CLA-2 CO:R:C:S RAH
Mr. Leslie Alan Glick
Porter, Wright, Morris & Arthur
1233 20th Street, N.W.
Washington, D.C. 20036-2395
RE: Eligibility of certain nuts, bolts, rivets and screws for
duty-free treatment under the GSP; Pickling; Drawing of
Steel Rod; Threading; Forming of Drawn Wires; Die-
forming; Heat Treatment; Zinc Plating
Dear Mr. Glick:
This is in response to your letter of September 15, 1992,
requesting a ruling on whether steel imported into Mexico and
made into fasteners satisfies the double substantial
transformation test, thereby allowing the value of the steel to
be included in the 35 percent value-content requirement under the
Generalized System of Preferences (GSP).
FACTS:
Your client manufactures nuts, bolts, rivets, washers and
screws (cumulatively referred to as "fasteners") in Mexico from
steel rod imported into that country. The fasteners are then
sold in Mexico or exported to the United States.
You describe the manufacturing of the raw materials (ferrous
and non-ferrous metal alloys and many plastic materials) in a
seven step process. In the first stage of the processing, the
raw material's (steel rod) oxidation is removed through a
pickling process. A concentration of hydrochloric acid and water
is first used to wipe off all impurities and rust from the steel
rod. Next, the rod is immersed in a concentration of lime and
water to clean the rod and prevent contamination of the zinc
phosphate tank. An oxalic acid and water preparation is used to
remove residues of hydrochloric acid and make the rod ready for
the zinc phosphate coating. The rod is submerged in a mixture of
zinc phosphate, sodium nitrite and water to give the rod a
coating of zinc phosphate. You state that this prevents the rod
from rusting when it is in stock and simplifies the second
process. The rod is then rinsed with water and is immersed in a
solution of metallic soap and water to lubricate it and make it
easier for it to pass through the drawing die.
In the second stage of the manufacturing process, the steel
rod is drawn to wire rods ranging from 4-9 millimeters, 5.5-17
millimeters, and 17-28 millimeters. You contend that the wire
drawing itself constitutes one substantial transformation and
creates new and different articles (wire rods). You also state
that the unthreaded drawn wires have been used as automobile
steering equipment and gear handles and, thus, have a different
use in commerce.
The third stage involves threading the wire rod by passing
it through threading machines. You contend that the threaded
wire rods can be used to make locking instruments and fasteners,
which make the threaded wire rods intermediate products and
independent articles of commerce.
The fourth stage involves the forming of the drawn wires.
Fastener manufacturing is achieved by a variety of means such as
hot-forging, cold-heading, and molding. The processing involves
punching in four dies for fitting and alignment. The fasteners
produced at this stage are sold as spare parts, hand tools,
including pins, rivets and sockets, which can be subsequently
made into bolts, screws or nuts. You also claim these fasteners
are independent articles of commerce.
The fifth stage entails manufacturing the specific types of
threaded and unthreaded fasteners. In the manufacture of the
threaded screws, the first step is to prepare the die to
specification. Next, the fastener goes through a female die
fitting, pitch alignment, diameter adjustment, and is measured by
a thread gauge. The thread of the nut is made by tapping. The
process commences with tooling preparation. Then, the fasteners
are placed in a feeding track to feed the threading machines and
are threaded by the machines that perform the tapping function.
An alternative, sixth stage, involves the threading of bolts
or tapping of nuts to produce fasteners or threaded rods that are
actual products sold in commerce. You state that they can be
sold to companies that manufacture fasteners, as well as to other
buyers.
Finally, the seventh stage of the manufacturing process
consists of the heat treatment of the formed fasteners. The
fasteners are fed into the heat treatment machine. The fasteners
are initially quenched, by rapid heating and cooling in water at
hot and cold temperatures. This is done to increase their
hardness. Because of the instability of the products after
quenching, the fasteners are then sent for tempering to stabilize
their structure. You state that tempering helps to reduce the
heat-stress caused by the quenching process, and also reduces the
hardness of the fasteners. You assert that the mechanical
properties and character of the fasteners are altered at this
stage, and a substantial transformation occurs.
For certain items, a zinc plating of the fasteners takes
place as a last step in the manufacturing process. You state
that it, like hot-dip galvanizing, protects the fasteners against
oxidation, and that it affects the physical properties of the
fasteners resulting in yet another substantial transformation.
ISSUE:
Whether the processing of steel rod in Mexico into fasteners
(nuts, bolts, rivets, washers and screws) constitutes a double
substantial transformation, whereby the cost or value of the
steel rod may be counted toward the 35 percent value content
requirement under the GSP.
LAW AND ANALYSIS:
Under the GSP, eligible articles the growth, product or
manufacture of a designated beneficiary developing country (BDC)
which are imported directly into the customs territory of the
U.S. from a BDC may receive duty-free treatment if the sum of (1)
the cost or value of materials produced in the BDC, plus (2) the
direct costs of the processing operations in the BDC, is
equivalent to at least 35 percent of the appraised value of the
article at the time of entry. See 19 U.S.C. 2463(b).
Mexico is a designated BDC. See General Note 3(c)(ii)(A),
Harmonized Tariff Schedule of the United States (HTSUS).
Therefore, the fasteners and unthreaded wire will receive duty-
free treatment if they are classified under a GSP-eligible
provision, are considered to be "products of" Mexico, are
imported directly into the United States, and the 35 percent
value-content requirement is satisfied. Merchandise is
considered the "product of" a BDC if it either is wholly the
growth, product or manufacture of a BDC or has been substantially
transformed there into a new or different article of commerce.
19 U.S.C. 2463(b)(2). A substantial transformation occurs "when
an article emerges from a manufacturing process with a new name,
character, or use which differs from that of the original
material subjected to the process." The Torrington Company v.
United States, 764 F.2d 1563, 1568 (Fed. Cir. 1985). An
"article of commerce" is one that is readily susceptible of
trade, and is an item that persons might well wish to acquire for
their own purposes of consumption or production. Id. at 1570.
If an article is comprised of materials that are imported
into the BDC, the cost or value of those materials may be
included in calculating the 35 percent value-content requirement
only if they undergo a "double substantial transformation" in the
BDC. See, section 10.177(a), Customs Regulations (19 CFR
10.177(a)); Azteca Milling Co. v. United States, 703 F. Supp. 949
(CIT 1988), aff'd 890 F.2d 1150 (1989). That is, the imported
materials must first be substantially transformed in the BDC into
a new and different constituent material which is then used to
produce the eligible article which is subsequently exported to
the United States. Headquarters Ruling Letter (HRL) 055591,
dated August 22, 1978.
You argue that the drawing of the rod constitutes a
substantial transformation because it amounts to a change in
character of the rod by reducing the rod significantly in
diameter and giving it different fundamental properties,
including yield, hardness and elongation. You also claim that
the processing of the rod limits the use of the rod to the
manufacture of products requiring those dimensions.
We disagree with your argument that the drawn wire rod is a
substantially transformed constituent material. The court in
Superior Wire v. United States, 669 F. Supp. 472 (CIT 1987),
aff'd, 867 F. 2d. 1409 (Fed. Cir. 1989), held that the drawing of
wire rod into wire through a multi-stage process did not
constitute a substantial transformation of the wire rod. The
court found that there was no significant change in the use or
character of the wire, and only a relatively insignificant change
in name. Moreover, the court found that the operations performed
on the wire rod were minor rather than substantial and concluded
that the "wire rod and wire may be viewed as different stages of
the same product." Id. at 1414. See HRL 555705 dated August 26,
1991, in which we held that the drawing process of copper wire,
whereby the wire is reduced through a multi-stage process from a
diameter of 14 AWG (approximately .064 in.) to a diameter
ultimately of 36 AWG (approximately .005 in.) did not constitute
a substantial transformation.
A test recognized by the courts as indicative (although not
dispositive) of a substantial transformation is whether the
manufacturing process results in a transition from producers'
goods to consumers' goods. Midwood Industries v. United States,
62 Cust. Ct. 499, 313 F. Supp. 951 (1970). The facts in question
are similar to Superior Wire in that there is no clear change
from a producer good to consumer good when the rod is drawn. The
primary use of the rod, without further manufacturing, has not
significantly changed with the drawing. Furthermore, there is no
significant change from a product suitable for many uses to one
fit for only a few uses. Like the copper wire in Superior Wire,
the steel rod in this case dictates the final form of the
finished wire rod, as the basic properties of the wire rod are
predetermined by the undrawn rod. Moreover, no significant
change in the composition of the wire rod occurs between the
stages of drawing.
You also contend that threading the wire rods by specialized
machinery results in another substantial transformation. In
Headquarters Ruling Letter (HRL) 734186 dated October 24, 1991,
we held that steel pipe exported to Mexico where it was cut to
length and threaded at both ends and imported into the United
States for use as nipples did not constitute a "product of"
Mexico. See also T.D. 87-46 and T.D. 67-249(12) (cutting to
length and threading of steel pipe is not a substantial
transformation and will not be deemed to change its country of
origin).
You further argue that another intermediate product is
created in the die-forming stage where the rods are made into
specific fasteners. It is in this stage of manufacturing that we
find the first substantial transformation of the steel rod into a
new and different article of commerce. In HRL 085535 dated
December 28, 1989, we held that wire rod drawn into wire and
converted to nails constitutes a single substantial
transformation. See HRL 055722 dated August 14, 1979 (the
manufacture of tungsten carbide plunged tool blanks from rough
tungsten carbide rod resulted in a single substantial
transformation).
Finally, you state that the heat treatment, which consists
of quenching and tempering the finished fasteners, also amounts
to a substantial transformation. We have held that heat
treatment which is not extensive or complex, and does not
transform or narrow the uses of the article is not a substantial
transformation. See HRL 555103 dated February 2, 1989 (solution
quenching and annealing stainless steel bars and wire rod, which
maximizes softness, ductility, and corrosion resistance in the
steel, does not constitute a substantial transformation, where
steel retains its multi-functional utility); HRL 730648 dated
August 14, 1987 (stainless steel pipe which is annealed,
restraightened and pickled is not substantially transformed). We
are not convinced that the heat treatment in question is
sufficiently extensive or complex to substantially transform the
name, character or use of the fasteners.
Finally, zinc plating is not the type of operation which
constitutes a substantial transformation. See C.S.D. 91-7 (HRL
732159 dated September 7, 1990) (gold plating of jewelry is not a
substantial transformation).
Based on the foregoing analysis, we find that the seven step
processing of the steel rod into fasteners results in a single
substantial transformation. Accordingly the cost or value of the
steel rod may not be counted toward the 35 percent value-content
requirement for purposes of the GSP.
HOLDING:
The seven step processing of imported steel rod in Mexico,
which consists of pickling, drawing, threading, die-forming,
threading of bolts and tapping of nuts, heat treatment and, in
some cases, plating, collectively constitute a single substantial
transformation. Accordingly, because the steel rod is not
substantially transformed into an intermediate article of
commerce in Mexico, the cost or value thereof may not be counted
toward the 35 percent value-content requirement of the GSP.
Sincerely,
John Durant, Director
Commercial Rulings Division