CLA-2-84:OT:RR:NC:N1:104
Josh Beker
Givens & Johnston, PLLC
950 Echo Lane, Suite 360
Houston, TX 77024-2788
RE: The country of origin of drill string assemblies.
Dear Mr. Beker:
In your letter dated January 31, 2020, you requested a country of origin ruling on behalf of your client, Grant Prideco, L.P. (GP).
The subject drill string assemblies are drill pipes that are fitted with permanently attached
tool joints. The drill string assemblies are used in drilling for oil and gas. The drill string assemblies are screwed together using pin and box joints, which are permanently welded to either end of the drill pipe. During drilling, the entire line of screwed-together drill string assemblies are attached to weighted drill collars at the bottom of the well. The drill bit is then joined to the bottom of the drill collars. The finished drill string assemblies are made of steel and all heat treatment, welding and assembling, and post-production work has been completed prior to importation into the United States.
The drill string assemblies will first undergo manufacturing in China and then are further processed in Mexico.
In China: (1) the drill pipes are subjected to induction heating; (2) the ends of the pipes are upset (a process which allows pipe to be threaded) and deburred; (3) the tubes are austentized and quenched; (4) the tubes are inspected and straightened; (5) quality checks are preformed; and (6) the tubes are tempered in the furnace and the finished drill pipes are sent to Mexico. At this point of the manufacturing process, the drill pipes cannot be attached together and used in a drill string assembly.
In Mexico, solid steel bars (in either solid round or square with rounded corners forms) for the manufacturing of the tool joints are imported from the U.S. and South Korea. In Mexico: (1) the bars are heated to the material forging temperature, sheared into shorter segments, and then formed into the approximate shape of the final tool joints; (2) the tool joints are austentized, quenched, and tempered; (3) the outside and inside surfaces are fully machined in a computer-controlled lathe to the final dimensions and tolerances; (4) each tool joint has either an external (pin) or internal (box) threaded connection machined by a computer-controlled lathe; (5) the threaded connections are coated with heated zinc phosphate chemical etching treatment; and (6) an optional high chromium overlay may be welded to the outside surface of either the pin or box tool joints. Lastly, the tool joints are attached to the drill pipe via friction welding, then austentized, quenched, and tempered (via induction heating). Each outer surface is painted with a protective coating and final identification markings are stenciled onto the surface coating. The completed drill assemblies are then inspected prior to being exported to the United States.
Although you did not explicitly request a tariff classification ruling, in order to determine eligibility for preferential tariff treatment under the North American Free Trade Agreement (NAFTA), a tariff classification is necessary.
The applicable subheading for the drill string assemblies, will be 8431.43.8040, Harmonized Tariff Schedule of the United States (HTSUS), which provides for “Parts, suitable for use solely or principally with the machinery of headings 8425 to 8430: Parts for boring or sinking machinery of subheading 8430.41 or 8430.49: Other: Drill pipe fitted with tool joints”. The rate of duty will be free.
General Note (GN) 12(b), HTSUS, sets forth the criteria for determining whether a good which includes content from both a NAFTA country (Mexico) and a non-NAFTA country (China), is an “originating good” under the NAFTA, and thereby qualifies for preferential tariff treatment. The NAFTA rules of origin are based on a tariff-shift method and/or the regional content method. In this case, to be an “originating good” the drill string assemblies must be transformed in the territory of Mexico pursuant to General Note 12(b)(ii)(A), HTSUS, which states in pertinent part:
Except as provided in subdivision (f) of this note, each of the non-originating materials used in the production of such good undergoes a change in tariff classification described in subdivisions (r), (s) and (t) of this note or the rules set forth therein.
Subdivision (t) states that, in order to be subject to NAFTA, the manufacturing in a NAFTA country must result in a change as follows:
Chapter 84:
79. (A) A change to subheading 8431.43 from any other heading; or
(B) No required change in tariff classification to subheading 8431.43, provided there is a regional value content of not less than:
(1) 60 percent where the transaction value method is used, or
(2) 50 percent where the net cost method is used.
The components from China, which are classified outside of heading 8431.43, HTSUS, are imported to Mexico where the Mexico-origin tool joints are permanently attached to the drill pipes to complete the final drill string assemblies. As these manufacturing operations satisfy the tariff shift rule, the completed drill string assemblies are eligible for NAFTA preferential duty treatment.
The country of origin of the drill string assemblies will be determined in accordance with the rules set forth in 19 C.F.R. § 102.11 (goods other than textile and apparel products covered by Section 102.21). Section 102.11(a) provides that the country of origin of a good is the country in which:
(1) The good is wholly obtained or produced;
(2) The good is produced exclusively from domestic materials; or
(3) Each foreign material incorporated in that good undergoes an applicable change in tariff classification set out in section 102.20 and satisfies any other applicable requirements of that section, and all other requirements of these rules are satisfied.
As the subject merchandise is not wholly obtained or produced in a single country, Rule (1) of Section 102.11(a)(1) is inapplicable.
As the subject merchandise is not produced exclusively from domestic materials, Rule (2) of Section 102.11(a)(2) is inapplicable. Accordingly, Rule (3) applies.
Section 102.20 sets forth specific rules by tariff classification. The pertinent tariff shift rule for subheading 8431.43, states:
A change to heading 8431 from any other heading, except from heading 8501 when resulting from a simple assembly [.]
As the non-originating components (which fall outside of Chapter 84) and the originating tool joints will undergo a change in tariff classification as specified in 102.11(a)(3), the country of origin of the imported drill string assemblies for marking purposes will be Mexico.
In your letter, you also request a determination on the applicability of Section 232 and Section 301 trade remedies for the drill string assemblies.
Title 19, Code of Federal Regulations, Section 134 (“19 CFR 134”) governs country of origin. As stated in HQ 735009 dated July 30, 1993, “The country of origin is the country where the article last underwent a ‘substantial transformation’, that is, processing which results in a change in the article's name, character, or use”. In addition, the courts have held that a substantial transformation occurs when an article emerges from a manufacturing process with a name, character, and use that differs from the original material subjected to the processing. However, if the manufacturing or combining process is merely a minor one that leaves the identity of the article intact, a substantial transformation has not occurred.
In order to determine whether a substantial transformation occurs when components of various origins are assembled into completed products, all factors such as the components used to create the product and manufacturing processes that these components undergo are considered in order to determine whether a product with a new name, character and use has emerged. No one factor is decisive. Assembly operations that are minimal will generally not result in a substantial transformation.
Therefore, based upon the facts presented, it is the opinion of this office that the drill string assemblies manufacturing operations performed in Mexico result in a substantial transformation of the drill pipes and tool joints into a new and different article of commerce with a new name, character, and use. As such, the subject drill string assemblies would be considered products of Mexico in accordance with 19 CFR 134 and they are not subject to Section 232 and Section 301 trade remedies. See Headquarters Ruling Number HQ 561016 dated March 29, 1999.
In your country of origin submission, you indicate that you could have a scenario where the drill pipes will be manufactured in the United States. Please note that 19 CFR § 171.1(a) (1) provides guidance on requesting a binding ruling on prospective shipments. Please resubmit your country of origin request when the manufacturing operations in the United States are prospective in nature.
Duty rates are provided for your convenience and are subject to change. The text of the most recent HTSUS and the accompanying duty rates are provided on the World Wide Web at https://hts.usitc.gov/current.
This ruling is being issued under the provisions of Part 177 of the Customs Regulations (19 C.F.R. 177).
A copy of the ruling or the control number indicated above should be provided with the entry documents filed at the time this merchandise is imported. If you have any questions regarding the ruling, contact National Import Specialist Denise Hopkins at [email protected].
Sincerely,
Steven A. Mack
Director
National Commodity Specialist Division