OT:RR:CTF:VS H312790 AP
Nicolas Guzman, Partner
Faegre Drinker Biddle & Reath LLP
191 N. Wacker Drive, Suite 3700
Chicago, Illinois 60606
RE: Country of Origin; Marine propulsion outboard engine; Section 301 trade remedy; 9903.88.01, HTSUS
Dear Mr. Guzman:
This is in response to your June 19, 2020 ruling request and December 4, 2020 supplemented submission, on behalf of Mercury Marine (“MM”), regarding the country of origin of certain marine propulsion outboard engine used in recreational and light commercial marine applications (“outboard engine”) for purposes of Section 301 trade remedies under three proposed scenarios. A virtual meeting with counsel and MM representatives was held on November 18, 2020.
FACTS:
The merchandise at issue is described as a four-stroke marine propulsion outboard engine ranging from 40 to 60 horsepower classifiable in subheading 8407.21.00, Harmonized Tariff Schedule of the United States (“HTSUS”). The outboard engine is attached to the back of a boat. The engine is composed of a powerhead engine assembly, a mid-section assembly, and a gear case assembly. Power is generated by an internal combustion engine called the powerhead located at the top of the outboard. The power is transferred vertically downward through the midsection of the outboard, via a driveshaft, to the gear case at the bottom. The gear case, which is under the water line during operation, redirects the power 90 degrees in a backwards direction from the boat and is attached to a propeller. The propeller can be rotated in a clockwise or counterclockwise direction to propel the boat forward or backwards.
The powerhead engine assembly will be assembled in Country A (a non-USMCA country), which is other than China, from individual components sourced from China, the United States, Mexico, and South Korea, among other countries. Under scenarios 1 and 2, the engine block of the powerhead engine assembly will be manufactured in China while under scenario 3, it will be manufactured elsewhere. The mid-section and gear case assemblies will be produced in China from individual components sourced primarily from China. The production of the powerhead engine assembly in Country A will be undertaken in two steps. First, a “green assembly” process creates the body of the engine from individual components. This process involves: (1) the assembly of the main bearings and crank to the engine block; (2) the assembly of the piston subassembly from individual rod, pistons, and retainer components, stuffed into the block connected to the crank; (3) the formation of the cylinder head assembly from stamped plates, head gasket, and pin screws; and (4) the assembly of the cylinder head cover, which includes spark plugs, valve cover assemblies, mounting fittings, and seals. You state that the “green assembly” process involves component level assembly of materials like castings, rods, pistons, plates, gaskets and other products, into functional subassemblies like the crankshaft assembly, the piston rod assembly, and the cylinder head assembly.
Next, a “dress assembly” process finalizes the powerhead engine assembly. It consists of: (1) the ignition coil plate assembly; (2) the intake manifold assembly; (3) the harness and electronic control unit assembly; (4) the voltage regulation assembly; (5) the fuel pump assembly; (6) the throttle cam assembly; and (7) the flywheel assembly, among others. The “dress assembly” process also includes cold testing and calibration.
Once the final powerhead engine assembly is produced in Country A, it will be shipped to China where it will be “married to” the mid-section assembly and the gear case assembly through a simple assembly by fitting the powerhead engine assembly into the mid-section and connecting the gear case. The mid-section assembly process consists primarily of connecting the driveshaft housing assembly with the adaptor plate, which connects the engine to the boat. You state that the components for the mid-section assembly are primarily sourced in China and final production of this assembly will remain in China. The gear case assembly consists primarily of assembling the gear case housing with the drive shaft, gears, and propeller shaft. You state that the components for the gear case assembly are primarily sourced in China and final production of this assembly will remain in China.
Under Scenario 1 and 2, the assembly and production steps described above are the same, except that MM will source approximately 20 percent more raw material and components outside of China. Under Scenario 3, the engine block of the powerhead engine assembly will be sourced outside of China. The casting and the machining of the engine block will take place outside of China, in a country to be determined. The engine block will be assembled with the other components of the powerhead engine assembly (the crankshaft and the cylinder head) in Country A.
ISSUE:
What is the country of origin of the outboard engine under scenarios 1, 2 and 3 for the purposes of applying Section 301 trade remedies?
LAW AND ANALYSIS:
The United States Trade Representative (“USTR”) has determined that an additional ad valorem duty of 25 percent will be imposed on certain Chinese imports pursuant to USTR’s authority under Section 301(b) of the Trade Act of 1974 (“Section 301 measures”). The
Section 301 measures apply to products of China enumerated in Section XXII, Chapter 99, Subchapter III, U.S. Note 20(b), HTSUS. Among the subheadings listed in U.S. Note 20(b) of Subchapter III, Chapter 99, HTSUS, is 8407.21.00.
When determining the country of origin for purposes of applying trade remedies under Section 301, the substantial transformation analysis is applicable. The test for determining whether a substantial transformation will occur is whether an article emerges from a process with a new name, character or use, different from that possessed by the article prior to processing. Texas Instruments, Inc. v. United States, 69 CCPA 151, 681 F.2d 778 (1982). In deciding whether the combining of parts or materials constitutes a substantial transformation, the determinative issue is the extent of operations performed and whether the parts lose their identity and become an integral part of the new article. Belcrest Linens v. United States, 6 CIT 204, 573 F. Supp. 1149 (1983), aff’d, 741 F.2d 1368 (Fed. Cir. 1984).
Assembly operations that are minimal or simple, as opposed to complex or meaningful, will generally not result in a substantial transformation. Factors which may be relevant in this evaluation may include the nature of the operation (including the number of components assembled), the number of different operations involved, and whether a significant period of time, skill, detail, and quality control are necessary for the assembly operation. See C.S.D. 80-111, C.S.D. 85-25, C.S.D. 89-110, C.S.D. 89-118, C.S.D. 90-51, and C.S.D. 90-97. If the manufacturing or combining process is a minor one, which leaves the identity of the article intact, a substantial transformation has not occurred. See Uniroyal, Inc. v. United States, 3 CIT 220, 542 F. Supp. 1026 (1982), aff’d, 702 F.2d 1022 (Fed. Cir. 1983). No substantial transformation occurs if the imported parts are formed into their final shape prior to importation and their intended use is predetermined at the time of importation. See Nat’l Hand Tool Corp. v. United States, 16 CIT 308 (1992), aff’d per curiam, 989 F.2d 1201 (Fed. Cir. 1993) (hand tool components intended to be incorporated in a finished mechanic’s hand tool were cold-formed or hot-forged into their final shape prior to their importation into the U.S.).
In addition, U.S. Customs and Border Protection (“CBP”) has held that whether an assembly process is sufficiently complex to rise to the level of substantial transformation is determined upon consideration of all of the operations that occur within that country, including any subassembly processes that take place in that country. For example, in Headquarters Ruling Letter (“HQ”) H303529, dated June 6, 2019, the subject merchandise was an incomplete postage meter, which functioned as a specialized printer in a mail handling system. While one of the major subassemblies was made in Malaysia, the remaining subassemblies were made in China, and the final assembly process of connecting the subassemblies also occurred in China. CBP found that the assembly process that occurred in China was sufficiently extensive and complex as to substantially transform the components into a product of China. In doing so, CBP noted that the question of the complexity of the assembly process which occurred in China was not limited to an examination of the assembly of the various subassemblies to one another, but included an examination of all the assembly processes involved in China in the production of the incomplete postage meter. See Energizer Battery, Inc. v. United States, 190 F. Supp. 3d 1308, 1318 (CIT 2016) (“… case law … indicates that a determination of substantial transformation must be based on a totality of factors”) (citing Nat’l Hand Tool Corp., 16 CIT at 312, and Ran-Paige Co., Inc. v. United States, 35 Fed. Cl. 117, 121 (1996)).
Similarly, in HQ H303866, dated February 13, 2020, we examined the production of an automobile windshield washer pump. In that ruling, approximately half of the discrete parts from foreign countries were shipped to Mexico to be combined with components from Mexico into subassemblies. These subassemblies and the plastic pump components were then combined to form the finished centrifugal windshield washer pump. We noted that the assembly process was complex and involved soldering, fusing, machining, plastic injection molding, and crimping. Therefore, CBP found that the discrete parts were substantially transformed when they were combined to form a finished centrifugal pump in Mexico.
However, HQ H302821, dated July 26, 2019, involved five subassemblies manufactured in China from components from various countries. The five subassemblies and other components from China, with the exception of high voltage cables and wheels from Europe, were then assembled into passenger vehicles in Sweden. CBP determined that the manufacturing processes of the five subassemblies in Sweden did not rise to the level of complex processes necessary for a substantial transformation to occur. The subassemblies from China had a pre-determined end-use and did not undergo a change in use due to the assembly process in Sweden. CBP concluded that the subassemblies and the foreign parts that were imported to Sweden were not substantially transformed as a result of the assembly operations performed in Sweden.
In HQ H301619, dated Nov. 6, 2018, a stator or rear housing, a rotor or armature assembly, and an end cap assembly, which were Chinese originating components of an electric motor, did not undergo a substantial transformation in China. The subassemblies were manufactured in China and upon importation into Mexico had a pre-determined end-use as parts and components of an electric motor. The production process performed in Mexico was simple assembly and the foreign subassemblies were not substantially transformed. The origin of the electric motors was China, the country of origin of the subassemblies.
In HQ H303864, Dec. 26, 2019, the assembly of a Chinese motor with an impeller, a seal, and a plastic housing to form a finished pump assembly in Mexico did not result in a substantial transformation of the Chinese motor and the pump assembly remained a product of China. The assembly was rather simple – it involved press fitting the parts into each other.
New York Ruling Letter (“NY”) N126155, dated Oct. 29, 2010, involved a marine thrust assembly serving as a mechanical coupling between a boat’s propeller and a boat’s engine. The marine thrust assembly was assembled in Germany from Swedish and German components. The time necessary to assemble the product was one hour. The components were first painted, and then dried, cleaned and assembled. The Swedish components were the components that effected the mechanical coupling within the completed trust assembly and were the components visible upon examination of the final assembly. CBP determined that the assembly in Germany of foreign coupling components did not constitute a substantial transformation of the Swedish components. The operations performed in Germany required a limited number of assembly operations and the Swedish components did not lose their identity as a result of the operations performed. No new article was created which possesses a different name, character, or use than that of the original Swedish components. Since the assembled product could not be considered of German origin, the country of origin of the thrust assemblies remained the country of origin of the Swedish components.
Here MM asserts that the assembly and processing operations performed in Country A to create the powerhead engine assembly are extensive, complex and meaningful, and substantially more than a simple combination of subassemblies. The assembly operations involve component level assembly of materials like castings, rods, pistons, plates, gaskets and other products, into functional subassemblies like the crankshaft assembly, the piston rod assembly, and the cylinder head assembly. These subassemblies are joined with other functional assemblies to form the finished powerhead engine assembly. MM explains that these processes require skilled technicians, and on average take approximately one hour to complete. MM believes that the assembly process undertaken in China to marry the powerhead engine assembly, mid-section assembly, and gear case is insufficiently complex to result in a substantial transformation. MM submits that the country of origin of the outboard engine under all three scenarios is Country A, where the powerhead engine assembly is assembled.
While the powerhead engine assembly involves many parts, based upon the information presented, we find that no substantial transformation will occur in Country A under scenarios 1 and 2. In examining the exhibits, we note that major parts of the cylinder head (cylinder head assembly, valve cover assembly, and oil plug assembly), the cylinder block and crankcase (cylinder block), and the crankshaft, pistons and connecting rods (connecting rod assembly and piston assembly), which will be assembled in the “green assembly” process to create the body of the powerhead engine, are from China. We further note that major parts of the electrical components (blank engine control module, voltage regulator, and starter motor), the flywheel (timing belt), the ignition coil mounting (coil plate assembly), the throttle linkage (link throttle assembly, spring, cam lever, and cam follower), the fuel pump (deflector), the vapor separator (vapor separator assembly), and the intake manifold (intake manifold assembly and attenuator), which will be assembled in the “dress assembly” process to finalize the powerhead engine assembly, are also from China. Since the country of origin of the powerhead engine assembly is China, where its major parts are sourced, and the components for the mid-section and the gear case assemblies are primarily sourced and assembled in China, the last substantial transformation will be where these major components are made. Therefore, the country of origin of the finished outboard engine under scenarios 1 and 2 will be China.
You cite cases in support that a substantial transformation occurs in Country A under scenarios 1 and 2. However, the cases that you cite are distinguishable. In NY N302707, dated Mar. 18, 2019, at issue was an electric motor manufactured in Mexico from components originating in Mexico, the United States, China, and Japan. The manufacturing processes in Mexico consisted of component-level production of subassemblies, the assembly of the motor, and the final testing. The operations in Mexico that produced the motor were complex and substantially transformed the raw materials and various components into the electric motor.
In NY N295964, dated Apr. 20, 2018, the product was a hand-held surgical power tool used in large bone surgery, which was fully assembled in the U.S. from domestic and foreign components. The components were generally assembled into four subassemblies and many of individual components required assembly into lower lever subassemblies first before integration into one of the four subassemblies. The main components were of U.S. origin. The foreign components lost their individual identities and became an integral part of the surgical power tool possessing a new name, character and use. The country of origin of the surgical power tool was the United States.
In HQ H100055, dated May 28, 2010, approximately 100 components manufactured in countries not designated under Title III of the Trade Agreements Act of 1979 were assembled in Sweden in four phases requiring specialized training and a 25-step testing process. CBP found the manufacturing and testing operations in Sweden to be sufficiently complex and meaningful, in that individual components’ names, uses, and identities were lost and were transformed in Sweden into a lift unit. Therefore, the country of origin of the lift unit for government procurement purposes was Sweden.
In HQ 563236, dated July 6, 2005, multi-line telephone sets were assembled from of individual parts and more complex subassemblies in Mexico. Some of the parts were manufactured within Mexico and others were imported from Malaysia, China, and the U.S. The handsets, LCD assemblies, microphone assemblies and stands were manufactured in Mexico. Prior to assembly, none of the component parts were capable of performing any useful function or performing the function of a telephone. CBP found that the components imported into Mexico for use in the multi-line telephone sets were substantially transformed when assembled in Mexico and were a product of Mexico for government procurement purposes.
In HQ H270580, dated May 10, 2016, even though all or nearly all the parts were of Chinese origin, the U.S. assembly operations were sufficiently complex and meaningful to result in a substantial transformation. U.S. workers needed to produce separate weldments and weld seams to create the major components that comprised the finished equipment. The welding of the subassemblies together required significant education, skill, and attention to detail. As a result, the country of origin of the finished exercise equipment under scenario one was the U.S. for purposes of government procurement.
HQ 556647, dated Aug. 10, 1992, involves fabrics and trim, which are not comparable to the instant outboard engine. In HQ 556647, foreign fabrics and trim from Hong Kong were sent to the Northern Mariana Islands, a U.S. insular possession. In the Northern Mariana Islands, the foreign fabrics were inspected, marked on a cutting table, and cut into shaped component parts, and assembled by sewing and tailoring into a finished men’s shirt. The cutting of the fabric in the Northern Mariana Islands into specific shapes, which served as components in the assembly operation, constituted a substantial transformation of the fabric into new and different articles of commerce.
Regarding scenario 3, in examining the exhibits, we note that unlike in scenarios 1 and 2, all dominant components of the powerhead engine assembly are not from China. Specifically, the engine block, which is a major part of the powerhead engine assembly, will be sourced from a country other than China. The casting and the machining of the non-Chinese engine block will take place outside of China. It is not indicated if the source of the engine block will be the same country where the powerhead engine assembly is assembled. Nonetheless, unlike scenarios 1 and 2, there are possibly three countries under consideration where the casting and manufacture of the main components and assembly take place. In this scenario, no one country’s operations will dominate the manufacturing operations of the outboard engines. The main components to the function of the outboard engines will be from China and from the country where the engine block is made, but the assembly in Country A is important to bring these components together into the final article. Therefore, we find that under scenario 3, the last substantial transformation of the outboard engine will occur where the powerhead engine assembly is assembled, which is Country A.
HOLDING:
Under scenarios 1 and 2, the country of origin of the marine propulsion outboard engine for the purposes of the application of subheading 9903.88.01, HTSUS, is China, and Section 301 measures will apply. Under scenario 3, the country of origin of the outboard engine for the purposes of the application of subheading 9903.88.01, HTSUS, is Country A.
Please note that 19 C.F.R. § 177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by [CBP] field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.”
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 CBP officer handling the transaction.
Sincerely,
Monika R. Brenner, Chief
Valuation and Special Programs Branch