[Federal Register Volume 63, Number 123 (Friday, June 26, 1998)]
[Notices]
[Pages 34960-34963]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-17059]


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DEPARTMENT OF THE TREASURY

Customs Service


Determination of Origin of Goods Processed in a Qualifying 
Industrial Zone or in Israel and the West Bank or Gaza Strip

AGENCY: U.S. Customs Service, Department of the Treasury.

ACTION: General policy statement.

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SUMMARY: This document expands upon T.D. 96-58 by notifying the public 
that in determining the country of origin of textile and apparel 
products processed in a designated qualifying industrial zone Customs 
will exclusively apply the rules of origin for textile and apparel 
products set forth in section 102.21, Customs Regulations (19 CFR 
102.21), which were promulgated pursuant to the authority of section 
334, Uruguay Round Agreements Act (19 U.S.C. 3592). A qualifying 
industrial zone is defined in General Note 3(a)(v)(G), Harmonized 
Tariff Schedule of the United States (HTSUS), in part, as an area that 
encompasses portions of the territory of Israel and Jordan or Israel 
and Egypt.
    In addition, this document advises the public that, in accordance 
with the principles and policy set forth in T.D. 96-58, Customs 
determines the origin of a textile or apparel product processed both in 
Israel (outside of a qualifying industrial zone) and in the West Bank 
or Gaza Strip by first applying the Customs rulings and administrative 
practices in effect prior to December 8, 1994. If the application of 
those rulings and practices results in Israel not being the origin of 
the good, Customs applies the rules in section 102.21 to determine the 
country of origin, with no further consideration being given to the 
processing performed in Israel.
    Finally, this document reminds the public that section 102.21 is 
not used to determine whether foreign materials have undergone a 
``double substantial transformation'' for purposes of determining 
whether their cost or value may be counted toward the value-content 
requirement of various special tariff treatment programs, such as the 
U.S.-Israel Free Trade Implementation Act.

EFFECTIVE DATE: The portion of this policy statement concerning the 
origin of textile and apparel products processed in a qualifying 
industrial zone shall apply to goods entered or withdrawn from 
warehouse for consumption on or after March 13, 1998. The remainder of 
this policy statement shall apply to goods entered or withdrawn from 
warehouse for consumption on or after July 1, 1996.

FOR FURTHER INFORMATION CONTACT: Craig Walker, Special Classification 
and Marking Branch, Office of Regulations and Rulings, (202) 927-1116.

SUPPLEMENTARY INFORMATION:

Background

    Section 334 of the Uruguay Round Agreements Act (``URAA'') (19 
U.S.C. 3592) established rules of origin for textiles and textile 
products. Section 102.21, Customs Regulations (19 CFR 102.21), 
implemented the provisions of section 334, which became effective July 
1, 1996.

T.D. 96-58

    T.D. 96-58, published in the Federal Register on July 31, 1996 (61 
FR 40076), gave notice of Customs interpretation and application of 
section 334(b)(5) of the URAA. That subsection excepts from the rules 
of origin governing textiles and textile products set forth in section 
334, goods which under rulings and administrative practices in effect 
immediately before the enactment of section 334 (December 8, 1994) 
would have originated in, or been the growth, product, or manufacture 
of, Israel. Section 334(b)(5) further provides that those rulings and 
administrative practices in effect prior to December 8,

[[Page 34961]]

1994, will continue to be applied in determining whether goods 
originate in Israel, ``unless such rulings and practices are modified 
by the mutual consent of the parties to the [the U.S.-Israel Free Trade 
Agreement].''
    After analyzing the wording in section 334(b)(5) and the 
implementing Customs Regulations (19 CFR 102.21), Customs concluded in 
T.D. 96-58 that in determining whether goods originate in, or are the 
growth, product, or manufacture of Israel, Customs will first apply the 
rulings and administrative practices in effect prior to December 8, 
1994. If that determination results in Israel not being the country of 
origin of the goods, then Customs will apply the rules in 19 CFR 102.21 
to determine the country of origin, with no consideration being given 
to assembly or manufacturing processes performed in Israel. In other 
words, if a good is determined not to be a product of Israel under the 
rulings and administrative practices in effect prior to December 8, 
1994, the application of the rules in section 102.21 cannot result in 
Israel being the country of origin of the good. The statement of policy 
in T.D. 96-58 was effective July 1, 1996.

Qualifying Industrial Zones

    On October 2, 1996, the U.S.-Israel Free Trade Area Implementation 
Act of 1985 (19 U.S.C. 2112 note), was amended, creating a new section 
9, to authorize the President to proclaim the elimination of duties for 
articles produced in the West Bank, Gaza Strip, and a ``qualifying 
industrial zone.'' Pursuant to that authority, the President issued 
Proclamation No. 6955 dated November 13, 1996 (published in the Federal 
Register on November 18, 1996 (61 FR 58761)), which modified General 
Note 3(a), Harmonized Tariff Schedule of the United States (HTSUS), to 
provide duty-free treatment to articles which are the product of the 
West Bank, Gaza Strip or a qualifying industrial zone (``QIZ''), 
provided certain requirements are met. Such treatment was effective for 
products of the West Bank, Gaza Strip or a QIZ entered or withdrawn 
from warehouse for consumption on or after November 21, 1996. In 
Proclamation 6955, the President delegated to the U.S. Trade 
Representative the authority to designate QIZs.
    Under General Note 3(a)(v)(A), HTSUS, articles the product of the 
West Bank, Gaza Strip or a QIZ which are imported directly to the U.S. 
from the West Bank, Gaza Strip, a QIZ or Israel qualify for duty-free 
treatment, provided the sum of (1) the cost or value of materials 
produced in the West Bank, Gaza Strip, a QIZ or Israel, plus (2) the 
direct costs of processing operations performed in the West Bank, Gaza 
Strip, a QIZ or Israel, is not less than 35% of the appraised value of 
such articles when imported into the U.S. An article is considered to 
be a product of the West Bank, Gaza Strip or a QIZ if it is either 
wholly the growth, product or manufacture of one of those areas or a 
new or different article of commerce that has been grown, produced or 
manufactured in one of those areas. General Note 3(a)(v)(C), HTSUS, 
states that ``[t]he term ``new or different article of commerce'' means 
that articles must have been substantially transformed in the West 
Bank, the Gaza Strip or a qualifying industrial zone into articles with 
a new name, character or use.''
    General Note 3(a)(v)(G), HTSUS, defines a qualifying industrial 
zone as any area that: ``(1) Encompasses portions of the territory of 
Israel and Jordan or Israel and Egypt; (2) has been designated by local 
authorities as an enclave where merchandise may enter without payment 
of duty or excise taxes; and (3) has been designated by the U.S. Trade 
Representative in a notice published in the Federal Register as a 
qualifying industrial zone.''
    By letters dated June 30, 1997, and July 1, 1997, to the U.S. Trade 
Representative, the Governments of Jordan and Israel, respectively, 
requested the designation of the industrial zone in Irbid, Jordan, as a 
QIZ. Pursuant to subsequent consultations among the three Governments, 
the Governments of Israel and Jordan entered into a written agreement 
dated November 16, 1997, relating to the establishment of the Irbid 
QIZ, which included the following provision, entitled ``Rules of 
Origin':

    The [Governments of Israel and Jordan] agree that the origin of 
any textile or apparel product that is processed in the Irbid 
Qualifying Industrial Zone, regardless of the origin or place of 
processing of any of its imputs or materials prior to entry into, or 
subsequent to withdrawal from, the zone, will be determined solely 
pursuant to the rules of origin for textile and apparel products set 
out in Section 334 of Uruguay Round Agreements Act, 19 U.S.C. 3592.

    By notice published in the Federal Register on March 13, 1988 (63 
FR 12572), the Office of the U.S. Trade Representative formally 
designated the Israeli-Jordanian Irbid Qualifying Industrial Zone as a 
QIZ, effective upon publication of the notice in the Federal Register. 
To date, this is the only QIZ designated by the U.S. Trade 
Representative.
    Thus, pursuant to the agreement between the Governments of Israel 
and Jordan, and by the mutual consent of the U.S. and Israel, Customs 
will exclusively apply the textile and apparel rules of origin set 
forth in 19 CFR 102.21 in determining the country of origin of a 
textile or apparel product processed in the Irbid QIZ. This means that 
the section 102.21 rules will be used not only with regard to 
processing performed with respect to a textile or apparel article in 
the Jordanian and/or Israeli portion of the Irbid Zone, but also with 
regard to processing, if any, performed outside of the Zone in Israel 
or in any other country either prior to the article's entry into the 
Zone for processing or subsequent to its withdrawal from the Zone after 
processing.

Example

    The following example is set forth to illustrate the application of 
the 19 CFR 102.21 rules of origin to determine the origin of articles 
processed in the Irbid QIZ from imputs processed in Israel:

    Fabric woven in China is cut in Israel (outside of the Irbid 
QIZ) into components for a simple shirt. Those components are 
assembled into the completed shirt in the Jordanian portion of the 
Irbid QIZ by sewing.
    Pursuant to section 334(b)(5) of the URAA, the U.S. and Israel 
have determined by mutual consent that the section 102.21 rules of 
origin rather than the rulings and administrative practices in 
effect prior to December 8, 1994, shall be used to determine the 
country of origin of textile and apparel products processed in the 
Irbid QIZ. Therefore, Customs must apply section 102.21 to determine 
the origin of the shirt.
    (a) Section 102.21 requires that the General Rules, found in 
section 102.21(c), be applied in sequential order. Section 
102.21(c)(1) states that the country of origin of a good is the 
single country, territory, or insular possession in which the good 
was wholly obtained or produced. Since the shirt in the above 
example was not wholly obtained or produced in a single country, 
that section is not applicable.
    (b) Section 102.21(c)(2) requires that the good comply with the 
applicable tariff shift rule in section 102.21(e). The applicable 
tariff shift rule for the shirt in the above example is a change to 
the heading in which that garment is classified from any other 
heading, provided that the change is the result of the garment being 
wholly assembled in a single country, territory, or insular 
possession. The shirt in the above example meets this requirement 
because it was wholly assembled in the Jordanian portion of the 
Irbid QIZ. Therefore, the shirt is considered to be the ``growth, 
product or manufacture'' of the QIZ for purposes of obtaining duty-
free treatment under General Note 3(a)(v), HTSUS. It should also be 
noted that, because the country of origin marking statute (19 U.S.C. 
1304) provides that, unless excepted, every imported foreign article 
(or its container) shall be marked with the ``name of the country of 
origin of the article'' (emphasis

[[Page 34962]]

added), merely marking the shirt to indicate that it is a product of 
the Irbid QIZ would not satisfy the requirements of 19 U.S.C. 1304. 
Therefore, since the processing which determines the origin of the 
shirt under 19 CFR 102.21 takes place in the Jordanian portion of 
the QIZ, the country of origin of the shirt for marking purposes is 
Jordan, and it must be so marked.

West Bank and Gaza Strip

    As previously stated, articles produced in the West Bank or Gaza 
Strip which meet the requirements set forth in General Note 3(a)(v), 
HTSUS, are entitled to duty-free treatment when imported into the U.S., 
effective for articles entered on or after November 21, 1996.

Example

    The following example illustrates how a determination is made as to 
the country of origin of a textile or apparel product which is 
processed in the West Bank or Gaza Strip from imputs processed in 
Israel (outside of the Irbid QIZ):

    Fabric woven in country A is cut in Israel (outside the Irbid 
QIZ) into components for men's boxer shorts of the underwear type. 
The components are assembled into the completed boxer shorts in the 
West Bank or Gaza Strip.
    In this example, no processing is performed in the Irbid QIZ. 
Therefore, pursuant to section 334(b)(5) of the URAA and the 
statement of policy set forth in T.D. 96-58, Customs must first 
apply the rulings and administrative practices in effect prior to 
December 8, 1994, to determine whether Israel is the country of 
origin of the good. It is only when the first determination results 
in Israel not being the country of origin of the good that resort is 
made to the section 102.21 rules of origin to determine the good's 
country of origin, with no further consideration being given to the 
processing performed in Israel.
    With regard to the example, Customs has a long line of 
administrative rulings predating December 8, 1994, holding that the 
cutting of fabric into garment components results in a substantial 
transformation of the fabric, while the assembly of those components 
into a simple garment does not. Thus, in this example, since the 
cutting of the garment parts is performed in Israel, Israel is the 
country of origin of the boxer shorts, and there is no application 
of the section 102.21 rules.

Double Substantial Transformation

    In addition to the North American Free Trade Agreement (``NAFTA'') 
(General Note 12, HTSUS), there are a number of special tariff 
preference programs which Congress has implemented to promote economic 
development in certain parts of the world by permitting duty-free entry 
of certain products from designated countries, provided certain 
requirements are met. These include the Generalized System of 
Preferences (``GSP'') (19 U.S.C. 2461 et seq.), the Caribbean Basin 
Economic Recovery Act (``CBERA'') (19 U.S.C. 2701 et seq.), the Andean 
Trade Preference Act (``ATPA'') (19 U.S.C. 3201 et seq.), the U.S.-
Israel Free Trade Area Implementation Act (``IFTA'') (19 U.S.C. 2112 
note), General Note 3(a)(iv), HTSUS (relating to products from U.S. 
insular possessions), and General Note 3(a)(v), HTSUS (relating to 
products from the West Bank, Gaza Strip or a QIZ).
    To receive duty-free treatment under these programs, an eligible 
article must be a ``product of'' the beneficiary country, it must be 
imported directly to the U.S., and it must satisfy a value-content 
requirement. The value content requirements in the GSP, CBERA, ATPA, 
IFTA, and General Note 3(a)(v), HTSUS, are nearly identical and provide 
that the sum of (1) the cost or value of the materials produced in the 
beneficiary country (or countries), plus (2) the direct costs of 
processing operations performed in the beneficiary country (or 
countries), must represent at least 35% of the appraised value of the 
article at the time it is entered into the U.S.
    The value-content requirement set forth in General Note 3(a)(iv), 
HTSUS, is somewhat different. It provides that products of a U.S. 
insular possession must not contain foreign materials which represent 
more than 70% of the goods' total value, or in the case of goods 
ineligible for duty-free treatment under the CBERA, more than 50% of 
their total value.
    In determining whether products meet the value-content requirements 
in the above programs, a concept known as ``double substantial 
transformation'' is used. According to this concept, the value of 
foreign material (that is, material that does not originate in the 
applicable country, territory or possession) may be considered as part 
of the value of materials produced in that country, territory or 
possession for purposes of the value-content requirement only if it 
undergoes two substantial transformations in the country, territory or 
possession. That is, the foreign material must be substantially 
transformed in the beneficiary country, territory or possession into a 
new and different intermediate article of commerce, which is then 
transformed a second time during production of the final article which 
is exported to the U.S.
    Customs application of the double substantial transformation 
requirement in the context of the GSP received judicial approval in The 
Torrington Company v. United States, 596 F.Supp. 1083 (CIT 1984), 
aff'd. 764 F.2d 1563 (Fed.Cir. 1985). See also Azteca Milling Co. v. 
United States, 703 F.Supp. 949 (CIT 1988), aff'd 890 F.2d 1150 (Fed. 
Cir. 1989), and F.F. Zuniga, a/c Refractarios Monterrey, S.A. v. United 
States, 16 CIT 459 (1992), aff'd 996 F.2d 1203 (Fed.Cir. 1993). T.D. 
88-17, published in the Federal Register on April 13, 1988 (53 FR 
12143), applied the double substantial transformation concept to 
products of U.S. insular possessions for purposes of determining 
whether the products meet the foreign value limitation under General 
Note 3(a)(iv), HTSUS.
    The GSP, CBERA, and ATPA statutes specifically exclude most textile 
and apparel articles from eligibility for duty-free treatment under 
those programs. However, all textile and apparel articles are eligible 
for duty-free treatment under the IFTA, General Note 3(a)(iv), HTSUS, 
and General Note 3(a)(v), HTSUS, provided that they meet the applicable 
requirements of those programs.
    In T.D. 95-69 (the Final Rule document promulgating 19 CFR 102.21), 
which was published in the Federal Register on September 5, 1995 (60 FR 
46189), Customs responded to certain comments received in response to 
the Notice of Proposed Rulemaking concerning the effect of the section 
102.21 rules of origin on existing Customs rulings holding that the 
cutting of garment parts and the assembly of those parts into garments 
constitute a double substantial transformation for purposes of the 
foreign value limitation in General Note 3(a)(iv), HTSUS. Customs 
stated that:

    [s]ince section 334 deals with the country of origin of textile 
and apparel products and not with value requirements for purposes of 
duty preferences, section 334 will not affect either foreign 
material value determinations required under General Note 3(a)(iv) 
or value-added requirements contained in other statutory provisions. 
Accordingly, Customs intends to continue its current tariff 
treatment of garments which are cut and assembled in insular 
possessions.

    Consistent with the above response, Customs wishes to remind the 
public that the section 102.21 rules of origin are not used to 
determine whether foreign materials have undergone a double substantial 
transformation for purposes of determining whether their cost or value 
may be considered as part of the value of materials produced in the 
beneficiary country, territory or possession under the tariff 
preference programs referenced above.

[[Page 34963]]

Conclusion

    In determining the country of origin of textile and apparel 
products processed in a designated QIZ, Customs will exclusively apply 
the rules of origin for textile and apparel products set forth in 19 
CFR 102.21. However, pursuant to the principles and policy set forth 
T.D. 96-58, Customs determines the origin of a textile or apparel 
product processed both in Israel (outside of a QIZ) and in the West 
Bank or Gaza Strip by first applying the rulings and administrative 
practices in effect prior to December 8, 1994. If that determination 
results in Israel not being the origin of the good, Customs applies the 
rules in section 102.21 to determine the country of origin, with no 
further consideration being given to the processing performed in 
Israel.
    Finally, section 102.21 is not used to determine whether foreign 
materials have undergone a double substantial transformation so that 
their cost or value may be considered as part of the value of materials 
produced in the beneficiary country, territory or possession for 
purposes of the value-content requirements set forth in the above-
specified tariff preference programs.

    Dated: June 22, 1998.
Stuart P. Seidel,
Assistant Commissioner, Office of Regulations and Rulings.
[FR Doc. 98-17059 Filed 6-25-98; 8:45 am]
BILLING CODE 4820-02-P