Tariff Treatment Related to Disassembly Operations Under the North American Free Trade Agreement, 37669-37674 [05-12902]

Download as PDF Nora Mead BROWNELL, Commissioner dissenting in part: DEPARTMENT OF HOMELAND SECURITY For the reasons I articulated in my partial dissent to Order No. 2003–B, I would have granted rehearing and reinstated the original provision in Order No. 2003 that ensured Interconnection Customers full reimbursement of their up-front funding of Network Upgrades within five years. Therefore, I dissent from this portion of today’s order. Bureau of Customs and Border Protection Nora Mead Brownell [FR Doc. 05–12870 Filed 6–29–05; 8:45 am] BILLING CODE 6717–01–P DEPARTMENT OF THE TREASURY 19 CFR Part 181 [CBP Dec. 05–24] RIN 1505–AB41 Tariff Treatment Related to Disassembly Operations Under the North American Free Trade Agreement Customs and Border Protection, Department of Homeland Security. ACTION: Final rule. AGENCY: VerDate jul<14>2003 15:12 Jun 29, 2005 Jkt 205001 PO 00000 Frm 00023 Fmt 4700 Sfmt 4700 37669 SUMMARY: This document adopts as a final rule, with some changes, proposed amendments to the Customs and Border Protection (‘‘CBP’’) Regulations concerning the North American Free Trade Agreement (‘‘the NAFTA’’). The regulatory changes interpret the term ‘‘production’’ to include disassembly and clarify that components recovered from the disassembly of used goods in a NAFTA country are entitled to NAFTA originating status when imported into the United States provided that the recovered components satisfy the applicable NAFTA rule of origin requirements. DATES: Effective August 1, 2005. FOR FURTHER INFORMATION CONTACT: Shari Suzuki, International Agreements Staff, Office of Regulations and Rulings, (202) 572–8818. E:\FR\FM\30JNR1.SGM 30JNR1 ER30JN05.000</GPH> Federal Register / Vol. 70, No. 125 / Thursday, June 30, 2005 / Rules and Regulations 37670 Federal Register / Vol. 70, No. 125 / Thursday, June 30, 2005 / Rules and Regulations SUPPLEMENTARY INFORMATION: Background Statutory and Regulatory Background On December 17, 1992, the United States, Canada, and Mexico (the parties) entered into an agreement, the North American Free Trade Agreement (the NAFTA). The provisions of the NAFTA were adopted by the United States with the enactment of the North American Free Trade Agreement Implementation Act, Pub. L. 103–182, 107 Stat. 2057 (December 8, 1993). Under NAFTA Article 401(b) and 19 U.S.C. 3332(a)(1)(B)(i), a good originates in the territory of a party where each of the non-originating materials used in the production of the good undergoes an applicable change in tariff classification set out in Annex 401 of the NAFTA as a result of production occurring entirely in the territory of one or more of the parties. These change in tariff classification rules are set forth in General Note 12(t) of the Harmonized Tariff Schedule of the United States (‘‘HTSUS’’) (hereinafter ‘‘the Annex 401 rules’’). It is therefore understood that unless a change in tariff classification results from an activity that qualifies as ‘‘production,’’ the mere fact that there is a prescribed change in tariff classification will not be considered as meeting a rule of origin. The NAFTA does not explicitly address the question of whether disassembly occurring in a NAFTA country may be considered NAFTA origin-conferring ‘‘production’’ when the recovery of components by the disassembly operation satisfies the applicable rules of origin listed in Annex 401 of the NAFTA. Publication of Proposed Regulatory Changes On March 13, 2003, the U.S. Customs Service (now Customs and Border Protection (‘‘CBP’’)) published in the Federal Register (68 FR 12011) a notice of proposed rulemaking (‘‘NPRM’’) setting forth proposed amendments to Part 181 to add a new § 181.132 to the CBP Regulations (19 CFR 181.132). The proposed rule stated that components which were recovered from the disassembly of used goods in a NAFTA country would be entitled to NAFTA originating status upon importation into the United States, provided that: (1) The recovered components satisfy the applicable NAFTA rule of origin requirements in Annex 401, and (2) if the rule of origin in Annex 401 applicable to the components does not include a regional value content requirement, the components are subject VerDate jul<14>2003 15:12 Jun 29, 2005 Jkt 205001 to further processing in the NAFTA country beyond certain specified minor operations. The NPRM explained the need for a regulation to address disassembly in order to: (1) Provide an appropriate regulatory basis for the treatment of recycled or remanufactured goods under the NAFTA; (2) provide guidance regarding the meaning of the statutory term ‘‘production;’’ and (3) clarify the relationship between the Annex 401 rules of origin and the disassembly of goods. In addition, the NPRM noted that allowing the disassembly of used goods to confer origin under certain circumstances would promote recycling and re-manufacturing in North America and, therefore, would advance the economic and environmental objectives of the NAFTA. The NPRM prescribed a 60-day period for the submission of public comments on the proposed regulatory changes. A total of 10 commenters responded. Nine comments focused on the proposed text while one comment concerned CBP’s certification under the Regulatory Flexibility Act of 1980. A majority of the comments received by CBP supported the proposed amendment which would allow components that are recovered from the disassembly of a used good in a NAFTA country to be entitled to NAFTA originating status upon importation into the United States. Most commenters agreed with CBP that interpreting ‘‘production’’ to include disassembly would promote recycling and remanufacturing in North America. However, all of the comments suggested changes regarding the approach set forth in the NPRM. Most commenters expressed the opinion that, while the proposed amendment was well intended, it would not completely remedy the situation and, in some cases, would restrict the ability of remanufactured goods to qualify for preferential treatment under NAFTA. Many commenters objected to the addition of a further processing requirement in cases where the applicable rule of origin did not include a regional value content requirement. Several commenters identified practical problems in administering the proposed regulation, including inconsistencies with commercial and accounting practices. Lastly, many commenters maintained that the proposed regulation was too complicated. Discussion of Comments Of the 10 commenters who responded to the solicitation of comments on the proposed Part 181 changes, 9 provided one or more specific comments on the PO 00000 Frm 00024 Fmt 4700 Sfmt 4700 proposed § 181.132 text. The comments are discussed below. Comment: Four commenters expressed concern with the unilateral approach being pursued by the U.S. Government in regard to the proposed amendment. The commenters stated that the adoption of an amendment solely within the territory of the United States would give rise to uncertainty within the trading community and result in inconsistent application of the rules of origin between the NAFTA parties. These commenters indicated their preference for the development of a trilateral approach. CBP’s Response: A trilateral approach remains under discussion in the NAFTA working group. While there appears to be agreement in principle, the trilateral text is still being developed. In the meantime, this interpretive regulatory guidance is needed to aid U.S. importers in exercising reasonable care. Comment: Four commenters suggested adopting an approach similar to that taken by the U.S. Administration in several recent free trade agreements. Under this approach, ‘‘goods wholly obtained or produced entirely’’ in the territories of the parties are considered to be originating. ‘‘Recovered goods’’ are specifically included in the definition of ‘‘goods wholly obtained or produced entirely’’ in the territories of the parties. Thus, ‘‘recovered goods’’ are considered to be originating goods. The commenters stated that the same result could be achieved by clarifying the NAFTA definition of ‘‘goods wholly obtained or produced’’ under the NAFTA Uniform Regulations. According to these commenters, this approach recognizes disassembly as conferring origin without the technical and cumbersome requirement of establishing that disassembly operations satisfy the product-specific rules of origin. Two commenters supported adopting the provision for ‘‘recovered goods’’ in the definition of ‘‘goods wholly obtained or produced entirely.’’ One commenter proposed that a new item covering ‘‘materials recovered by means of disassembly’’ be included in the definition of ‘‘goods wholly obtained or produced entirely.’’ Another commenter recommended amending the existing provision for waste and scrap, which exists under the definition of ‘‘goods wholly obtained or produced entirely,’’ to provide for recovered goods. CBP’s Response: CBP agrees that the approach taken by the United States in several recent free trade agreements is administrable. However, amending the definition of ‘‘goods wholly obtained or produced’’ in NAFTA cannot be achieved merely by amending the E:\FR\FM\30JNR1.SGM 30JNR1 Federal Register / Vol. 70, No. 125 / Thursday, June 30, 2005 / Rules and Regulations definition found in the regulations. The definition of ‘‘goods wholly obtained or produced’’ is found in Article 401 of the NAFTA and any change would require an amendment to the agreement and implementing legislation. Comment: One comment emphasized the importance of consistency. This commenter stated that there should be as much consistency as possible among the various agreements to which the United States is a party. CBP’s Response: While agreeing that consistency of rules under various free trade agreements is desirable, CBP’s responsibility is to implement agreements as negotiated and implemented in U.S. law. Comment: Several commenters maintained that the fundamental basis on which the Annex 401 rules were negotiated presumed the manufacture or assembly of a good from its constituent parts. Thus, the commenters believed that interpreting the term ‘‘production’’ to include disassembly is not sustainable when interpreted in context and in light of the objectives and purpose of the agreement. CBP’s Response: As indicated in the NPRM, CBP finds no evidence showing that the NAFTA intended not to treat ‘‘disassembly’’ as a production process. The term ‘‘production’’ includes a broad range of economic activity. Moreover, the goals of the NAFTA include elimination of barriers to trade, facilitation of cross-border movement of goods, promotion of economic activity in North America, and protection of the environment. Thus, it is consistent with the free trade purposes of NAFTA to treat the recovery of goods by disassembly as ‘‘production’’ under the NAFTA rules of origin. Comment: Two commenters expressed a desire for an approach that would confer originating status on goods recovered from disassembly operations in a manner that applies equally to all manufacturers across industry sectors. These commenters note that differences in the structure of the Harmonized System may result in lack of uniformity of application across industry sectors. CBP’s Response: CBP notes that any lack of uniformity in the treatment of recovered components will parallel the effect of the applicable NAFTA rules of origin on other types of ‘‘production.’’ Application of Annex 401 does result in lack of uniformity of application across industry sectors. The results depend on both the structure of the Harmonized System and the product-specific rules in Annex 401 which were negotiated in the context of trade policy goals, which may differ between sectors. There is no VerDate jul<14>2003 15:12 Jun 29, 2005 Jkt 205001 uniform level of processing across sectors in the rules. CBP notes that in many cases where a heading change rule cannot be met, an alternative rule of origin allows a change within the heading provided a regional value content requirement is met. CBP also notes that Article 401(d) provides a special rule for goods and parts that are classified in the same heading or subheading where there can be no change in tariff classification. CBP believes that the fact that some recovered goods will meet a tariff shift requirement while others will not is an insufficient reason to abandon the proposed regulation altogether (as this result will comport with the NAFTA rules of origin themselves). Comment: Six commenters were opposed to the imposition of additional processing requirements for recovered components that meet the tariff shift rule under Annex 401. The proposed regulation specified that recovered components that met a tariff shift rule, but were not subject to a regional value content (RVC) requirement, had to be further processed beyond certain minor operations. The commenters argued that the effect of this requirement is that recovered components that would otherwise qualify for the NAFTA preference would not qualify unless they had been subjected to additional processing. Additionally, these commenters stated that this ‘‘advanced-in-value’’ requirement effectively makes the origin requirements applicable to goods derived from disassembly operations stricter than those applicable to other goods, which need only satisfy the Annex 401 requirements. They believe that requiring goods derived from disassembly operations to satisfy both the Annex 401 rule of origin and the additional processing requirements imposes a double burden on remanufacturers that undermines the goals of the rule. Two commenters stated that the additional processing requirement is unnecessary because the Annex 401 rules of origin, which were negotiated and agreed to by all three countries, already define the degree of production that will confer origin on nonoriginating materials. In some cases, that degree of production would involve a tariff shift, in others a regional value content requirement, and in still others a combination of both. However, the commenters argued that, in all cases, the degree of production established by the Annex 401 rules of origin would be sufficient to address when disassembly results in an originating good. PO 00000 Frm 00025 Fmt 4700 Sfmt 4700 37671 One commenter believed that disassembly is merely the inverse of assembly. Therefore, if the applicable Annex 401 rule of origin provides that origin is conferred by a simple tariff shift that may be achieved through assembly, achieving that same tariff shift through disassembly should also confer origin. Another commenter argued that while the assembly process is predictable and quantifiable because every part entering the production line is the same, each disassembly is unique due to the condition of the used good, and that disassembly may be far more difficult than simple assembly with clean new parts. Thus, the proposed rule does not recognize the complexity and difficulty of disassembly and ignores the substantial effort necessary to recover parts from used equipment. Several commenters objected to the proposed rule because some recovered components are not subject to operations other than those enumerated as minor operations in the proposed rule. Two commenters stated that there is little in the remanufacturing process that cannot be categorized within the list of minor operations. One commenter stated that the remanufacturing process consists of all the listed processes linked together. Thus, the commenters believed that the additional requirements would preclude the remanufacturing process from conferring originating status on recovered components. One commenter believed that the additional processing requirement would increase the complexity of NAFTA compliance systems because it may be necessary to record the processing performed on individual recovered components. The commenter stated that this would create a de facto direct identification requirement which may be impractical or impossible to implement and very difficult to audit. CBP’s Response: CBP agrees that the Annex 401 rules define the degree of production required for conferring origin and has deleted the additional processing requirements. Comment: Several commenters objected to the application of the Annex 401 rules of origin. They claimed that subjecting recovered components and remanufactured goods to the same NAFTA rules as items produced entirely from new components makes it extremely difficult to qualify remanufactured goods as originating goods under the NAFTA. The commenters argued that, in many cases, NAFTA certificates are not available for recovered components and, therefore, they must be deemed non- E:\FR\FM\30JNR1.SGM 30JNR1 37672 Federal Register / Vol. 70, No. 125 / Thursday, June 30, 2005 / Rules and Regulations originating. Furthermore, when applying the Annex 401 rules to the remanufactured good, the recovered component often fails to satisfy the required tariff shift because it is generally classified in the same tariff provision as the remanufactured good. These commenters also contended that if the remanufactured good is subject to an RVC rule, the good will fail to meet the rule because the recovered component often represents the majority of the value or net cost of the remanufactured good. In this situation, the RVC cannot be met because the recovered component is deemed to be non-originating. CBP’s Response: The situation the commenters describe is one of the reasons that more recent free trade agreements take a different approach to recycled and recovered goods, but the issue here is how to interpret NAFTA, and solutions are limited by the NAFTA text. The feasibility of determining the cost or value of a recovered component will be discussed later in this document. Comment: Four commenters expressed the view that the proposed rule should be a simple rule that treats all materials yielded from disassembly in a NAFTA country as originating materials. These commenters stated that the removal of a worn component should be an origin-conferring process. This would ensure that the value of the recovered component, including the very substantial content resulting from the labor involved in the removal, will be included in the value of originating materials when determining whether the remanufactured good qualifies as an originating good. By considering the removal of worn parts to be origin conferring, the commenters stated that it would be possible to count that valuable operation towards qualifying the remanufactured good as an originating good. These commenters contended that the above ‘‘simple’’ rule could be administered more easily than CBP’s proposed rule which they characterized as highly complex and difficult, if not impossible, to administer. With respect to CBP’s concern regarding sufficient processing, the commenters suggested that CBP could condition this rule by providing that goods yielded from a ‘‘minor disassembly’’ would not be treated as NAFTA originating. They suggested that disassembly of an article into five (or ten) or fewer components by processes such as removing screws, bolts, pins or other fasteners could be treated as a ‘‘minor disassembly’’ operation. Moreover, certain minor operations, such as separating a good and its component by disconnecting VerDate jul<14>2003 15:12 Jun 29, 2005 Jkt 205001 cables or by unsnapping could be ruled not to constitute disassembly. Thus, these commenters proposed a rule that treats all components yielded from disassembly as NAFTA originating, subject to a simple disassembly exception. The commenters claimed that their proposal would meet the goals of NAFTA while avoiding administrative problems. Several remanufacturers expressed dissatisfaction with the proposed regulation for the reason that their recovered parts would never qualify under the proposed rule since the parts would not satisfy the required tariff shift and also would not meet the RVC requirement based only on labor costs. These commenters support a simple disassembly rule under which recovered parts would qualify as originating. If the recovered parts were considered originating, they could meet the RVC requirement associated with the rule for the remanufactured good. This approach would allow the recovered parts to qualify as an originating material but would still require the producer of the remanufactured good to meet the NAFTA Annex 401 rule of origin applicable to the remanufactured good. CBP’s Response: Although CBP understands the appeal of a ‘‘simple’’ disassembly rule, CBP cannot adopt such an approach because it conflicts with the Annex 401 rules of origin. CBP cannot disregard the rules of origin that already exist for specific products; the Annex 401 rules of origin set the minimum threshold that must be met in order to confer originating status to a good. The commenters would prefer to have a new rule that allows mere disassembly to confer origin without having to meet any tariff shift or regional value content requirements. CBP does not have the authority to change the Annex 401 rules of origin. The only question addressed in this interpretive regulation is whether the NAFTA definition of production can be interpreted to include disassembly. CBP is not adopting a new rule of origin. Comment: One commenter maintained that all goods which are subject to additional processing should be treated as originating goods without regard to whether the good meets the Annex 401 rules. This commenter stated that if CBP must require that goods be advanced in value or improved in condition, then all goods that satisfy the additional processing requirements should be considered originating, regardless of whether they satisfy the specific rule of origin under Annex 401. The commenter recommended a new rule in which the Annex 401 rules are overridden. A component recovered PO 00000 Frm 00026 Fmt 4700 Sfmt 4700 from a good disassembled in the territory of a party would be considered to be originating as a result of such disassembly provided that the recovered component is advanced in value or improved in condition by means of additional processing other than certain listed minor processes. CBP’s Response: CBP disagrees. The Annex 401 rules of origin set forth the minimum level of processing required and cannot be disregarded. Comment: One commenter expressed concern with how CBP will interpret a required change in tariff classification. The commenter provided an example involving a cover from the document feeder portion of a laser printer. The commenter asked whether CBP would focus on the laser printer or the document feeder for the purpose of determining whether the cover met a required change in tariff classification. The cover meets the tariff shift requirement when the laser printer is viewed as the non-originating material. However, the cover does not meet the tariff shift requirement when the document feeder is viewed as the nonoriginating material. CBP’s Response: CBP assumes that, in the example provided by the commenter, the remanufacturer disassembled the laser printer into various parts, including the document feeder, and then disassembled the document feeder into its constituent parts, including the cover. Under the principles of self-produced materials contained in part II, section 4(8) of the appendix to part 181 of the CBP Regulations (19 CFR part 181, appendix), the producer should be able to designate the laser printer as the nonoriginating material for the purpose of determining whether the nonoriginating materials underwent the applicable change in tariff classification. Comment: One commenter suggested that remanufactured goods should be considered to be originating goods and provided a precise definition of remanufactured goods. In order to qualify as an originating good, the product must: (1) Be dismantled; (2) have all parts cleaned, inspected and returned to sound working condition; and (3) be reconstructed to sound working condition. In addition to this definition, the commenter recommended a rule which requires that the components undergo processing that restores their functionality and fit; the components be re-assembled back into an item that is the equivalent of the item disassembled; all ‘‘new’’ parts used in the remanufacturing process satisfy the traditional specific rules of origin for the finished item; and the originating value E:\FR\FM\30JNR1.SGM 30JNR1 Federal Register / Vol. 70, No. 125 / Thursday, June 30, 2005 / Rules and Regulations of the recovered parts be some derivation of the core charge value if a core charge applies. The commenter believes that this definition would eliminate the possibility of disassembly operations being used as a method of circumvention because there must be complete reassembly. This commenter also proposed, with respect to country of origin marking, that all remanufactured parts be labeled ‘‘Remanufactured in (named country),’’ and that the country of origin of the used items imported into a territory and used in the remanufacturing process be the country in which the parts expired, regardless of marking. CBP’s Response: The Annex 401 rules of origin cannot be disregarded. The regulation under consideration addresses the issue of whether goods that are the result of disassembly are considered to have undergone ‘‘production’’ for purposes of determining whether the good qualifies as an originating good under the NAFTA. The regulation does not address country of origin for marking purposes. Country of origin for NAFTA marking purposes is governed by part 102 of the CBP Regulations (19 CFR part 102). CBP notes Headquarters Ruling Letters 561209, dated May 4, 1999, and 561854, dated December 15, 2000, which address the country of origin marking of rebuilt automotive parts. Comment: One commenter suggested that, if the restrictions on ‘‘minor operations’’ are included in the final regulation, ‘‘precision machining’’ should be defined as ‘‘machining performed on a numerically controlled mill, lathe or similar equipment.’’ CBP’s Response: As noted above, CBP has decided to delete the portion of the proposed regulation that refers to minor operations. Comment: Two commenters stated that it is unlikely that a new nonoriginating good would be disassembled in one party’s territory and shipped to another party where it would be reassembled. According to these commenters, the importer would have to pay duties, fees and brokerage charges on the initial importation into the party where the goods would be disassembled; incur the cost of setting up a disassembly operation; pay the overhead costs and costs to employ workers; pay additional transportation and handling costs; pay broker charges on the subsequent importation into the territory of the other party where the ‘‘recovered goods’’ would be reassembled; and pay all the same costs noted previously for the subsequent reassembly in the territory of the other party. Thus, these commenters believe it VerDate jul<14>2003 15:12 Jun 29, 2005 Jkt 205001 is highly unlikely that the duty savings would be substantial enough to make such operations feasible from a cost/ benefit standpoint. One commenter suggested excluding high duty rate goods from the disassembly rule but acknowledged that most high duty rate goods (textiles, footwear, chemicals, agricultural products, etc.) do not easily lend themselves to disassembly. Another commenter stated that precluding application of the proposed rule to new products adequately deals with possible abuses of disassembly to confer origin. CBP’s Response: CBP specifically requested comments on the view that an applicable value-content rule or alternative rule would be sufficient to permit the disassembly of new goods to be considered ‘‘production.’’ None of the comments received endorsed this view. Accordingly, the final rule continues to reflect the portion of the proposed rule that precludes application of the regulation to new goods. Article 412 of NAFTA and section 17 of the appendix to 19 CFR part 181 contain a very broad anti-circumvention provision which states that a good will not be considered to be an originating good if the object of the production can be shown by a preponderance of the evidence to have been to circumvent the rules of origin. CBP believes that a change in tariff classification resulting from the disassembly of new, nonoriginating goods should not make the resulting goods eligible for originating status. Generally, a ‘‘new’’ good is a good which is in the same condition as it was when it was manufactured and which meets the commercial standards for new goods in the relevant industry. Accordingly, § 181.132(b) in this final rule document provides that the disassembly of new goods will not be considered ‘‘production’’ for the purposes of NAFTA Article 415 and the NAFTA rules of origin. To clarify the meaning of the term ‘‘new goods,’’ CBP also has included in § 181.132(b) the definition set forth above for this term. Comment: One commenter pointed out an error in proposed § 181.132(c). The reference to ‘‘Schedule V’’ should be ‘‘Part V.’’ However, the commenter believes that a reference to automotive goods is unnecessary because remanufactured goods are not used as original equipment in the production of motor vehicles. Thus, they do not fall within the definition of ‘‘light duty automotive good’’ or ‘‘heavy-duty automotive good’’ and would not be subject to tracing requirements. PO 00000 Frm 00027 Fmt 4700 Sfmt 4700 37673 CBP’s Response: CBP agrees that the reference in proposed § 181.132(c) should have been to ‘‘Part V.’’ CBP takes note of the commenter’s statement that remanufactured goods are not used as original equipment in the production of motor vehicles. Upon further reflection, CBP has decided to delete paragraph (c) because it is unnecessary. Comment: The Office of Advocacy of the U.S. Small Business Administration (SBA) expressed concern that the proposed rule’s certification pursuant to the Regulatory Flexibility Act was deficient. CBP certified that the proposed rule would not have a significant economic impact on a substantial number of small entities. However, the SBA is concerned that there is no information on the number of small entities that would be impacted by this rule or the magnitude of the impact. Based on discussions with small entities in the automotive recycling business, the SBA recommended that CBP revisit its certification and at a minimum provide a factual basis for certification. The SBA stated that CBP must show which small entities will be affected and whether those affected constitute a substantial number within the regulatory industry. CBP’s Response: In the NPRM, CBP certified that the proposed rule would not have a significant economic impact on a substantial number of small entities. However, upon reconsideration, CBP believes that the proposed rule should have stated that the Regulatory Flexibility Act is not applicable to this rule because the rule is exempt from notice and comment procedures pursuant to the Administrative Procedure Act (5 U.S.C. 553). First, this is an interpretive rule that is exempt from notice and public procedure pursuant 5 U.S.C. 553(b)(A). Second, this rule involves a foreign affairs function of the United States because it implements an international trade agreement. A notice of proposed rulemaking is not required for such rules pursuant to 5 U.S.C. 553(a)(1). Accordingly, because the Regulatory Flexibility Act, as amended (5 U.S.C. 601 et seq.) applies to a rule only when an agency is required by 5 U.S.C. 553 or any other law to publish a notice of proposed rulemaking, this rule is not subject to the regulatory analysis or other requirements of 5 U.S.C. 603 and 604. Even if the Regulatory Flexibility Act applied to this rule, CBP would again certify that this final rule does not have a significant economic impact on a substantial number of small entities. The rule has only a positive economic impact on small (or other) entities E:\FR\FM\30JNR1.SGM 30JNR1 37674 Federal Register / Vol. 70, No. 125 / Thursday, June 30, 2005 / Rules and Regulations regulated by the rule. The rule regulates only U.S. importers of components of used goods that were recycled or remanufactured in Canada or Mexico, and, rather than increasing the economic burdens on these importers, the rule provides these importers with customs duty relief. Comment: Four commenters expressed opposition to requiring a RVC calculation for recovered components because it is claimed either that there is no clear method for valuing individual components or that their value is not readily ascertainable. Most commenters stated that they did not know how to value the components removed from used goods. They requested that the rules clarify how the value and origin of individual used components are to be established. The commenters claimed that identifying the cost of each individual recovered component from the cost of the used good would not be feasible. While there may be an ascertainable value for the used good, there is not necessarily a purchase price or individualized value for the components included inside it. Additionally, the commenters claimed that it is not clear whether the value of the used component or the used good is to be included in the value of nonoriginating materials. CBP’s Response: CBP agrees that applying the value-content requirement to the disassembly process raises certain questions. However, the value-content requirement exists as part of the Annex 401 rule and cannot be disregarded. CBP recognizes that if more than one component is recovered from the used good, the value of the used good should be allocated over the disassembled components. Additionally, the cost of the disassembly would have to be spread over all of the constituent disassembled components and then reallocated and added to the cost of each of those components. CBP notes that it has previously ruled that the scrap value of the parts and components that cannot be reused may be deducted from the value of the non-originating materials. See Headquarters Ruling Letter 547088, dated August 29, 2002. Remanufacturers may have internal bookkeeping records that would aid in valuing such components. CBP acknowledges that trade in remanufactured goods already exists and is inclined to consider reasonable accounting methods that have been used consistently in the trade. Comment: Many commenters began their analysis by attempting to determine whether the used good was an originating good. They stated that it was highly unlikely that a NAFTA VerDate jul<14>2003 15:12 Jun 29, 2005 Jkt 205001 certificate of origin could be provided for the used good since the good would probably be several years old and pertinent records would no longer be available. CBP’s Response: CBP agrees. It is likely that the used good will be assumed to be non-originating. However, the new regulation allows the component recovered from the used good to qualify as an originating good. If the recovered component meets the Annex 401 rule applicable to that component, the recovered component will be considered to be an originating good (or material). Conclusion Accordingly, based on the comments received and the analysis of those comments as set forth above, and after further review of this matter, CBP believes that the proposed regulatory amendments regarding disassembly should be adopted as a final rule with the following changes: 1. The additional processing requirements set forth in paragraph (a)(2) of proposed § 181.132 have been deleted for the reasons explained in the analysis of comments. 2. Paragraph (c) of the proposed regulation has been deleted because, as explained further in the analysis of comments, the reference to automotive goods in this provision is unnecessary. Executive Order 12866 This document does not meet the criteria for a ‘‘significant regulatory action’’ as specified in E.O. 12866. Regulatory Flexibility Act Because this rule interprets and implements the obligations of the United States under the NAFTA, a notice of proposed rulemaking was not required pursuant to 5 U.S.C. 553(a)(1) and (b)(A). Accordingly, the provisions of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) are inapplicable to this rule. Drafting Information The principal author of this document was Shari Suzuki, Office of Regulations and Ruling, Bureau of Customs and Border Protection. However, personnel from other offices participated in its development. List of Subjects in 19 CFR Part 181 Administrative practice and procedure, Canada, Customs duties and inspection, Imports, Mexico, Trade agreements (North American Free Trade Agreement). Amendments to the Regulations Accordingly, for the reasons stated above, part 181 of the CBP Regulations (19 CFR part 181) is amended as set forth below. I PART 181—NORTH AMERICAN FREE TRADE AGREEMENT 1. The authority citation for part 181 is revised to read as follows: I Authority: 19 U.S.C. 66, 1202 (General Note 3(i), Harmonized Tariff Schedule of the United States), 1624, 3314. 2. Subpart L of part 181 is amended by adding a new § 181.132 to read as follows: I § 181.132 Disassembly. (a) Treated as production. For purposes of implementing the rules of origin provisions of General Note 12, HTSUS, and Chapter Four of the NAFTA, except as provided in paragraph (b) of this section, disassembly is considered to be production, and a component recovered from a good disassembled in the territory of a Party will be considered to be originating as the result of such disassembly provided that the recovered component satisfies all applicable requirements of Annex 401 and this part. (b) Exception; new goods. Disassembly, as provided in paragraph (a) of this section, will not be considered production in the case of components that are recovered from new goods. For purposes of this paragraph, a ‘‘new good’’ means a good which is in the same condition as it was when it was manufactured and which meets the commercial standards for new goods in the relevant industry. Signing Authority This document is being issued by CBP in accordance with § 0.1(a)(1) of the CBP Regulations (19 CFR 0.1(a)(1)), pertaining to the authority of the Secretary of the Treasury (or his/her delegate) to approve regulations related to certain CBP revenue functions. Robert C. Bonner, Commissioner of Customs and Border Protection. Approved: June 27, 2005. Timothy E. Skud, Deputy Assistant Secretary of the Treasury. [FR Doc. 05–12902 Filed 6–29–05; 8:45 am] BILLING CODE 4820–02–P PO 00000 Frm 00028 Fmt 4700 Sfmt 4700 E:\FR\FM\30JNR1.SGM 30JNR1

Agencies

[Federal Register Volume 70, Number 125 (Thursday, June 30, 2005)]
[Rules and Regulations]
[Pages 37669-37674]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-12902]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF HOMELAND SECURITY

Bureau of Customs and Border Protection

DEPARTMENT OF THE TREASURY

19 CFR Part 181

[CBP Dec. 05-24]
RIN 1505-AB41


Tariff Treatment Related to Disassembly Operations Under the 
North American Free Trade Agreement

AGENCY: Customs and Border Protection, Department of Homeland Security.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: This document adopts as a final rule, with some changes, 
proposed amendments to the Customs and Border Protection (``CBP'') 
Regulations concerning the North American Free Trade Agreement (``the 
NAFTA''). The regulatory changes interpret the term ``production'' to 
include disassembly and clarify that components recovered from the 
disassembly of used goods in a NAFTA country are entitled to NAFTA 
originating status when imported into the United States provided that 
the recovered components satisfy the applicable NAFTA rule of origin 
requirements.

DATES: Effective August 1, 2005.

FOR FURTHER INFORMATION CONTACT: Shari Suzuki, International Agreements 
Staff, Office of Regulations and Rulings, (202) 572-8818.

[[Page 37670]]


SUPPLEMENTARY INFORMATION:

Background

Statutory and Regulatory Background

    On December 17, 1992, the United States, Canada, and Mexico (the 
parties) entered into an agreement, the North American Free Trade 
Agreement (the NAFTA). The provisions of the NAFTA were adopted by the 
United States with the enactment of the North American Free Trade 
Agreement Implementation Act, Pub. L. 103-182, 107 Stat. 2057 (December 
8, 1993).
    Under NAFTA Article 401(b) and 19 U.S.C. 3332(a)(1)(B)(i), a good 
originates in the territory of a party where each of the non-
originating materials used in the production of the good undergoes an 
applicable change in tariff classification set out in Annex 401 of the 
NAFTA as a result of production occurring entirely in the territory of 
one or more of the parties. These change in tariff classification rules 
are set forth in General Note 12(t) of the Harmonized Tariff Schedule 
of the United States (``HTSUS'') (hereinafter ``the Annex 401 rules''). 
It is therefore understood that unless a change in tariff 
classification results from an activity that qualifies as 
``production,'' the mere fact that there is a prescribed change in 
tariff classification will not be considered as meeting a rule of 
origin.
    The NAFTA does not explicitly address the question of whether 
disassembly occurring in a NAFTA country may be considered NAFTA 
origin-conferring ``production'' when the recovery of components by the 
disassembly operation satisfies the applicable rules of origin listed 
in Annex 401 of the NAFTA.

Publication of Proposed Regulatory Changes

    On March 13, 2003, the U.S. Customs Service (now Customs and Border 
Protection (``CBP'')) published in the Federal Register (68 FR 12011) a 
notice of proposed rulemaking (``NPRM'') setting forth proposed 
amendments to Part 181 to add a new Sec.  181.132 to the CBP 
Regulations (19 CFR 181.132). The proposed rule stated that components 
which were recovered from the disassembly of used goods in a NAFTA 
country would be entitled to NAFTA originating status upon importation 
into the United States, provided that: (1) The recovered components 
satisfy the applicable NAFTA rule of origin requirements in Annex 401, 
and (2) if the rule of origin in Annex 401 applicable to the components 
does not include a regional value content requirement, the components 
are subject to further processing in the NAFTA country beyond certain 
specified minor operations.
    The NPRM explained the need for a regulation to address disassembly 
in order to: (1) Provide an appropriate regulatory basis for the 
treatment of recycled or remanufactured goods under the NAFTA; (2) 
provide guidance regarding the meaning of the statutory term 
``production;'' and (3) clarify the relationship between the Annex 401 
rules of origin and the disassembly of goods. In addition, the NPRM 
noted that allowing the disassembly of used goods to confer origin 
under certain circumstances would promote recycling and re-
manufacturing in North America and, therefore, would advance the 
economic and environmental objectives of the NAFTA.
    The NPRM prescribed a 60-day period for the submission of public 
comments on the proposed regulatory changes. A total of 10 commenters 
responded. Nine comments focused on the proposed text while one comment 
concerned CBP's certification under the Regulatory Flexibility Act of 
1980.
    A majority of the comments received by CBP supported the proposed 
amendment which would allow components that are recovered from the 
disassembly of a used good in a NAFTA country to be entitled to NAFTA 
originating status upon importation into the United States. Most 
commenters agreed with CBP that interpreting ``production'' to include 
disassembly would promote recycling and re-manufacturing in North 
America.
    However, all of the comments suggested changes regarding the 
approach set forth in the NPRM. Most commenters expressed the opinion 
that, while the proposed amendment was well intended, it would not 
completely remedy the situation and, in some cases, would restrict the 
ability of remanufactured goods to qualify for preferential treatment 
under NAFTA. Many commenters objected to the addition of a further 
processing requirement in cases where the applicable rule of origin did 
not include a regional value content requirement. Several commenters 
identified practical problems in administering the proposed regulation, 
including inconsistencies with commercial and accounting practices. 
Lastly, many commenters maintained that the proposed regulation was too 
complicated.

Discussion of Comments

    Of the 10 commenters who responded to the solicitation of comments 
on the proposed Part 181 changes, 9 provided one or more specific 
comments on the proposed Sec.  181.132 text. The comments are discussed 
below.
    Comment: Four commenters expressed concern with the unilateral 
approach being pursued by the U.S. Government in regard to the proposed 
amendment. The commenters stated that the adoption of an amendment 
solely within the territory of the United States would give rise to 
uncertainty within the trading community and result in inconsistent 
application of the rules of origin between the NAFTA parties. These 
commenters indicated their preference for the development of a 
trilateral approach.
    CBP's Response: A trilateral approach remains under discussion in 
the NAFTA working group. While there appears to be agreement in 
principle, the trilateral text is still being developed. In the 
meantime, this interpretive regulatory guidance is needed to aid U.S. 
importers in exercising reasonable care.
    Comment: Four commenters suggested adopting an approach similar to 
that taken by the U.S. Administration in several recent free trade 
agreements. Under this approach, ``goods wholly obtained or produced 
entirely'' in the territories of the parties are considered to be 
originating. ``Recovered goods'' are specifically included in the 
definition of ``goods wholly obtained or produced entirely'' in the 
territories of the parties. Thus, ``recovered goods'' are considered to 
be originating goods. The commenters stated that the same result could 
be achieved by clarifying the NAFTA definition of ``goods wholly 
obtained or produced'' under the NAFTA Uniform Regulations. According 
to these commenters, this approach recognizes disassembly as conferring 
origin without the technical and cumbersome requirement of establishing 
that disassembly operations satisfy the product-specific rules of 
origin.
    Two commenters supported adopting the provision for ``recovered 
goods'' in the definition of ``goods wholly obtained or produced 
entirely.'' One commenter proposed that a new item covering ``materials 
recovered by means of disassembly'' be included in the definition of 
``goods wholly obtained or produced entirely.'' Another commenter 
recommended amending the existing provision for waste and scrap, which 
exists under the definition of ``goods wholly obtained or produced 
entirely,'' to provide for recovered goods.
    CBP's Response: CBP agrees that the approach taken by the United 
States in several recent free trade agreements is administrable. 
However, amending the definition of ``goods wholly obtained or 
produced'' in NAFTA cannot be achieved merely by amending the

[[Page 37671]]

definition found in the regulations. The definition of ``goods wholly 
obtained or produced'' is found in Article 401 of the NAFTA and any 
change would require an amendment to the agreement and implementing 
legislation.
    Comment: One comment emphasized the importance of consistency. This 
commenter stated that there should be as much consistency as possible 
among the various agreements to which the United States is a party.
    CBP's Response: While agreeing that consistency of rules under 
various free trade agreements is desirable, CBP's responsibility is to 
implement agreements as negotiated and implemented in U.S. law.
    Comment: Several commenters maintained that the fundamental basis 
on which the Annex 401 rules were negotiated presumed the manufacture 
or assembly of a good from its constituent parts. Thus, the commenters 
believed that interpreting the term ``production'' to include 
disassembly is not sustainable when interpreted in context and in light 
of the objectives and purpose of the agreement.
    CBP's Response: As indicated in the NPRM, CBP finds no evidence 
showing that the NAFTA intended not to treat ``disassembly'' as a 
production process. The term ``production'' includes a broad range of 
economic activity. Moreover, the goals of the NAFTA include elimination 
of barriers to trade, facilitation of cross-border movement of goods, 
promotion of economic activity in North America, and protection of the 
environment. Thus, it is consistent with the free trade purposes of 
NAFTA to treat the recovery of goods by disassembly as ``production'' 
under the NAFTA rules of origin.
    Comment: Two commenters expressed a desire for an approach that 
would confer originating status on goods recovered from disassembly 
operations in a manner that applies equally to all manufacturers across 
industry sectors. These commenters note that differences in the 
structure of the Harmonized System may result in lack of uniformity of 
application across industry sectors.
    CBP's Response: CBP notes that any lack of uniformity in the 
treatment of recovered components will parallel the effect of the 
applicable NAFTA rules of origin on other types of ``production.'' 
Application of Annex 401 does result in lack of uniformity of 
application across industry sectors. The results depend on both the 
structure of the Harmonized System and the product-specific rules in 
Annex 401 which were negotiated in the context of trade policy goals, 
which may differ between sectors. There is no uniform level of 
processing across sectors in the rules.
    CBP notes that in many cases where a heading change rule cannot be 
met, an alternative rule of origin allows a change within the heading 
provided a regional value content requirement is met. CBP also notes 
that Article 401(d) provides a special rule for goods and parts that 
are classified in the same heading or subheading where there can be no 
change in tariff classification. CBP believes that the fact that some 
recovered goods will meet a tariff shift requirement while others will 
not is an insufficient reason to abandon the proposed regulation 
altogether (as this result will comport with the NAFTA rules of origin 
themselves).
    Comment: Six commenters were opposed to the imposition of 
additional processing requirements for recovered components that meet 
the tariff shift rule under Annex 401. The proposed regulation 
specified that recovered components that met a tariff shift rule, but 
were not subject to a regional value content (RVC) requirement, had to 
be further processed beyond certain minor operations.
    The commenters argued that the effect of this requirement is that 
recovered components that would otherwise qualify for the NAFTA 
preference would not qualify unless they had been subjected to 
additional processing. Additionally, these commenters stated that this 
``advanced-in-value'' requirement effectively makes the origin 
requirements applicable to goods derived from disassembly operations 
stricter than those applicable to other goods, which need only satisfy 
the Annex 401 requirements. They believe that requiring goods derived 
from disassembly operations to satisfy both the Annex 401 rule of 
origin and the additional processing requirements imposes a double 
burden on remanufacturers that undermines the goals of the rule.
    Two commenters stated that the additional processing requirement is 
unnecessary because the Annex 401 rules of origin, which were 
negotiated and agreed to by all three countries, already define the 
degree of production that will confer origin on non-originating 
materials. In some cases, that degree of production would involve a 
tariff shift, in others a regional value content requirement, and in 
still others a combination of both. However, the commenters argued 
that, in all cases, the degree of production established by the Annex 
401 rules of origin would be sufficient to address when disassembly 
results in an originating good.
    One commenter believed that disassembly is merely the inverse of 
assembly. Therefore, if the applicable Annex 401 rule of origin 
provides that origin is conferred by a simple tariff shift that may be 
achieved through assembly, achieving that same tariff shift through 
disassembly should also confer origin.
    Another commenter argued that while the assembly process is 
predictable and quantifiable because every part entering the production 
line is the same, each disassembly is unique due to the condition of 
the used good, and that disassembly may be far more difficult than 
simple assembly with clean new parts. Thus, the proposed rule does not 
recognize the complexity and difficulty of disassembly and ignores the 
substantial effort necessary to recover parts from used equipment.
    Several commenters objected to the proposed rule because some 
recovered components are not subject to operations other than those 
enumerated as minor operations in the proposed rule. Two commenters 
stated that there is little in the remanufacturing process that cannot 
be categorized within the list of minor operations. One commenter 
stated that the remanufacturing process consists of all the listed 
processes linked together. Thus, the commenters believed that the 
additional requirements would preclude the remanufacturing process from 
conferring originating status on recovered components.
    One commenter believed that the additional processing requirement 
would increase the complexity of NAFTA compliance systems because it 
may be necessary to record the processing performed on individual 
recovered components. The commenter stated that this would create a de 
facto direct identification requirement which may be impractical or 
impossible to implement and very difficult to audit.
    CBP's Response: CBP agrees that the Annex 401 rules define the 
degree of production required for conferring origin and has deleted the 
additional processing requirements.
    Comment: Several commenters objected to the application of the 
Annex 401 rules of origin. They claimed that subjecting recovered 
components and remanufactured goods to the same NAFTA rules as items 
produced entirely from new components makes it extremely difficult to 
qualify remanufactured goods as originating goods under the NAFTA.
    The commenters argued that, in many cases, NAFTA certificates are 
not available for recovered components and, therefore, they must be 
deemed non-

[[Page 37672]]

originating. Furthermore, when applying the Annex 401 rules to the 
remanufactured good, the recovered component often fails to satisfy the 
required tariff shift because it is generally classified in the same 
tariff provision as the remanufactured good. These commenters also 
contended that if the remanufactured good is subject to an RVC rule, 
the good will fail to meet the rule because the recovered component 
often represents the majority of the value or net cost of the 
remanufactured good. In this situation, the RVC cannot be met because 
the recovered component is deemed to be non-originating.
    CBP's Response: The situation the commenters describe is one of the 
reasons that more recent free trade agreements take a different 
approach to recycled and recovered goods, but the issue here is how to 
interpret NAFTA, and solutions are limited by the NAFTA text. The 
feasibility of determining the cost or value of a recovered component 
will be discussed later in this document.
    Comment: Four commenters expressed the view that the proposed rule 
should be a simple rule that treats all materials yielded from 
disassembly in a NAFTA country as originating materials. These 
commenters stated that the removal of a worn component should be an 
origin-conferring process. This would ensure that the value of the 
recovered component, including the very substantial content resulting 
from the labor involved in the removal, will be included in the value 
of originating materials when determining whether the remanufactured 
good qualifies as an originating good. By considering the removal of 
worn parts to be origin conferring, the commenters stated that it would 
be possible to count that valuable operation towards qualifying the 
remanufactured good as an originating good.
    These commenters contended that the above ``simple'' rule could be 
administered more easily than CBP's proposed rule which they 
characterized as highly complex and difficult, if not impossible, to 
administer. With respect to CBP's concern regarding sufficient 
processing, the commenters suggested that CBP could condition this rule 
by providing that goods yielded from a ``minor disassembly'' would not 
be treated as NAFTA originating. They suggested that disassembly of an 
article into five (or ten) or fewer components by processes such as 
removing screws, bolts, pins or other fasteners could be treated as a 
``minor disassembly'' operation. Moreover, certain minor operations, 
such as separating a good and its component by disconnecting cables or 
by unsnapping could be ruled not to constitute disassembly. Thus, these 
commenters proposed a rule that treats all components yielded from 
disassembly as NAFTA originating, subject to a simple disassembly 
exception. The commenters claimed that their proposal would meet the 
goals of NAFTA while avoiding administrative problems.
    Several remanufacturers expressed dissatisfaction with the proposed 
regulation for the reason that their recovered parts would never 
qualify under the proposed rule since the parts would not satisfy the 
required tariff shift and also would not meet the RVC requirement based 
only on labor costs. These commenters support a simple disassembly rule 
under which recovered parts would qualify as originating. If the 
recovered parts were considered originating, they could meet the RVC 
requirement associated with the rule for the remanufactured good. This 
approach would allow the recovered parts to qualify as an originating 
material but would still require the producer of the remanufactured 
good to meet the NAFTA Annex 401 rule of origin applicable to the 
remanufactured good.
    CBP's Response: Although CBP understands the appeal of a ``simple'' 
disassembly rule, CBP cannot adopt such an approach because it 
conflicts with the Annex 401 rules of origin. CBP cannot disregard the 
rules of origin that already exist for specific products; the Annex 401 
rules of origin set the minimum threshold that must be met in order to 
confer originating status to a good.
    The commenters would prefer to have a new rule that allows mere 
disassembly to confer origin without having to meet any tariff shift or 
regional value content requirements. CBP does not have the authority to 
change the Annex 401 rules of origin. The only question addressed in 
this interpretive regulation is whether the NAFTA definition of 
production can be interpreted to include disassembly. CBP is not 
adopting a new rule of origin.
    Comment: One commenter maintained that all goods which are subject 
to additional processing should be treated as originating goods without 
regard to whether the good meets the Annex 401 rules. This commenter 
stated that if CBP must require that goods be advanced in value or 
improved in condition, then all goods that satisfy the additional 
processing requirements should be considered originating, regardless of 
whether they satisfy the specific rule of origin under Annex 401. The 
commenter recommended a new rule in which the Annex 401 rules are 
overridden. A component recovered from a good disassembled in the 
territory of a party would be considered to be originating as a result 
of such disassembly provided that the recovered component is advanced 
in value or improved in condition by means of additional processing 
other than certain listed minor processes.
    CBP's Response: CBP disagrees. The Annex 401 rules of origin set 
forth the minimum level of processing required and cannot be 
disregarded.
    Comment: One commenter expressed concern with how CBP will 
interpret a required change in tariff classification. The commenter 
provided an example involving a cover from the document feeder portion 
of a laser printer. The commenter asked whether CBP would focus on the 
laser printer or the document feeder for the purpose of determining 
whether the cover met a required change in tariff classification. The 
cover meets the tariff shift requirement when the laser printer is 
viewed as the non-originating material. However, the cover does not 
meet the tariff shift requirement when the document feeder is viewed as 
the non-originating material.
    CBP's Response: CBP assumes that, in the example provided by the 
commenter, the remanufacturer disassembled the laser printer into 
various parts, including the document feeder, and then disassembled the 
document feeder into its constituent parts, including the cover. Under 
the principles of self-produced materials contained in part II, section 
4(8) of the appendix to part 181 of the CBP Regulations (19 CFR part 
181, appendix), the producer should be able to designate the laser 
printer as the non-originating material for the purpose of determining 
whether the non-originating materials underwent the applicable change 
in tariff classification.
    Comment: One commenter suggested that remanufactured goods should 
be considered to be originating goods and provided a precise definition 
of remanufactured goods. In order to qualify as an originating good, 
the product must: (1) Be dismantled; (2) have all parts cleaned, 
inspected and returned to sound working condition; and (3) be 
reconstructed to sound working condition. In addition to this 
definition, the commenter recommended a rule which requires that the 
components undergo processing that restores their functionality and 
fit; the components be re-assembled back into an item that is the 
equivalent of the item disassembled; all ``new'' parts used in the 
remanufacturing process satisfy the traditional specific rules of 
origin for the finished item; and the originating value

[[Page 37673]]

of the recovered parts be some derivation of the core charge value if a 
core charge applies. The commenter believes that this definition would 
eliminate the possibility of disassembly operations being used as a 
method of circumvention because there must be complete reassembly.
    This commenter also proposed, with respect to country of origin 
marking, that all remanufactured parts be labeled ``Remanufactured in 
(named country),'' and that the country of origin of the used items 
imported into a territory and used in the remanufacturing process be 
the country in which the parts expired, regardless of marking.
    CBP's Response: The Annex 401 rules of origin cannot be 
disregarded. The regulation under consideration addresses the issue of 
whether goods that are the result of disassembly are considered to have 
undergone ``production'' for purposes of determining whether the good 
qualifies as an originating good under the NAFTA. The regulation does 
not address country of origin for marking purposes. Country of origin 
for NAFTA marking purposes is governed by part 102 of the CBP 
Regulations (19 CFR part 102). CBP notes Headquarters Ruling Letters 
561209, dated May 4, 1999, and 561854, dated December 15, 2000, which 
address the country of origin marking of rebuilt automotive parts.
    Comment: One commenter suggested that, if the restrictions on 
``minor operations'' are included in the final regulation, ``precision 
machining'' should be defined as ``machining performed on a numerically 
controlled mill, lathe or similar equipment.''
    CBP's Response: As noted above, CBP has decided to delete the 
portion of the proposed regulation that refers to minor operations.
    Comment: Two commenters stated that it is unlikely that a new non-
originating good would be disassembled in one party's territory and 
shipped to another party where it would be reassembled. According to 
these commenters, the importer would have to pay duties, fees and 
brokerage charges on the initial importation into the party where the 
goods would be disassembled; incur the cost of setting up a disassembly 
operation; pay the overhead costs and costs to employ workers; pay 
additional transportation and handling costs; pay broker charges on the 
subsequent importation into the territory of the other party where the 
``recovered goods'' would be reassembled; and pay all the same costs 
noted previously for the subsequent reassembly in the territory of the 
other party. Thus, these commenters believe it is highly unlikely that 
the duty savings would be substantial enough to make such operations 
feasible from a cost/benefit standpoint.
    One commenter suggested excluding high duty rate goods from the 
disassembly rule but acknowledged that most high duty rate goods 
(textiles, footwear, chemicals, agricultural products, etc.) do not 
easily lend themselves to disassembly.
    Another commenter stated that precluding application of the 
proposed rule to new products adequately deals with possible abuses of 
disassembly to confer origin.
    CBP's Response: CBP specifically requested comments on the view 
that an applicable value-content rule or alternative rule would be 
sufficient to permit the disassembly of new goods to be considered 
``production.'' None of the comments received endorsed this view. 
Accordingly, the final rule continues to reflect the portion of the 
proposed rule that precludes application of the regulation to new 
goods.
    Article 412 of NAFTA and section 17 of the appendix to 19 CFR part 
181 contain a very broad anti-circumvention provision which states that 
a good will not be considered to be an originating good if the object 
of the production can be shown by a preponderance of the evidence to 
have been to circumvent the rules of origin. CBP believes that a change 
in tariff classification resulting from the disassembly of new, non-
originating goods should not make the resulting goods eligible for 
originating status. Generally, a ``new'' good is a good which is in the 
same condition as it was when it was manufactured and which meets the 
commercial standards for new goods in the relevant industry.
    Accordingly, Sec.  181.132(b) in this final rule document provides 
that the disassembly of new goods will not be considered ``production'' 
for the purposes of NAFTA Article 415 and the NAFTA rules of origin. To 
clarify the meaning of the term ``new goods,'' CBP also has included in 
Sec.  181.132(b) the definition set forth above for this term.
    Comment: One commenter pointed out an error in proposed Sec.  
181.132(c). The reference to ``Schedule V'' should be ``Part V.'' 
However, the commenter believes that a reference to automotive goods is 
unnecessary because remanufactured goods are not used as original 
equipment in the production of motor vehicles. Thus, they do not fall 
within the definition of ``light duty automotive good'' or ``heavy-duty 
automotive good'' and would not be subject to tracing requirements.
    CBP's Response: CBP agrees that the reference in proposed Sec.  
181.132(c) should have been to ``Part V.'' CBP takes note of the 
commenter's statement that remanufactured goods are not used as 
original equipment in the production of motor vehicles. Upon further 
reflection, CBP has decided to delete paragraph (c) because it is 
unnecessary.
    Comment: The Office of Advocacy of the U.S. Small Business 
Administration (SBA) expressed concern that the proposed rule's 
certification pursuant to the Regulatory Flexibility Act was deficient. 
CBP certified that the proposed rule would not have a significant 
economic impact on a substantial number of small entities. However, the 
SBA is concerned that there is no information on the number of small 
entities that would be impacted by this rule or the magnitude of the 
impact. Based on discussions with small entities in the automotive 
recycling business, the SBA recommended that CBP revisit its 
certification and at a minimum provide a factual basis for 
certification. The SBA stated that CBP must show which small entities 
will be affected and whether those affected constitute a substantial 
number within the regulatory industry.
    CBP's Response: In the NPRM, CBP certified that the proposed rule 
would not have a significant economic impact on a substantial number of 
small entities. However, upon reconsideration, CBP believes that the 
proposed rule should have stated that the Regulatory Flexibility Act is 
not applicable to this rule because the rule is exempt from notice and 
comment procedures pursuant to the Administrative Procedure Act (5 
U.S.C. 553). First, this is an interpretive rule that is exempt from 
notice and public procedure pursuant 5 U.S.C. 553(b)(A). Second, this 
rule involves a foreign affairs function of the United States because 
it implements an international trade agreement. A notice of proposed 
rulemaking is not required for such rules pursuant to 5 U.S.C. 
553(a)(1). Accordingly, because the Regulatory Flexibility Act, as 
amended (5 U.S.C. 601 et seq.) applies to a rule only when an agency is 
required by 5 U.S.C. 553 or any other law to publish a notice of 
proposed rulemaking, this rule is not subject to the regulatory 
analysis or other requirements of 5 U.S.C. 603 and 604.
    Even if the Regulatory Flexibility Act applied to this rule, CBP 
would again certify that this final rule does not have a significant 
economic impact on a substantial number of small entities. The rule has 
only a positive economic impact on small (or other) entities

[[Page 37674]]

regulated by the rule. The rule regulates only U.S. importers of 
components of used goods that were recycled or remanufactured in Canada 
or Mexico, and, rather than increasing the economic burdens on these 
importers, the rule provides these importers with customs duty relief.
    Comment: Four commenters expressed opposition to requiring a RVC 
calculation for recovered components because it is claimed either that 
there is no clear method for valuing individual components or that 
their value is not readily ascertainable. Most commenters stated that 
they did not know how to value the components removed from used goods. 
They requested that the rules clarify how the value and origin of 
individual used components are to be established. The commenters 
claimed that identifying the cost of each individual recovered 
component from the cost of the used good would not be feasible. While 
there may be an ascertainable value for the used good, there is not 
necessarily a purchase price or individualized value for the components 
included inside it. Additionally, the commenters claimed that it is not 
clear whether the value of the used component or the used good is to be 
included in the value of non-originating materials.
    CBP's Response: CBP agrees that applying the value-content 
requirement to the disassembly process raises certain questions. 
However, the value-content requirement exists as part of the Annex 401 
rule and cannot be disregarded.
    CBP recognizes that if more than one component is recovered from 
the used good, the value of the used good should be allocated over the 
disassembled components. Additionally, the cost of the disassembly 
would have to be spread over all of the constituent disassembled 
components and then reallocated and added to the cost of each of those 
components. CBP notes that it has previously ruled that the scrap value 
of the parts and components that cannot be reused may be deducted from 
the value of the non-originating materials. See Headquarters Ruling 
Letter 547088, dated August 29, 2002. Remanufacturers may have internal 
bookkeeping records that would aid in valuing such components. CBP 
acknowledges that trade in remanufactured goods already exists and is 
inclined to consider reasonable accounting methods that have been used 
consistently in the trade.
    Comment: Many commenters began their analysis by attempting to 
determine whether the used good was an originating good. They stated 
that it was highly unlikely that a NAFTA certificate of origin could be 
provided for the used good since the good would probably be several 
years old and pertinent records would no longer be available.
    CBP's Response: CBP agrees. It is likely that the used good will be 
assumed to be non-originating. However, the new regulation allows the 
component recovered from the used good to qualify as an originating 
good. If the recovered component meets the Annex 401 rule applicable to 
that component, the recovered component will be considered to be an 
originating good (or material).

Conclusion

    Accordingly, based on the comments received and the analysis of 
those comments as set forth above, and after further review of this 
matter, CBP believes that the proposed regulatory amendments regarding 
disassembly should be adopted as a final rule with the following 
changes:
    1. The additional processing requirements set forth in paragraph 
(a)(2) of proposed Sec.  181.132 have been deleted for the reasons 
explained in the analysis of comments.
    2. Paragraph (c) of the proposed regulation has been deleted 
because, as explained further in the analysis of comments, the 
reference to automotive goods in this provision is unnecessary.

Executive Order 12866

    This document does not meet the criteria for a ``significant 
regulatory action'' as specified in E.O. 12866.

Regulatory Flexibility Act

    Because this rule interprets and implements the obligations of the 
United States under the NAFTA, a notice of proposed rulemaking was not 
required pursuant to 5 U.S.C. 553(a)(1) and (b)(A). Accordingly, the 
provisions of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) are 
inapplicable to this rule.

Drafting Information

    The principal author of this document was Shari Suzuki, Office of 
Regulations and Ruling, Bureau of Customs and Border Protection. 
However, personnel from other offices participated in its development.

Signing Authority

    This document is being issued by CBP in accordance with Sec.  
0.1(a)(1) of the CBP Regulations (19 CFR 0.1(a)(1)), pertaining to the 
authority of the Secretary of the Treasury (or his/her delegate) to 
approve regulations related to certain CBP revenue functions.

List of Subjects in 19 CFR Part 181

    Administrative practice and procedure, Canada, Customs duties and 
inspection, Imports, Mexico, Trade agreements (North American Free 
Trade Agreement).

Amendments to the Regulations

0
Accordingly, for the reasons stated above, part 181 of the CBP 
Regulations (19 CFR part 181) is amended as set forth below.

PART 181--NORTH AMERICAN FREE TRADE AGREEMENT

0
1. The authority citation for part 181 is revised to read as follows:

    Authority: 19 U.S.C. 66, 1202 (General Note 3(i), Harmonized 
Tariff Schedule of the United States), 1624, 3314.

0
2. Subpart L of part 181 is amended by adding a new Sec.  181.132 to 
read as follows:


Sec.  181.132  Disassembly.

    (a) Treated as production. For purposes of implementing the rules 
of origin provisions of General Note 12, HTSUS, and Chapter Four of the 
NAFTA, except as provided in paragraph (b) of this section, disassembly 
is considered to be production, and a component recovered from a good 
disassembled in the territory of a Party will be considered to be 
originating as the result of such disassembly provided that the 
recovered component satisfies all applicable requirements of Annex 401 
and this part.
    (b) Exception; new goods. Disassembly, as provided in paragraph (a) 
of this section, will not be considered production in the case of 
components that are recovered from new goods. For purposes of this 
paragraph, a ``new good'' means a good which is in the same condition 
as it was when it was manufactured and which meets the commercial 
standards for new goods in the relevant industry.

Robert C. Bonner,
Commissioner of Customs and Border Protection.
    Approved: June 27, 2005.
Timothy E. Skud,
Deputy Assistant Secretary of the Treasury.
[FR Doc. 05-12902 Filed 6-29-05; 8:45 am]
BILLING CODE 4820-02-P