finished product as originating. Although the language in subsequent free trade agreements differs from that in the NAFTA, and the election to use accumulation is no longer required, the concept has remained intact. Accumulation is a mechanism to allow greater flexibility for meeting the requirements for establishing an article as “originating” under a free trade agreement. It is not a mechanism for establishing the origin of an article. See Headquarters Ruling Letter 545977, dated November 29, 1997, discussing the use of accumulation in the NAFTA.
CBP’s view of accumulation is supported by the interpretation of accumulation expressed by our trading partners in publications found on the internet. In “AUSFTA, A Guide to determining the origin of goods using the ‘change in tariff classification method”, dated July 2004, at page 7(referencing the United States – Australia Free Trade Agreement), accumulation is described as a means of determining whether a goods meets a tariff classification change and allows for “treat[ing] all the production done in both countries as if it occurred in one, and treat[ing] all the production by all producers in the FTA region as if it were completed by one.” In the “Manufacturer’s Guide to Rules of Origin under the Free Trade Agreements” wherein various free trade agreements to which Singapore is a party are referenced, with regard to bilateral accumulation of materials, it is stated:
In all our FTAs, our Singapore manufacturer is allowed to treat imported materials from our FTA partner country as “local” to help our product qualify for the rules of origin provided the product is exported back to the same FTA partner country.
The concept is useful especially to Singapore as we do not produce all the materials that are used in production. It allows us to accumulate material costs from our FTA partner country in the local content calculation and in the change in tariff classification criterion, such accumulated materials are excluded from the test since that are treated as local materials.
We note that the language of the accumulation provisions in the United States – Australia Free Trade Agreement and the United States – Singapore Free Trade Agreement is identical to the language in the DR-CAFTA accumulation provision with minor adaptations made for the difference in the number of parties to the agreement. Furthermore, in “The Application of the Dominican Republic – Central America – United States Free Trade Agreement”, by Anabel Gonzalez, March 2005 (published by the Organization of American States, Office of Trade, Growth and Competitiveness), with regard to Article 4.5(1), implemented as GN 29(c)(iv)(A), it is written:
By virtue of this provision, each Central American country may use goods or materials originating in the United States for incorporation into a good produced within its own territory, and may export that good under the DR-CAFTA to another Central American country. . . .
What the foregoing means is that it does not matter whether a good is produced in the territory of a Central American country or of the United States, using material from any of the six countries, as long as the rules of origin are met.
See also “DR-CAFTA: Challenges and Opportunities for Central America”, Central America Department and Office of the Chief Economist, Latin America and Caribbean Region.
Based on the above analysis, under any provision of the tariff schedule utilized to enter the subject socks, the socks will be treated as of foreign origin for purposes of assessing duty. This means that since the only foreign country in which the socks were advanced in value or improved in condition is Honduras, the socks will be treated as of Honduran origin for duty assessment purposes. However, as the socks are not “of Honduras”, but are products of the United States under 19 U.S.C. § 3592, the socks are not within the scope of heading 9915.50.01, HTSUS.
HOLDING:
The socks at issue which are knit to shape and finished in the United States and boarded, paired, inspected, folded and packed in Honduras are not subject to heading 9915.50.01, HTSUS, as the socks are of U.S. origin and are not “of Honduras.” However, when entered under any provision of the tariff schedule, the socks are of foreign origin for purposes of assessing duty.
A copy of this ruling letter should be attached to the entry documents filed at the time the goods are entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the CBP officer handling the transaction
Sincerely,
Myles B. Harmon, Director
Commercial and Trade Facilitation Division