[Federal Register Volume 68, Number 49 (Thursday, March 13, 2003)]
[Proposed Rules]
[Pages 12011-12013]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-6051]


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DEPARTMENT OF THE TREASURY

Customs Service

19 CFR PART 181

RIN 1515-AD23


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

AGENCY: Customs Service, Department of the Treasury.

ACTION: Proposed rule.

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SUMMARY: This document proposes to amend the Customs Regulations 
concerning the North American Free Trade Agreement (the NAFTA). 
Specifically, the proposed rule would allow components which are 
recovered from the disassembly of used goods in a NAFTA country to be 
entitled to NAFTA originating status when imported into the United 
States, provided that: The recovered components satisfy the applicable 
NAFTA rule of origin requirements; and if the applicable rule of origin 
does not include a regional value content requirement, the components 
are subject to further processing in the NAFTA country beyond certain 
minor operations.
    The proposed rule is intended to promote economic activity and the 
protection of the environment in North America, both of which are goals 
of the NAFTA. To this end, the recovery and recycling of used goods is 
a critical element in both the economic activity and the environmental 
goals of the nation, and disassembly for the recovery of used goods is 
a key process in many such recycling operations.

DATES: Comments must be received on or before May 12, 2003.

ADDRESSES: Written comments are to be addressed to the U.S. Customs 
Service, Office of Regulations and Rulings, Attention: Regulations 
Branch, 1300 Pennsylvania Avenue, NW., Washington, DC 20229. Submitted 
comments may be inspected at U.S. Customs Service, 799 9th Street, NW., 
Washington, DC during regular business hours. Arrangements to inspect 
submitted comments should be made in advance by calling Mr. Joseph 
Clark at (202) 572-8768.

FOR FURTHER INFORMATION CONTACT: Edward M. Leigh, Office of Regulations 
and Rulings, (202) 572-8827.

SUPPLEMENTARY INFORMATION:

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, Public Law 103-182, 107 Stat. 2057 
(December 8, 1993).
    The question has arisen, in the context of recycling or re-
manufacturing operations, whether disassembly occurring in a NAFTA 
country may be considered NAFTA origin conferring ``production'' where 
the components recovered by disassembly satisfy the Annex 401 rules of 
origin for the NAFTA and there is some form of substantial processing 
performed on the recovered components.
    The NAFTA does not explicitly address whether parts or components, 
whose origin is non-NAFTA or unknown, that are recovered by disassembly 
in a NAFTA country from a non-originating good, may qualify as NAFTA 
originating goods if, as a result of the disassembly, they satisfy the 
rules of origin set out in Article 401 and Annex 401 of the NAFTA and 
are themselves subjected to some form of substantial further 
processing.
    The recovery and recycling of used goods is an increasingly 
important element in the economic activity as well as the environmental 
goals of the nation, and disassembly, for the recovery of parts or for 
the re-manufacturing of a good, is a key process in many recycling 
operations.
    The goals of the North American Free Trade Agreement (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. The Department of the Treasury and 
Customs Service have examined NAFTA's rules of origin as applied to 
both recovered and recycled goods. Allowing disassembly to confer 
origin under certain circumstances promotes recycling and re-
manufacturing in North America and would advance these economic and 
environmental objectives.

Proposed Rule

    To this end, accordingly, this document proposes to amend the 
Customs Regulations to allow components which are recovered from the 
disassembly of used goods in a NAFTA country to be entitled to NAFTA 
originating status upon importation to 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.

Treatment of Disassembly as a Production Consistent with the Intent of 
NAFTA

    Under the proposal, treatment of disassembly as potentially 
conferring NAFTA originating status must, of course, be consistent with 
the terms and objectives of the NAFTA Implementation Act of 1993. 
Within that framework, the most important question which must be 
answered is does ``disassembly'' constitute origin conferring 
``production'' within the meaning of that term as defined in Article 
415 of the NAFTA, as implemented in 19 U.S.C. 3332(a)(1)(B)(i) and 
3332(p)(22) and in section 2(1) of the NAFTA Rules of Origin 
Regulations (Uniform Regulations) (19 CFR part 181, Appendix, section 
2(1))?

A Change in Tariff Classification Resulting from a Production

    Under NAFTA Article 401(b) and 19 U.S.C. 3332(a)(1)(B)(i), a good 
shall originate 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 as a 
result of production occurring entirely in the territory of one or more 
of the parties. It is therefore understood that unless it results from 
an activity

[[Page 12012]]

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 term ``production'' is defined in Article 415 of the NAFTA and 
in 19 U.S.C. 3332(p)(22) and is implemented in section 2(1) of the 
Uniform Regulations (19 CFR part 181, Appendix, section 2(1)). As 
noted, the term, in relevant part, requires a manufacturing, processing 
or assembling of a good. Of course, the processes listed here are 
illustrative, not exhaustive, and the absence of the term 
``disassembly'' is not dispositive of whether or not a disassembly 
operation is a production process for NAFTA purposes.
    A disassembly operation will result in one or more articles being 
taken or separated from a manufactured good. Assuming no further 
production, these various articles are typically classifiable under 
tariff provisions (often those for ``parts'' of goods) other than the 
classification of the original good from which the articles were 
disassembled. Consequently, if disassembly is treated as production and 
any other requirements are satisfied, the recovered component may 
satisfy the NAFTA rules of origin.

Disassembly as a Production Process

    Upon review, we find no evidence (beyond the failure to explicitly 
include disassembly in the illustrative list of ``production'' 
activities in NAFTA Article 415) showing that the NAFTA intended not to 
treat ``disassembly'' as a production process. Use of the term 
``processing'' includes a broad range of economic activity within 
production. Recycling operations for the recovery by disassembly of 
reusable components such as automotive parts and photocopier or 
computer parts constitute identifiable business operations within the 
NAFTA territories and the free trade purposes of NAFTA (discussed 
above) would be satisfied by establishing rules under which substantial 
``production'' consistent with those purposes will be deemed to occur. 
Recycling operations based on certain repair or alteration operations 
already have been given appropriate recognition under NAFTA Article 
307. Equally, operations based on the recovery of certain waste or 
scrap materials have been designated in the NAFTA rules of origin as 
conferring origin where such operations take place (NAFTA Article 415). 
It is thus consistent with the NAFTA to treat the recovery of useable 
goods by disassembly as ``production'' under the NAFTA rules of origin.

Circumvention of NAFTA's Rules of Origin; Disassembly of New Products

    Moreover, to ensure that disassembly is not used to circumvent the 
intent of NAFTA, the proposed rule provides that, under certain 
circumstances, additional operations beyond disassembly are required 
for the recovered component to acquire NAFTA originating status. 
Specifically, as previously outlined, the recovered component must meet 
the requirement of the applicable rule of origin in Annex 401, 
including any pertinent regional value content requirement; and, if the 
applicable rule of origin in Annex 401 does not include a regional 
value content requirement, the recovered component must be subject to 
additional processing beyond certain minor operations.
    Where there is no regional value content requirement applicable to 
the recovered components, the additional processing operations 
necessary to confer NAFTA originating status must involve more than 
certain minor operations which are enumerated as follows: (1) Cleaning 
or sterilizing, including removal of rust, grease, paint, or other 
coatings; (2) Application of preservative or decorative coatings, 
including lubricants, protective encapsulation, preservative or 
decorative paint, or metallic coatings; (3) Trimming, filing or cutting 
off small amounts of excess materials (precision machining, however, is 
not to be considered a minor operation); (4) Unloading, reloading or 
any other operation necessary to maintain the good in good condition; 
(5) Packing, re-packing, packaging or repackaging; or (6) Testing, 
marking, sorting, or grading.
    Customs has also examined whether a producer might use disassembly 
of new goods to circumvent the intent of the NAFTA. A new non-NAFTA 
product could be imported into Mexico or Canada, disassembled, and the 
disassembled parts could then be imported into the United States and 
either re-assembled or used as parts. Customs 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. Because the disassembly of new goods may 
potentially be treated as a circumvention activity within the meaning 
of section 17 of the Uniform Regulations (19 CFR part 181, Appendix, 
section 17), the proposed rule provides that the disassembly of new 
goods shall not be considered to be ``production'' for the purposes of 
NAFTA Article 415 and the NAFTA rules of origin. Notwithstanding this 
proposal, Customs is particularly interested in receiving comments on 
the contrary view that an applicable value content rule or alternative 
requirement for substantial processing suffice to permit ``production'' 
to be considered to have occurred in this case as well. After reviewing 
the comments, Customs will issue a final rule that will resolve the 
question definitively.
    To reflect the above-described interpretations of law and 
substantive considerations, this document proposes to add a new Sec.  
181.132 to the Customs Regulations (19 CFR 181.132).

Comments

    Before adopting the proposed regulation, consideration will be 
given to any written comments that are timely submitted to Customs. 
Customs specifically requests comments on the clarity of the proposed 
rule and how it may be made easier to understand. Comments submitted 
will be available for public inspection in accordance with the Freedom 
of Information Act (5 U.S.C. 552), Sec.  1.5, Treasury Department 
Regulations (31 CFR 1.5) and Sec.  103.11(b), Customs Regulations (19 
CFR 103.11(b)), at the U.S. Customs Service, 799 9th Street, NW., 
Washington, DC during regular business hours. Arrangements to inspect 
submitted comments should be made in advance by calling Mr. Joseph 
Clark at (202) 572-8768.

Regulatory Flexibility Act and Executive Order 12866

    The proposed rule is intended to promote economic activity as well 
as the protection of the environment in North America, both of which 
are goals of the NAFTA. Specifically, the recovery and recycling of 
used goods is a critical element in both the economic activity and the 
environmental goals of the nation, and disassembly, for the recovery or 
re-manufacturing of used goods, is a key process in many such 
operations. Hence, pursuant to the provisions of the Regulatory 
Flexibility Act (5 U.S.C. 601 et seq.), it is certified that the 
proposed rule, if adopted, will not have a significant economic impact 
on a substantial number of small entities. Accordingly, it is not 
subject to the regulatory analysis or other requirements of 5 U.S.C. 
603 and 604. Nor does the proposed rule result in a ``significant 
regulatory action'' under E.O. 12866.

List of Subjects in 19 CFR Part 181

    Administrative practice and procedure, Canada, Customs duties and 
inspection, Imports, Mexico, Trade

[[Page 12013]]

agreements (North American Free-Trade Agreement).

Proposed Amendments to the Regulations

    It is proposed to amend part 181, Customs Regulations (19 CFR part 
181), as set forth below.

PART 181--NORTH AMERICAN FREE TRADE AGREEMENT

    1. The authority citation for part 181 would continue to read as 
follows:

    Authority: 19 U.S.C. 66, 1202 (General Note 23, Harmonized 
Tariff Schedule of the United States), 1624, 3314.

    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 a 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:
    (1) The recovered component satisfies all applicable requirements 
of Annex 401 and this part; and
    (2) Where the rule in Annex 401 applicable to the recovered 
component does not include a regional value content requirement, the 
recovered component is thereafter advanced in value or improved in 
condition by means of additional processing operations other than those 
listed below. Merely processing by performing any or all of the 
following minor operations would not be sufficient to be considered 
production:
    (i) Cleaning or sterilizing, including removal of rust, grease, 
paint, or other coatings;
    (ii) Application of preservative or decorative coatings, including 
lubricants, protective encapsulation, preservative or decorative paint, 
or metallic coatings;
    (iii) Trimming, filing or cutting off small amounts of excess 
materials (precision machining, however, is not considered a minor 
operation);
    (iv) Unloading, reloading or any other operation necessary to 
maintain the good in good condition;
    (v) Packing, re-packing, packaging or repackaging; or
    (vi) Testing, marking, sorting, or grading.
    (b) Exception; new goods. Disassembly as provided in paragraph (a) 
of this section will not be considered a production in the case of 
components that are recovered from new goods.
    (c) Automotive components/goods. Notwithstanding the provisions of 
Schedule V (Automotive Goods) of the Appendix to this part, the rule 
set forth in this section applies for purposes of determining whether 
goods of that Schedule are originating.

Robert C. Bonner,
Commissioner of Customs.
    Approved: February 18, 2003.
Timothy E. Skud,
Deputy Assistant Secretary of the Treasury.
[FR Doc. 03-6051 Filed 3-12-03; 8:45 am]
BILLING CODE 4820-02-P