CLA-02 RR:CR:SM 562743 DCC
Elizabeth J. Vann, Esq.
Law Offices of Elizabeth Janie Vann, P.C.
600 Sunland Park Drive, Suite 2-100
El Paso, Texas 79912
RE: Eligibility of wire harness products imported from the Philippines for duty-free treatment under the Generalized System of Preferences
Dear Ms. Vann:
This is in response to your letter dated April 17, 2003, requesting a ruling on behalf of the Lear Corporation (“Lear”). Specifically, you ask whether certain wire harness products from the Philippines qualify for duty-free treatment under the Generalized System of Preferences (“GSP”).
In a letter dated December 17, 1998, you requested a ruling regarding the GSP eligibility of wire harnesses on behalf of United Technologies Automotive, Inc. (“UTA”). In response to your request, Customs issued HRL 561245, dated June 24, 1999. That ruling determined that two of the constituent materials—copper rod and either Polyvinyl Chloride (“PVC”) or Cross-Link Polyethylene (“XLPE”)—underwent a double substantial transformation as a result of manufacturing processing performed in the Philippines. Subsequent to issuing that ruling to UTA, Lear acquired UTA where it continues to produce wire harnesses at the former UTA facilities. Although you state the manufacturing processes in the present case are identical to those described in HRL 561245, your current request provides new information regarding the manufacturing of certain wire harness components. We therefore consider anew whether the wire harnesses in the present case qualify for GSP.
According to your submission, Lear’s Philippine affiliate (“Lear Philippines”) operates a manufacturing facility located in Lapu-Lapu, Philippines, where it produces various types of wire harness products for sale to its parent corporation. You State that Lear imports these harnesses into the United States directly from the Philippines. The wire harnesses are for use in automotive electrical systems.
Multi-Stranded Copper Wire Production
Lear Philippines purchases insulated multi-stranded copper wire from IWG-Philippines, Inc. (“IWG”) of Cebu, Philippines. IWG manufactures this wire from copper rod (8 mm. in diameter), packaged in 6,500 pound continuous coils, and either PVC or XLPE compounds in pellet form. The copper rod is of Japanese origin and the XLPE or PVC pellets are of U.S. origin. The copper rod, and the PVC or XLPE pellets undergo the following processing:
Drawing of Rod through Rod Mill Drawing Machine. Coils of copper rod are welded together to form a continuous copper rod. The rod is then subjected to two drawings. The first drawing is through the rod mill machine which compresses and elongates the rod. After the first drawing, the 8 mm. diameter rod is reduced to a 2.05 mm. diameter (12 American Wire Gauge, or “AWG”) strand. The AWG level identifies the diameter, electrical current capacity and maximum temperature levels within which the wire can function. This strand is packaged into a 3,000 pound stem pack that becomes the feedstock for the multi-wire drawing process.
Drawing through Multi-Draw Machine. The second drawing is accomplished by means of a 14-wire multi-draw machine. The strands are fed through a series of dies that draw the strands down to the final size (0.18 mm. to 0.58 mm., depending on product specifications) in incremental steps.
Annealing of Stranded Wire. In the final phase of the multi-draw machine, the strands are passed through an oxygen-free zone. While passing through this zone, the strands are electronically heated. This process, called annealing, relieves stress caused by the drawing process, and restores the copper’s flexibility and “memory.”
Insulation. The multi-stranded copper wire is coated with a plastic insulating material of either PVC or XLPE compounds by means of an extrusion process. Two different extrusion processes are used, depending on the type of compound needed in the finished product.
In the first step of the extrusion process, the PVC or XLPE pellets are melted and pumped through a tip and die combination that forms the melted compound around the moving multi-stranded copper wire. The XLPE compound is a thermoset product and must be cured in a high pressure steam environment. The wire is cooled by use of a closed loop system of chilled water that is sprayed on the wire in the cooling trough. The PVC insulated wire may be used in applications where the temperature does not exceed 105( Celsius, while XLPE insulated wire may be used in applications where the temperature does not exceed 125( Celsius.
After coating, the finished stranded wire is wound onto coils and stored until shipment to IWG’s customers, including Lear Philippines. Lear Philippines purchases the insulated multi-stranded copper wire from IWG for use in the manufacture of wire harnesses at Lear Philippines’ facility.
Convoluted and Smooth Tubing Production
Lear Philippines purchases convoluted and smooth tubing from Sofanou Philippines (“Sofanou”), located in Lapu-Lapu City, the Philippines. Sofanou manufactures this tubing from Polyamide 6 (plastic) pellets, Medium Density Polyethylene (MD-PE) pellets, Polypropylene (PP) Compound pellets, Soft PVC pellets, and Rigid PVC compound pellets. All of these materials are of U.S. origin. According to counsel’s submission, the pellets undergo the following processing at Sofanou’s Philippine facility.
1. Material Preparation and Drying. The Plastic Pellets are loaded into a material bin. The Polyamide 6 material passes through a dryer to remove any moisture.
Pellets Loading. Plastic pellets from the material bin are transferred to the extrusion lines through the vacuum-powered pipe lines. Depending on the type of tubing, one or more types of plastic pellet material will be used. The material is transferred from the supply line to the hopper of the extrusion machine.
Mount Tooling/Start-up. The appropriate die head is installed into the extrusion machine and pairs of mold blocks are attached to the corrugation machine.
Melting of Plastic Pellets. From the hopper, the pellets are fed into the heating system composed of an auger type screw and heating bands. The screw moves the melted plastic to the die head.
Extrusion and Forming. For convoluted tubing, melted plastic materials come out from the inner pin in the die head. The melted plastic is then fed to the corrugator through the die head. Air from an air rod inserted into the corrugation machine keeps the tube from collapsing and, along with the mold blocks, causes the corrugation. The tubing cools as it exits the extrusion machine.
In the case of smooth tubing, the melted plastic exits the die head and is cooled in a water tank. Air from the inner pin blows the melted material and keeps it from collapsing. The tubing is then passed through a sizer or, in the case of soft tubing, through a water tank.
Striping. For convoluted tubing, as the tubing exits the corrugation machine it passes through a striping machine that transfers a pigment to form a continuous line along the length of the tubing.
Slitting. The tubing is removed from the corrugation machine by a puller.
Injection Molded Parts Production
Lear purchases various injection molded components from Cebu Dai-Ichi for use in the assembly of the wire harnesses. These parts are made from NSO resin pellets (U.S. origin), GE plastic resin pellets (Japanese origin), and Dupont resin pellets (Singapore origin). In the Philippines, Cebu Dai-Ichi uses the NSO resin pellets to manufacture injection molded retainer clips; GE plastic resin pellets to manufacture injection molded spacer wire connectors; and Dupont resin pellets to manufacture injection molded lamp socket covers.
In each case, raw material pellets are loaded into a hopper of an injection molding machine. As the pellets enter the barrel cylinder of the injection molding machine, they are heated until melted. The melted resin is then injected into a mold form to produce the required parts.
Rubber Grommets Production
Lear purchases rubber grommets from Molten Asia Polymer Products Co., Ltd. (“Polymer Products”). Polymer Products uses polymers (“EPDM”) of Japanese origin; carbon of Thai origin; oil of Japanese origin; and certain chemicals of Japanese and Philippine origin. In Thailand, these materials are mixed together by Polymer Products’ supplier to produce a ribbon material. After purchasing the ribbon material, Polymer Products loads it into an injection molding machine where it is heated and then injected into a mold to produce the rubber grommets. In some cases, a plastic insert is inserted into the rubber grommet.
Wire Harness Production
The wire harnesses are composed primarily of multi-stranded copper wire of varying sizes, colors, lengths, and current-carrying capacities. The harnesses may also include grommets, retainer clips, terminals, covers, rubber seals, spacer wire connectors, relay boxes, PVC-tub, convoluted or smooth tubes, and lamp sockets. Depending on the model, the number of components may vary widely. The number of electrical circuits may vary from a few to several hundred. The assembly of the harnesses involves two stages: pre-assembly and assembly.
At the pre-assembly stage, the insulated multi-stranded wire is first inspected for defects and then cut to a specified length. The insulating vinyl is removed from the ends of the wire and terminals are attached to form a circuit. Depending on the type of harness, further processing may be required, including: manual termination, soldering, molding, splicing and covering.
For circuits that cannot be handled by an automatic cutting machine or where an assembly of one or more components is required prior to termination, a terminal is manually crimped onto the end of the bare copper wire. Connections between the wire and terminal are subsequently soldered together using either a reflow or dip soldering process. For models that require a molding operation, a molten compound is poured into a metallic mold die to form a socket or connector. A mold is used in place of a hard shell connector when water or moisture sealing is required.
The splicing operation involves joining a group of circuits by welding. Welding is accomplished by either resistance or ultrasonic welding. After welding a splice, the bare weld is covered with a tape cover, heat shrink cover, mastic pad, or a thermoplastic mold.
After the above processing, the wires and components are ready to be assembled into wire harnesses. This process involves a rotating jig which carries the wires past work stations where operators add wires, protectors, grounders, corrugated tubes, rubber tubes, stoppers and other components to the assembly, and tape various sections of the harness.
I. Whether the materials imported into the Philippines undergo a substantial transformation as a result of processing and therefore become products of the Philippines.
II. Whether the copper rod, polyvinyl pellets, polyethylene pellets, polyamide pellets, polypropylene pellets, plastic resins, EPDM, carbon, oil, and certain chemicals undergo a double substantial transformation in Thailand and the Philippines during the production of the wire harnesses, allowing the cost of these materials to be counted towards the 35% beneficiary developing country value requirement for purposes of the GSP.
LAW AND ANALYSIS:
Title V of the Trade Act of 1974, as amended (19 U.S.C. §§ 2461-65), authorizes the President to establish a Generalized System of Preferences to provide duty-free treatment for eligible articles imported directly from beneficiary developing countries (“BDCs”). Articles produced in a BDC may qualify for duty-free treatment if the goods are imported directly into the customs territory of the United States from the BDC and the sum of the cost or value of materials produced in the BDC, or any two or more countries of that are members of the same association of countries and are treated as one country under 19 U.S.C. § 2467(2), plus the direct costs of the processing operations performed in the BDC or member countries, is equivalent to at least 35 percent of the appraised value of the article at the time of entry into the United States. See 19 U.S.C. § 2463(a)(2) and (3), codified at 19 C.F.R. §§ 10.171-78.
Under General Note 4(a), Harmonized Tariff Schedule of the United States (“HTSUS”), the Philippines is a designated BDC for purposes of the GSP. You state that the wire harnesses to be imported are classifiable under subheading 8544.30.0000, HTSUS, which provides for:
Insulated (including enameled or anodized) wire, cable (including coaxial cable) and other insulated electric conductors, whether or not fitted with connectors; optical fiber cables, made up of individually sheathed fibers, whether or not assembled with electric conductors or fitted with connectors:
Ignition wiring sets and other wiring sets of a kind used in vehicles, aircraft or ships.
Articles from the Philippines classified under this subheading are eligible for GSP treatment. For purposes of this ruling we assume your classification is correct. Therefore, the wire harnesses will receive duty-free treatment if they are considered to be a “product of” the Philippines, are “imported directly” into the United States, and satisfy the 35% value-content requirement.
A good is considered to be a “product of” a BDC if it is wholly the growth, product, or manufacture of a BDC, or has been substantially transformed in the BDC into a new or different article of commerce. See 19 U.S.C. § 2463(a)(3); 19 C.F.R. § 10.177(a).
Under limited circumstances, the value of non-BDC materials may be included in the 35% minimum value content. In order for the value of non-BDC materials to be included, there must be a substantial transformation of the non-BDC material into a new and different article of commerce in a BDC (or other member of an association of countries treated as one BDC), which must then be substantially transformed in the BDC into a new and different article of commerce. That is, materials that do not originate in the BDC must undergo a double substantial transformation in the BDC (or member countries) in order for the value of those materials to be counted toward the 35% minimum value content. See 19 C.F.R § 10.177; see also Aztec Milling Co. v. United States, 703 F. Supp. 949 (Ct. Int’l Trade 1988), aff’d 890 F.2d 1150 (Fed. Cir. 1989).
A substantial transformation occurs “when an article emerges from a manufacturing process with a name, character, or use which differs from [that] of the original material subjected to the process.” Torrington Co. v. United States, 764 F.2d 1563, 1568 (Fed. Cir. 1985) (citing Anheuser-Busch Brewing Ass’n v. United States, 207 U.S. 556, 562 (1908), and Texas Instruments v. United States, 681 F.2d 778, 782 (CCPA 1982)).
The Court of Appeals for the Federal Circuit considered the issue of substantial transformation of wire rod in Superior Wire v. United States, 867 F.2d 1409 (Fed. Cir. 1989). In Superior Wire, the appellate court affirmed the Court of International Trade’s conclusion that wire rod that was drawn into wire was not substantially transformed as there was no significant change in use or character. The court noted that the change in name was the “least persuasive factor and is insufficient by itself to support a holding that there is a substantial transformation.” Superior Wire, 867 F.2d at 1414. Following this reasoning, Customs determined in HRL 555705, dated August 26, 1991, that drawing 14 AWG copper wire into 36 AWG wire did not constitute a substantial transformation.
In general, Customs has held that wire laminating, coating, and encapsulating operations do not result in a substantial transformation. In HRL 557201, dated November 17, 1993, Customs determined that, although encapsulation may enhance the wire, such operations do not change the essential character of bunched wire as a conductor of electricity.
First Substantial Transformation
Counsel claims that based on HRL 561245, which was issued to Lear’s predecessor, production of the insulated copper wire changes the essential character of the Japanese-origin copper rod and the U.S.-origin PVC and XLPE into a new and different product. We agree. The production of the wire involves drawing, annealing, bunching, twisting the copper and then encapsulating it by extrusion with a polyvinyl or polyethylene material to produce insulated copper wire. The resulting insulated copper wire has a name, character and use distinct from the copper rod and PVC or XLPE pellets from which it was produced. Consequently, the copper rod, polyvinyl pellets, and polyethylene pellets are substantially transformed by the production process. The insulated copper wire is therefore a product of the Philippines.
We further determine that the production of the tubing, retainer clips, spacer wire connectors, lamp socket covers, and rubber grommets results in a substantial transformation of the materials used to produce these items. As counsel notes, Customs has previously held that forming synthetic materials into a new shape, either by thermal injection molding or extrusion, constitutes a substantial transformation. In HRL 557201, Customs found that the heating and extruding of PVC compounds onto bunched wire resulted in a substantial transformation of the PVC compounds, as the essential character of the compound was changed by the manufacturing process. Customs also determined in HRL 557403, dated November 22, 1993, that the extrusion of rubber silicone material into the shape of a balloon or shaft is a substantial transformation of the silicone compound.
Furthermore, forming the constituent materials (i.e., polyamide pellets, MD-PE pellets, PP compound pellets, soft PVC pellets, and rigid PVC compound pellets) by thermal extrusion or injection molding into tubing, retainer clips, spacer wire connectors, and lamp socket covers changes the name, character and use of the constituent materials. Consequently, the tubing, retainer clips, spacer wire connectors, and lamp socket covers are products of the Philippines.
We further determine that name, character and use of the materials used to produce the ribbon material (i.e., EPDM, carbon, oil, and certain chemicals) are changed as a result of the injection molding of the rubber grommets. Consequently, these materials are substantially transformed and the rubber grommets are a product of Thailand where they are produced.
Second Substantial Transformation
The second issue is whether the manufacture of wire harnesses from the insulated copper wire and other components results in a second substantial transformation. The manufacture of the wire harnesses involves cutting the insulated copper wire to specified lengths, stripping a portion of the insulation from the wires, attaching terminals to the end of the wire, forming sockets and connectors by injection molding, splicing groups of circuits, and covering the splice with a protective covering.
In HRL 556301, dated May 4, 1992, Customs reconsidered its decision in HRL 555705, dated August 26, 1991, based on additional facts provided about the processing of insulated copper wire. While affirming its finding that drawing does not substantially transform wire products, Customs found that the combination of drawing, bunching and twisting, annealing and encapsulating the wire strand does constitute a substantial transformation of the wire. Customs also held that the cost of the wire may not be included to satisfy the 35% value-content requirement because the subsequent operations of bundling and further encapsulation did not result in a second substantial transformation.
In 562581, dated February 13, 2003, Customs determined that bunching and encapsulating copper strands was sufficient processing to result in a change in character and use of the wire and therefore a substantial transformation. Similarly, in HRL 557087, dated July 22, 1993, Customs determined there was a substantial transformation when the wire harness assembly operations involved placing wires on automated jig tables that passed through several work stations where components were attached to the harnesses. In 557201, Customs found that the assembly of a wire harness was a substantial transformation where the insulated wires were cut to length followed by a “precision application of electrical terminals.”
In other rulings, however, Customs has determined that less involved wire manufacturing operations do not constitute a substantial transformation. In HRL 556564, dated October 30, 1992, Customs found that encapsulation of stranded wire did not substantially transform the wire into a new or different product for purposes of GSP. In HRL 556301, Customs held that a rod drawing operation did not represent a substantial transformation, either alone or in combination with bunching and twisting operations.
In this case, we find that a second substantial transformation results from the assembly of wire harnesses. In previous GSP cases, we have noted that in cases where all of the processing is performed in one GSP country, the likelihood that the processing constitutes little more than a “pass-through” operation is diminished. If the entire processing operation is performed in the BDC is significant, and the intermediate and final articles are distinct articles of commerce, then the double substantial requirement will be satisfied. Such is the case even though the processing required to convert the intermediate article into the final article is relatively simple and, standing alone, probably would not be considered a substantial transformation. See, e.g., HRL 557465 (Dec. 10, 1993), and HRL 555532 (Sept. 18, 1990). Although the rubber grommets are produced in Thailand, because Thailand and the Philippines are members of the Association of South East Asian Nations they are treated as one country for purposes of the GSP pursuant to General Note 4(a), HTSUS.
In view of the overall processing operations performed in Thailand and the Philippines to produce the wire harnesses, we do not believe that these constitute a minimal, “pass-through” operation that should be disqualified from receiving the benefit of GSP. Accordingly, the cost or value of the copper rod, polyvinyl pellets, polyethylene pellets, polyamide pellets, polypropylene pellets, plastic resins, EPDM, carbon, oil, and certain chemicals may be included as “materials produced” in the BDC for purposes of calculating the 35% value-content requirement of the GSP.
With respect to the cardboard packaging and wooden pallets, Customs previously held in C.S.D. 79-199, dated October 19, 1978 (HRL 055147), that the cost of packaging operations and the cost or value of materials necessary to place the articles in condition for export may be counted toward the 35% requirement if the operations were performed, and the materials were produced, in the BDC. Because the cardboard boxes and wooden pallets in this case are a product of the Philippines, the costs of these materials may be included in the 35% requirement.
Based on the information provided, we determine that the copper rod, polyvinyl pellets, polyethylene pellets, polyamide pellets, polypropylene pellets, plastic resins, EPDM, carbon, oil, and certain chemicals undergo a double substantial transformation in Thailand and the Philippines and, therefore, the cost or value of these materials may be included in the calculating the value of the BDC content. Furthermore, the wire harnesses, which are “products of” the Philippines, will be entitled to duty-free treatment under the GSP, assuming the 35% value-content and “imported directly” requirements are satisfied.
A copy of this ruling letter should be attached to the entry documents filed at the time the merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the Customs officer handling the transaction.
Myles B. Harmon, Director
Commercial Rulings Division