Neville Peterson LLP: Customs and International Trade Law

June 1, 2000
M E M O R A N D U M
TO:	Clients and Friends of the Firm
FROM:	Neville Peterson LLP
RE:	Amendments to Section 334 of the Uruguay Round Agreements Act: Rules of Origin for Fabrics and Certain Non-Apparel Textile Products

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I. INTRODUCTION
     The United States Congress recently passed H.R. 434, the Trade and Development Act of 2000. Although the principal purpose of this legislation was to expand United States market access for products (and in particular textile and apparel products) manufactured in African and Caribbean countries, the Act amends Section 334 of the Uruguay Round Agreements Act [19 U.S.C. Section 3592], changing rules of origin applicable to fabrics and certain non-apparel textile articles imported into the United States from all foreign countries.

     This Memorandum briefly discusses the new changes, which are effective for all products entered, or withdrawn from warehouse, for consumption in the United States on or after the Act is signed into law by the President. The President is expected to sign the Trade and Development Act within the next few days, which would make the new origin rules effective beginning in July, 2000.

II. EXECUTIVE SUMMARY
     Section 405 of the Trade and Investment Act of 2000 amends the textile rules of origin set out at Section 334 of the Uruguay Round Agreements Act. It restores the pre-URAA rule of origin which existed for fabrics of silk cotton, man-made fibers and vegetable fibers. Under this rule, where greige fabrics were subjected to printing and dyeing, plus at least two other named finishing operations in a second country, that country would be deemed the country of origin. However, the new law does not change the country of origin rule for wool fabrics; their origin continues to be determined by the country where they are formed (woven or knitted).

     Section 405 also changes rules of origin for certain non-apparel textile articles, most of which are currently subject to the "Special Rule" of origin set out at 19 U.S.C. Section 3592(b)(2)(A). Currently, the origin of those products is determined according to the country where their constituent fabric was woven or knitted. Under the new legislation, the origin of some of these product will be determined according to the country where their constituent fabric was dyed, printed, and subject to 2 or more specified finishing operations. Other non-apparel textile products, including products composed of cotton or wool fabrics, or of "cotton rich" fabrics [i.e., containing 16% or more by weight of cotton], will continue to have their origin determined according to the country where their constituent fabrics were formed in the "greige" state.

III. BACKGROUND
     Section 334 of the Uruguay Round Agreements Act [19 U.S.C. Section 3592] established rules of origin, for quota, tariff and marking purposes, for textile and apparel articles imported into the United States. The most controversial of these rules applied to determining the country of origin of textile fabrics, and certain non-apparel textile articles, including a wide array of home textiles (bed, bath and kitchen linens), bedding products (quilts, comforters, etc), home furnishings and similar non-apparel textile products. Section 334 subjected these goods to a "fabric forward" rule of origin, under which the country of origin of the product was deemed to be the country where their constituent fabric was formed (knit or woven) in the "greige" state. No account was taken of any subsequent value added operations, such as printing, dyeing or finishing (in the case of fabrics) or cutting, sewing, embroidering and decorating) in the case of made-up textile goods).

     These rules of origin, which became effective July 1, 1996, were upheld by United States courts ¹, but were challenged by various United States trading partners as violating United States obligations under various World Trade Organization (WTO) agreements. Last year, in an effort to resolve a WTO complaint brought by the European Union (on behalf of its scarf-making, fabric-finishing and bedding industries), the United States agreed to change its rules of origin for these goods.

     Section 405 of the Trade and Development Act carries out this agreement, in the form of a "clarification" of the origin rules Section 334 of the URAA.

     Although the sponsors of the legislation argued that it would return United States textile rules of origin to their pre-Uruguay Round Agreements Act (URAA) status, this is true only with respect to certain fabrics. For other products, the rules of origin have become even more complicated as a result of the new legislation.

IV. THE STATUTORY LANGUAGE
     Section 405 (a) of the Trade and Development Act provides as follows:

SEC. 405 CLARIFICATION OF SECTION 334 OF THE URUGUAY ROUND AGREEMENTS ACT

(a) In General -- Section 334 (b)(2) of the Uruguay Round Agreements Act (19 U.S.C. 3592 (b)(2) is amended -

(1) by redesignating subparagraphs (A) and (B) as clauses (i) and (ii), respectively;

(2) in the matter preceding clause (i) (as redesignated), by striking "notwithstanding (1) (D) and except as provided in subparagraph (B) and (C)"; and

(3) By adding at the end the following

(B) Notwithstanding paragraph (1)(C), fabric classified under the HTS as of silk, cotton, man-made fiber or vegetable fiber shall be considered to originate in, and be the growth, product and manufacture of, the country, territory, or possessions in which the fabric is both dyed and printed when accompanied by 2 or more of the following finishing operations: bleaching, shrinking, fulling, napping, decating, permanent stiffening, weighting, permanent embossing or moireing.

(C) Notwithstanding paragraph (1)(D), goods classified under HTS Heading 6117.10, 6213.00, 6214.00, 6302.22, 6302.29, 6302.52, 6302.53, 6302.59, 6302.92, 6302.93, 6302.99, 6303.92, 6303.99, 6304.19, 6304.93, 6304.99, 9404.90.85 or 9404.90.95, except for goods classified under such headings as of cotton or of wool or consisting of fiber blends containing 16% or more by weight of cotton, shall be considered to originate in, and be the growth, product or manufacture of, the country, territory or possession in which the fabric is both dyed and printed when accompanied by two or more of the following finishing operations: bleaching, shrinking, fulling, napping, decating, permanent stiffening, weighting, permanent embossing, or moireing.

     As indicated above, these new rules are applicable to goods entered, or withdrawn from warehouse for consumption in the United States, or after the date the Trade and Development Act is signed into law.

     In order to best understand these rules and their operation, it is helpful to review the entire structure of Section 334 of the URAA, as amended.

V. ANALYSIS
     1. Country of Origin of Fabrics

     Section 405 of the Trade and Development Act restores for certain fabrics imported into the United States the Rule of origin which obtained prior to the July 1, 1996 effective date of the URAA.² The new ruling recognizes that the substantial converting or finishing of greige fabrics - defined as involving both dyeing and printing, and at least two subsidiary operations - effects a change in the country of origin of the fabric.

     Thus, fabric formed in country A and processed in Country B will be considered to originate in Country B, for quota, tariff and marking purposes, if it is subjected in Country B to both dyeing and printing, plus at least two or more of the finishing operations specifically mentioned in the statute.

     However, the new rule of origin only applies to fabrics which are classified in the Harmonized Tariff Schedule of the United States (HTS) as being of (i.e., in chief weight of) silk, cotton, man-made fiber or vegetable fibers. It does not apply to wool fabrics, which will continue to originate in the country where they are "formed", by weaving or knitting.

     It is important to bear in mind that, in applying the origin rule of "dyeing and printing, plus two subsidiary operations", Customs has historically required that the strict requirements of the rule be met, and that the fabric be subject to both dyeing and printing, plus at least two of the named operations, in the country in question.

     The new fabric origin rules should be of considerable help to many industries, for example, European-based fabric convertors, who engage in the dyeing and printing of fabric formed in Asia.

     2. Non-Apparel Textile Articles

     The Trade and Development Act does not restore the pre-URAA rules of origin for non-apparel textile articles. Rather, it continues to link the origin of these made-up articles to the origin of their constituent fabric. Furthermore, it strangely bifurcates the current "special rule" of origin for certain non-apparel textile articles, set forth at 19 U.S.C. Section 3592(b)(2)(A). As a result, some of those goods will have their origin determined according to where their constituent fabrics were formed (knitted or woven), while others will continue to have their origin determined according to the country where the constituent fabric was converted (by dyeing, printing, and 2 or more additional operations).

     The law does not furnish any clear reasons why the peculiar dividing lines for these rules were selected. Apparently, the drafters of the legislation wished to continue applying a very strict rule of origin to non-apparel textile articles which are in chief weight of wool or cotton, or "cotton rich" fabric blends, containing 16% or more by weight of cotton.

     The following non-apparel textile articles are eligible to have their origin determined according to the country where their constituent fabrics are converted:

HTS Subheading	Product Description
6117.10	Shawls, mantles, mufflers, mantillas, etc., knitted or crocheted
6213.00	Handkerchiefs
6214.00	Shawls, scarves, mufflers, mantillas, etc., not knitted or crocheted
6302.22	Bed linen, printed, of man-made fibers
6302.29	Bed linens, printed, of other textile fibers
6302.52	Table cloths and napkins, of flax
6302.53	Table cloths and napkins, of man-made fibers
6302.59	Table cloths and napkins, of other materials
6302.92	Toilet or kitchen linens, of terry or similar fabric; of flax
6302.93	Toilet or kitchen linens, of terry or similar fabric; of man-made fibers
6302.99	Toilet or kitchen linens, of other materials
6303.92	Curtains, drapes, interior blinds, bed valances; other than knitted or crocheted; of synthetic fibers
6304.99	Curtains, drapes, interior blinds, bed valances; other than knitted or crocheted; of other materials
6304.19	Other furnishing articles, other than bedspreads; of cotton
6304.93	Other furnishing articles, not knitted or crocheted, other than bedspreads; of Synthetic fibers
6304.99	Other furnishing articles, not knitted or crocheted, other than bedspreads; of other materials
9404.90.85	Quilts, comforters, eiderdowns and similar articles, other than of cotton
9404.90.95	Other articles of bedding, stuffed or internally fitted with any materials

     It is important to remember that these products will take the origin of a converted fabric only if they are not classified as "of cotton" or "of wool". [i.e. composed in chief weight of either of these fibers]. It also does not cover such products, however classified, if they consist of fiber blends containing more than 16% by weight of cotton.

     Other products subject to the "Special Rule" of origin in 19 U.S.C. Section 3592(b(2)(A), such as comforter shells (HTS subheading 6307.90), blankets (heading 6301) or textile sacks or bags will continue to have their origin determined according to the country where their constituent fabric was formed - regardless of the composition of that fabric.

     We expect that Customs will shortly issue new regulations implementing the statutory changes.

     These new rules can lead to some confusing and perhaps illogical results. Consider the following example:

Example:

An 80% polyester, 20% cotton fabric is woven in China. It is then sent to Italy, where it is dyed, printed, and subjected to two or more of the additional operations named in the statute. The fabric, if imported into the United States as such, would be considered a product of Italy, for tariff, quota and marking purposes.

Assume, however, that the converted fabric is sent to Spain, where it is cut, sewn and otherwise manufactured into a bed valance of HTS subheading 6303.93. The valance, if exported to the United States, would be considered a product of China for tariff, quota and marking purposes. This is because, even though the valance and its constituent fabric are considered to be "of man-made fibers", it is a cotton-rich blend, i.e., containing more than 16% cotton by weight.

However, assume that the fabric woven in China was 85% polyester, and 15% cotton. If converted in Italy, the fabric would still be considered a product of Italy. If this fabric is manufactured into a bed valance in Spain, the valance would be considered a product of Italy, since it contains less than 16% by weight of cotton.

     Obviously, this is not a restoration of the "substantial transformation" rule which determined the origin of these goods prior to enactment of the URAA³.

VI. CONCLUSION
     In the case of certain fabrics (other than those in chief weight of wool), Section 405 of the Trade and Development Act returns United States country of origin rules to their pre-Uruguay Round Agreement Act status.

     In the case of non-apparel textile articles, Section 405 of the Trade and Development Act does not restore the pre-URAA rule of "substantial transformation". Rather, it bifurcates the "special" rule of origin appearing at 19 U.S.C. Section 3592(b)(2)(A). Some of the goods covered by the rule will have their origin determined by the country where their constituent fabric was converted. Other goods will continue to have their origin determined by the country where their constituent fabric was formed (i.e., woven or knitted).

     Our firm stands ready to offer affected companies counsel in adjusting to the new rules, to seeking Customs rulings concerning the origin of particular products, or in exploring new sourcing opportunities which may become available as a result of the adoption of these rules.

1.     Pac Fung Feather Co. v. United States, 111 F.3d 114 (1997).

2.     This Rule of origin is currently codified at Section 12.130(e)(1)(i) of the Customs Regulations [19 C.F.R. Section 12.130(e)(1)(i)] and has continued to apply in recent years for purposes of determining the country of origin of fabrics imported from Israel (whose products were not covered by the Section 334, URAA, origin rules.

3.     The new rules of origin are likely to mean no practical change for manufacturers of a wide range of bedding products (sheets, quilts, comforters, etc.), since these products are usually dyed or printed, but rarely subjected to both of these processes.

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