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HQ 087472

January 3, 1990

CLA-2 CO:R:C:G 087472 JS

CATEGORY: CLASSIFICATION

Nelson Kwong
A.Y.K. Enterprises Ltd.
Suite 7
265 Duthie Avenue
Burnaby, B.C.
Canada V5A 2P3

RE: Country of origin; baby's diaper; United States-Canada Free-Trade Agreement; originating good

Dear Mr. Kwong:

This is in reference to your letter of June 19, 1990, requesting a country of origin determination and tariff status of a baby's cotton diaper under the Harmonized Tariff Schedule of the United States Annotated (HTSUSA).

FACTS:

The merchandise at issue is a 100 percent cotton baby's diaper, measuring approximately 13 x 20 inches, which is constructed in the following manner:

In China, the cotton flannel is woven and placed on large rolls for exportation.

In Canada, one layer of fabric is placed onto the cutting table. The fabric is cut to a size 36" in width x 16" in length. The sides of the fabric are then folded in the following manner:
a. right to left 9" b. left to right 4 1/2 " c. left to right 9"

Next the folded edges are sewn with a straight sewing machine, and a serging machine will trim and overedge the top and bottom of the article. All excess threads are also trimmed, and the diaper is ready for inspection. Finally, the finished merchandise is packed in cartons for shipment.

ISSUE:

1) Whether for all Customs purposes, including quota, marking and export licensing, China or Canada is determined to be the country of origin under 19 CFR 12.130.

2) Whether for purposes of determining the rate of duty, the product is considered goods originating in the territory of Canada in accordance with General Note 3(c)(vii) HTSUSA; if so, what is the applicable duty rate for 1990 and subsequent years.

3) What quota and duty rates would apply if the diaper at issue were to be fully manufactured in China and exported to the United States.

LAW AND ANALYSIS:

Textile commodities produced in more than one foreign country are subject to the country of origin requirements delineated in Section 12.130 of the Customs Regulations (19 C.F.R. 12.130). Section 12.130(b) provides that a textile product which consists of materials produced or derived from, or processed in, more than one foreign...country shall be a product of that foreign country where it last underwent a substantial transformation. A substantial transformation is said to occur if a commodity undergoes a transformation, by means of substantial manufacturing or processing operations, into a new and different article of commerce.

The criteria used to determine whether a textile product has undergone substantial manufacturing or processing operations are outlined in Section 12.130(d), and include, among other things, the physical change in the material or article and the complexity of the operations. Under 19 C.F.R. Section 12.130(e)(1), an article will be considered a product of a particular country on the basis of the following operations:

(iv) Cutting of fabric into parts and the assembly of those parts into the completed article;

Since the raw material produced in China is specially cut, folded, and sewn in Canada, in a manner distinctive to the formation of a diaper, a substantial transformation is deemed to have occurred such that a new and different article of commerce results. When the diaper material is exported from China, on the other hand, it is mere cotton fabric which is suitable for multiple uses. No evidence, i.e., lines of demarcation, exist at that stage to aid the examiner in determining that the fabric is meant to be diapers. Therefore, the Canadian assembly of cut fabric into the completed article, a diaper, constitutes a substantial manufacturing process in accordance with Section 12.130(b).

The second issue which you raised is whether the diapers in question would be eligible for special tariff treatment under the United States-Canada Free-Trade Agreement Implementation Act of 1988 (FTA).

General Note 3(c)(vii) of the HTSUSA embodies the United States-Canada Free-Trade Agreement of 1988. Subdivision (vii)(A) provides that "[g]oods originating in...Canada" and imported into the United States may be subject to a different rate of duty set forth in the "Special" subcolumn of the Tariff Schedule. For the purposes of this subdivision, General Note 3(c)(vii)(B) allows consideration of goods as "goods originating in the territory of Canada" if:

(2) they have been transformed in the territory of Canada and/or the United States, so as to be subject--

(I) to a change in tariff classification as described in the rules of subdivision
(c)(vii)(R) of this note, or

(II) to such other requirements subdivision (c)(vii)(R) of this note may provide when no change in tariff classification occurs, and they meet the other conditions set out in (R) of this note.

Assuming heading 6209, Section XI, HTSUSA, provides for the present merchandise in its completed form, and heading 5208 prior to the manufacturing processes in Canada, General Note 3(c)(vii) (R)(11) governs the change in tariff classification. Subdivision (R)(11) states, in pertinent part, that in order to be considered goods originating in the territory of Canada, merchandise must undergo

(oo) A change to any heading of chapter 62 from any heading outside that chapter other than headings ...5208 through 5212...

(qq) Notwithstanding rules (nn) and (oo), apparel goods provided for in chapters 61 and 62 that are both cut and sewn in ...Canada (emphasis added)...from fabric produced or obtained in a third country, and that meet other applicable conditions for preferred tariff treatment under subdivision (c)(vii) of this note, shall be subject to the rate of duty provided in the "Special" subcolumn for goods that originate
in Canada, in the annual quantities set forth below, and shall, above those quantities for the remainder of the annual period, be subject to duty at the rates provided for in the "General" subcolumn of column 1:

Non-wool apparel 41,806,500 sq.m.
Wool apparel 5,016,780 sq.m.

Since the baby's diaper is both cut and sewn in Canada, imports of this item will be eligible for the "Special" rate of duty up to the annual quantities set forth above, at 7.9 percent ad valorem, assuming classification in heading 6209, HTSUSA. Beyond the annual quantities set forth above, or in case of failure to comply with Section 10.307 requirements, this merchandise will be subject to the "General" rate of duty at 9.9 percent ad valorem.

In order to qualify for the preferential rate, one must satisfy the requirements in 19 CFR 10.307, which state that a claim for FTA benefits must be based on documentation indicating origin. An existing Exporter's Certificate of Origin will satisfy this requirement if it is properly completed and signed by the person who exports or knowingly causes the goods to be exported from Canada. In addition, it must be made available to Customs at the time preferential treatment is claimed.

Further conditions to qualification for preferential treatment are mandated by General Note 3(c)(vii)(E) of the HTSUSA which require that
goods exported from the territory of Canada must be shipped to the territory of the United States without having entered the commerce of any third country, and the goods, if shipped through the territory of a third country, do not undergo any operations other than unloading, reloading, or any operation necessary to transport them to the territory of the United States or to preserve them in good condition, and the documents related to the exportation and shipment of the goods from the territory of Canada show the territory of the United States as their final destination.

The requirement that a claim be made at the time entry summary is filed, as stated in Section 10.307, has been modified by VBT-88-105. A Certificate of Eligibility is now required for all entries of textile articles from Canada seeking tariff rate quota status under rules 17 and 18 of the FTA and covered above. You must obtain this certificate from the Canadian government and
attach it to the entry. The Certificate of Eligibility must indicate the permit number assigned to you by the Canadian government, as well as the country from which the fabric was obtained, the quantity of the articles contained in the shipment, and a description of the articles in HTSUSA terms. The pink copy of the certificate must be presented with the entry package in order to be eligible for the "Special" subcolumn rates of duty up to the designated quantity for each quota.

In accordance with Presidential Proclamation 5923 dated December 16, 1988, the following duty rates are applicable in the future with respect to merchandise considered goods originating in the territory of Canada under the FTA:

6.9 percent ad valorem in 1991
5.9 percent ad valorem in 1992
4.9 percent ad valorem in 1993
3.9 percent ad valorem in 1994
2.9 percent ad valorem in 1995
1.9 percent ad valorem in 1996
.9 percent ad valorem in 1997
Free in 1998

With respect to the third issue, if the diaper were to be fully manufactured in and imported from China, classification would be subheading 6209.20.5040, HTSUSA, which provides for babies' garments and clothing accessories: of cotton: other: other, diapers, textile category 239. The applicable rate of duty is 9.9 percent ad valorem.

HOLDING:

Our analysis of the other applicable conditions for preferential tariff treatment under subdivision (c)(vii) of the Free-Trade Agreement establishes that the present merchandise, in its completed form, is considered goods originating in Canada for duty purposes under the HTSUSA.

The holding set forth above applies only to the specific factual situation and merchandise identified in the ruling request. This position is clearly set forth in Customs Regulations 19 CFR 177.9 (b)(1), which states that a ruling letter is issued on the assumption that all information furnished in connection with the ruling request and incorporated therein, either directly, by reference, or by implication, is accurate and complete in every material respect. Should it be subsequently determined that the information furnished is not
complete and does not comply with 19 CFR 177.9(b)(1), the ruling will be subject to modification or revocation. In the event that there is a change in the facts previously furnished, the country of origin determination may be affected. In such case, it is recommended that a new ruling request be submitted in accordance with section 177.2, Customs Regulations (19 CFR 177.2).

Sincerely,

John Durant, Director
Commercial Operations Division

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