• HQ H302480
• Sep 13, 2019

• Type : Origin • HTSUS :
•  Related:   282390; 734518; N301484; H282390; H219519   

OT:RR:CTF:VS H302480 JMV

Lawrence M. Friedman
Barnes, Richardson & Colburn, LLP
303 East Wacker Drive, Suite 305
Chicago, IL 60601

RE: Reconsideration of NY N301484; Preferential Tariff Treatment under NAFTA

Dear Mr. Friedman:

This is in response to your request, on behalf of your client Zoom Telephonics (“Zoom”), for reconsideration of New York Ruling Letter (“NY”) N301484, dated November 27, 2018, in which the country of origin of cable modems and cable modems with a Wi-Fi gateway was determined to be China. We reviewed your request and determined that NY N301484 is correct for the reasons set forth herein.

The items at issue are cable modems and cable modems with a Wi-Fi gateway classified in subheading 8517.62.00, Harmonized Tariff Schedule of the United States (“HTSUS”). The products are designed to permit a local computer, network, smartphone, smart television, or other device to connect to the internet. The specific models of cable modem to be imported are: MB7220, MB7420, MB7621, and MB8600. The specific models of cable modems with Wi-Fi gateway are: MG7310, MG7315, MG7540, MG7550, MG7700, and MT7711. All of the models are assembled in Mexico in a manner that is materially identical to the representative examples discussed below, and packed for retail sale.

The first representative example is model MB8600, which is a DOCSIS 3.1 modem optimized to deliver connectivity at speeds of up to approximately 1 Gbps. The MB8600 supports Ethernet port bonding and Active Queue Management to facilitate fast connections for applications such as video conferencing and online gaming. The MB8600 is compatible with U.S. cable systems including Comcast XFINITY, Comcast Business, and Cox.

The MB8600 consists of the following components:

An uncased printed circuit board assembly (“PCBA”) with boot loader program but no cable modem program, Left Side Case, Lens Case, Stand, Rear Case, Right Side including Light Pipe, Top Case, Rear Label Panel, Rear Label Panel to Cover Ports, Rubber Feet, and Bottom Compliance Label.

The second representative example is model MG7315. This model is also a DOCSIS 3.1 cable modem. It differs from the first model in that it includes a wireless Wi-Fi router allowing the modem to connect wirelessly to properly configured devices including computers, printers, mobile phones, smart televisions, and other devices. The MG7315 consists of the same components as the MB8600 but does not include a rear case label panel to cover ports.

For purposes of this request, you state that all the materials are products of China exported into Mexico. Once the Chinese origin components are received in Mexico, the following assembly processes will take place:

1. Materials will be inspected to ensure quality. 2. A programmer will download software onto the PCBA. 3. The PCBA will then be assembled into its case, which consists of six plastic components assembled together by press fitting and securing screws. 4. Adhesive rubber feet are placed on the bottom. 5. Labels that are specific to each individual cable modem and that identify the unit by serial number and MAC address are affixed to the modems. 6. After assembly, the device is scanned to load the correct serial number, MAC address, and cable modem certificates. Without proper addressing and certificates, the cable modems will not operate. In the case of cable modems with wireless capabilities, Wi-Fi network names and keys are scanned. 7. A label that includes the scanned items with standard product information (i.e. model number and compliance statements) is then attached to the bottom of the unit. 8. The cased unit is tested to confirm that they meet DOCSIS standards. It is attached to a Cable Modem Termination System (“CMTS”), which allows for high-speed data transmission through coaxial cables using the DOCSIS standard. The CMTS emulates an internet service provider and allows the assembler to connect to the board. The CMTS is connected to a local server via an Ethernet cable. The tests are performed at several frequencies to ensure compliance and consist of separate upstream and downstream testing on two different CMTS.

You state that Zoom’s cable modems rely on integrated circuits from Broadcom, headquartered in Irvine, California. The firmware is also largely developed by Broadcom. However, you also note that Broadcom does not quantify the amount of code that is developed in its various international locations. While Zoom is unable to definitively state the location where the software was developed, you assert that there is a substantial likelihood that development occurred predominantly in the United States.

Additional software for the user interface is necessary to make a functional modem or gateway. Zoom engineers in the United States design the user interface to make modem and gateway configuration options available to users in an easy-to-navigate environment. You state that the engineers use judgment, user feedback and guidance from the Motorola licensing group to design and develop the user experience. The U.S.-based engineers work with coders in China to implement the design.

In NY N301484, CBP found that, under the North American Free Trade Agreement (“NAFTA”), the modems may be marked as made in Mexico. However, CBP also used the substantial transformation standard to determine that the country of origin of the subject modems is China for the purposes of applying the 2018 Section 301 trade remedy under subheading 9903.88.04, HTSUS.

While you agree with the finding in NY N301484 that the modems may be marked as made in Mexico, you disagree with the use of the substantial transformation test to determine the country of origin of the modems for the purposes of Section 301. You assert that the country of origin of the modems should be determined by the NAFTA Marking rules as outlined in 19 C.F.R. § 102.11. You further assert that, even if CBP were to maintain that substantial transformation is the proper basis for determining the country of origin of the subject modems for purposes of Section 301, the modems do undergo a substantial transformation as a result of the processing in Mexico and should be considered a product of Mexico.

Effective July 6, 2018, the Office of the United States Trade Representative imposed an additional tariff on certain products of China classified in the subheadings enumerated in Section XXII, Chapter 99, Subchapter III U.S. Note 20(b), HTSUS. For additional information, see “Notice of Action and Request for Public Comment Concerning Proposed Determination of Action Pursuant to Section 301: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation” (June 20, 2018, 83 F.R. 28710) [hereinafter Proposed Determination of Action Pursuant to Section 301]. Products of China that are classified in the subheadings enumerated in U.S. Note 20(b), HTSUS, referenced in subheading 9903.88.04, HTSUS, shall continue to be subject to antidumping, countervailing, or other duties, fees and charges that apply to such products. Products of China classifiable in subheading 8517.62.00, HTSUS, are subject to the additional tariff under subheading 9903.88.04, HTSUS.

When determining the country of origin for purposes of applying current trade remedies under Section 301, Section 232, and Section 201, the substantial transformation analysis is applicable. In accordance with 19 C.F.R. § 102.0, the 102 marking rules are applicable for the limited purposes of: “country of origin marking; determining the rate of duty and staging category applicable to originating textile and apparel products as set out in Section 2 (Tariff Elimination) of Annex 300–B (Textile and Apparel Goods); and determining the rate of duty and staging category applicable to an originating good as set out in Annex 302.2 (Tariff Elimination).” See Headquarters Ruling (“HQ”) 563205, dated June 28, 2006; see also Belcrest Linens v. United States, 741 F.2d 1368, 1370-71 (Fed. Cir. 1984) (finding that “the term ‘products of’ at the least includes manufactured articles of such country or area” and that substantial transformation “is essentially the test used…in determining whether an article is a manufacture of a given country”). As stated above, the 102 rules do however continue to be applicable for purposes of country of origin marking of NAFTA goods, as defined in 19 C.F.R. § 134.1.

You note that the Statement of Administrative Action (“SAA”) of the NAFTA Implementation Act states, “. . . neither NAFTA nor the Implementing bill amend Section 301 of the Trade Act of 1974. . . . Section 301 will remain fully available in the event that another NAFTA country engages in practices that deny internationally worker rights and that burden or restrict U.S. commerce.” You assert that this language indicates that the NAFTA parties and the U.S. Congress intended that additional duties on products of Mexico or Canada would only be appropriate under Section 301 if and when Canada or Mexico engaged in conduct that burdens U.S. commerce. We disagree. We note that your cited excerpt is a part of a larger paragraph that explains how U.S. law is not specifically changed by the NAFTA implementing bill, but is left the same. The SAA gives Section 301 as an example of U.S. law that remains unchanged. It states: “As section 102(a)(2) of the bill makes clear, those provisions of U.S. law that are not addressed by the bill are left unchanged. In particular, neither NAFTA nor the implementing bill amend Section 301 of the Trade Act of 1974.” When examined in its entirety, this language simply asserts that Section 301 will remain unchanged. Congress did not say that Section 301 is not applicable against a party that burdens or restricts commerce because parts are assembled in a NAFTA party.

You also argue that whether the goods are NAFTA originating should have been addressed in NY N301484. You note that NAFTA Article 302(1) states, “Except as otherwise provided in this Agreement, no Party may increase any existing customs duty, or adopt any customs duty, on an originating good.” You further assert that the general exceptions in Chapter 21 of NAFTA do not apply. Again, we disagree. NAFTA Article 2101(1) states that the “[General Agreement on Tariffs and Trade (“GATT”)] Article XX and its interpretative notes, or any equivalent provision of a successor agreement to which all Parties are party, are incorporated into and made part of this Agreement.” The relevant portions of the GATT Article XX(d) state:

nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures: . . . necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement, including those relating to customs enforcement, the enforcement of monopolies operated under paragraph 4 of Article II and Article XVII, the protection of patents, trade marks and copyrights, and the prevention of deceptive practices . . .

Emphasis added.

Here, the additional duties were imposed to protect U.S. intellectual property and to prevent unfair practices. Specifically, the 301 duties were implemented in response to an investigation that found that acts, policies, and practices of the Government of China related to technology transfer, intellectual property, and innovation are unreasonable or discriminatory and burden or restrict U.S. commerce. Accordingly, the United States Trade Representative found these policies actionable under Section 301(b). See “Notice of Action and Request for Public Comment Concerning Proposed Determination of Action Pursuant to Section 301: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation” (June 20, 2018, 83 F.R. 28710) and “Initiation of Section 301 Investigation; Hearing; and Request for Public Comments: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation” (August 24, 2017, 82 Fed. Reg. 40213). Therefore, the general exception in NAFTA Article 2101(1), as outlined in GATT Article XX(d), applies here and as stated above, substantial transformation is the proper standard for determining country of origin for the purposes of applying current trade remedies under Section 301.

You argue that the processing of the modems in this case is similar to the processing that takes place in HQ H282390, dated January 30, 2018. In that case, CBP determined that installation of software and configuration data onto the Ethernet switches in Mexico substantially transformed the PCBA into the Ethernet switch. In HQ H282390, PCBAs and other hardware components were exported from China into Mexico, where parts were assembled into Ethernet switches. Configuration data was also downloaded onto the switches using in-circuit programming. CBP noted that “the configuration data physically changes the electrical values of the logic gates present in the components, by connecting the gates in combinations that tell the components how to function and communicate within the system.” CBP further noted that while the software and configuration data were simultaneously downloaded onto the switches through the in-circuit programming, the configuration data did not operate on the hardware in the manner that the software did. Instead, the configuration data completed the hardware programming, and the software ran on the completed hardware.

You assert that the decision in HQ H282390 was based on the Data General decision which states that “the programming of a device that defines its use generally constitutes a substantial transformation.” You further assert that the modems at issue are similarly being programmed in a manner that will define their use generally. However, unlike the configuration data in HQ H282390, the downloading of software does not result in a physical change.

In HQ H282390, CBP noted that “[t]he configuration data programs the logic gates of the hardware components on the PCBA, which imparts physical changes to the patterns of interconnections in the hardware circuitry, defining the behavior of each component.” While the central processing units (“CPUs”) and memory chips were mounted to a PCBA, they had no ability to operate as any type of CPU or memory. To transform the PCBA into a functioning Ethernet switch, a two-step programming process took place in Mexico. The first step included configuring the Ethernet switch with the configuration data, meaning the CPU and memory chips received their processing functionality. As stated in HQ H282390, normally all the CPUs and memory chips have already been programmed with their processing functionality prior to being mounted to a PCB. The second step included downloading the operating system onto the Ethernet switch.

Here, unlike the case in HQ 282390, the PCBA may only be used as a modem as imported into Mexico because, at the time of importation, the PCBA is already preloaded with the boot loading program. This demonstrates that the cable modem is manufactured to the point of being an incomplete or unfinished cable modem as it is the boot load program that allows the modem to run and accept the user interface programming. Therefore, this case is distinguishable from HQ H282390 as the only programming that occurs in Mexico is the downloading of software.

Further, in HQ H282390 both the software and configuration data were developed in the United States. While your submission emphasizes the software design steps that are undertaken in the United States and explains how U.S. engineers work with coders in China to develop the software, not enough information was provided to determine a country of origin for the software.

Accordingly, in this case, any reliance on Data General is misplaced. In HQ 734518, dated June 28, 1993, CBP found that a substantial transformation of motherboards did not occur because they were imported with a predetermined use. CBP noted that “[w]hereas in Data General use was being assigned to the PROM, the use of the motherboard had already been determined when the importer imported.” See also HQ H219519, dated April 3, 2013 (finding that the assembly of hardware and the downloading of firmware to form a functioning printer did not constitute a substantial transformation). Similarly, the use of the PCBAs at issue here has already been determined upon arrival in Mexico.

In Energizer Battery, Inc. v. United States, 190 F. Supp. 3d 1308 (2016), the Court of International Trade (“CIT”) also found that articles imported in a pre-fabricated form with a predetermined use are not substantially transformed by assembly into the final product, without more. In Energizer, the CIT interpreted the meaning of the term “substantial transformation” as used in the Trade Agreements Act of 1979 (“TAA”) for purposes of government procurement. Energizer involved the determination of the country of origin of a flashlight, referred to as the Generation II flashlight, under the TAA. All of the components of the Generation II flashlight were of Chinese origin, except for a white LED and a hydrogen getter. The components were imported into the United States where they were assembled into the finished Generation II flashlight.

The court reviewed the “name, character and use” test in determining whether a substantial transformation had occurred, and reviewed various court decisions involving substantial transformation determinations. The court noted, citing Uniroyal, Inc. v. United States, 3 C.I.T. 220, 226, 542 F. Supp. 1026, 1031, aff’d, 702 F.2d 1022 (Fed. Cir. 1983), that when “the post-importation processing consists of assembly, courts have been reluctant to find a change in character, particularly when the imported articles do not undergo a physical change.” Energizer at 1318. In addition, the court noted that “when the end-use was pre-determined at the time of importation, courts have generally not found a change in use.” Energizer at 1319, citing as an example, National Hand Tool Corp. v. United States, 16 C.I.T. 308, 310, aff’d 989 F.2d 1201 (Fed. Cir. 1993). Furthermore, courts have considered the nature of the assembly, i.e., whether it is a simple assembly or more complex, such that individual parts lose their separate identities and become integral parts of a new article.

In reaching its decision in Energizer, the court expressed the question as one of whether the imported components retained their names after they were assembled into the finished Generation II flashlights. The court found “[t]he constitutive components of the Generation II flashlight do not lose their individual names as a result [of] the post-importation assembly.” The court also found that the components had a pre-determined end-use as parts and components of a Generation II flashlight at the time of importation and did not undergo a change in use due to the post-importation assembly process. Finally, the court did not find the assembly process to be sufficiently complex as to constitute a substantial transformation. Thus, the court found that Energizer’s imported components did not undergo a change in name, character, or use as a result of the post-importation assembly of the components into a finished Generation II flashlight. The court determined that China, the source of all but two components, was the correct country of origin of the finished Generation II flashlights under the government procurement provisions of the TAA.

Similarly here, the materials from China have a pre-determined end-use as parts and components of a modem. The physical parts do not undergo a substantial transformation by the assembly operations in Mexico and the programming results in no physical change. The addition of the cable modem interface and other modem software applications to a cable modem device with an installed bootloader only acts to finish the product, which at time of import is already intended for an end use as a cable modem. Further, Broadcom is not able to provide information on the amount of code that is developed in its various international locations. Therefore, we find the origin of the modems is China, the country of origin of all of the physical components and the country where the software was partially developed. NY N301484, dated November 27, 2018, correctly determined the country of origin of the cable modems and cable modems with a Wi-Fi gateway.

Sincerely,

Myles B. Harmon, Director
Commercial and Trade Facilitation Division