HQ 0555736 - Steel strip subjected to pickling, cold-rolling, and galvanizing operations in Guam. General Note 3(a)(iv), HTSUS; insular possession; substantial transformation; Ferrostaal - United States International Trade Commision Rulings

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HQ 555736

July 2, 1991

CLA-2 CO:R:C:S 555736 KCC

CATEGORY: CLASSIFICATION

Mr. Paik W. Shin
BIEC International Inc.
Park Plaza, 3400 Bath Pike
Bethlehem, PA 18017

RE: Steel strip subjected to pickling, cold-rolling, and galvanizing operations in Guam. General Note 3(a)(iv), HTSUS; insular possession; substantial transformation; Ferrostaal

Dear Mr. Shin:

This is in response to your letters dated August 28, 1990, February 28, and April 26, 1991, concerning duty-free treatment under General Note 3 (a)(iv), Harmonized Tariff Schedule of the United States (HTSUS), for steel strip galvanized in Guam.

FACTS:

BIEC intends to establish a steel processing plant in Guam. Approximately $150 million will be used to establish the plant which will contain a hot-rolled steel pickler, a reversing cold- rolling mill, and a continuous hot-dip coating line. Hot-rolled steel coils, with material thicknesses ranging from 0.05 to 0.150 inch and in widths ranging from 24 to 48 inches, will be imported into Guam from overseas. The steel first is subjected to a pickling process which is designed to remove surface oxides (rust) from the hot-rolled steel coil using hydrochloric acid.

The pickled hot bands are then processed through the cold reversing mill to reduce the thickness from 50% to 80% so as to create a surface finish that can be processed successfully on a hot-dip metallic coating line. This process will produce a steel strip with a minimum thickness of 0.008 inch, of low carbon, high carbon or high strength low alloy grades. The pickling and cold- rolling operations require from one to two days and cost approximately $100.00 per ton.

The steel will then proceed to the continuous hot-dip coating line where the steel is annealed and then proceeds to the hot-dip bath where a protective anti-corrosive metal coating such
as zinc or an aluminum-zinc alloy will be applied. This process is known as galvanizing. The galvanized steel strip will then proceed to an organic coating or prepaint line capable of applying a two-coat paint system. The galvanizing operation requires approximately one day and costs approximately $150.00 per ton.

Upon completion of all the above-described operations, the steel strip is known as galvalume (BIEC's registered trade name for this product) which must meet ASTM standards A792 and A792M. The galvalume will be consumed in Guam or exported to other countries including the U.S.

ISSUE:

Whether the processed steel will be entitled to duty-free treatment under General Note 3(a)(iv), HTSUS, when imported into the U.S.

LAW AND ANALYSIS:

Under General Note 3(a)(iv), HTSUS, goods imported from an insular possession may enter the customs territory of the U.S. free of duty if they:

(1) are manufactured or produced in the possession; (2) do not contain foreign materials which represent more than 70 percent of the goods' total value (or more than 50 percent with respect to textile and apparel articles subject to textile agreements, and other goods described in section 213(b) of the Caribbean Basin Economic Recovery Act); and
(3) come directly to the customs territory of the U.S. from the possession.

Materials imported into an insular possession become a "product of" the possession if they are substantially transformed there. In other words:

"the question...is whether operations performed on products in the country of exportation are of such a substantial nature to justify the conclusion that the resulting product is a manufacture of that country. 'Manufacture implies a change, but every change is not a manufacture...there must be a transformation; a new and different article must emerge having a distinctive name, character or use.'" Ferrostaal Metals Corporation v. United States, 664 F. Supp. 535, 537 (CIT 1987) (quoting Anheuser-Busch Association v. United States, 207 U.S. 556, 562 (1908)).

In the Ferrostaal case, the dispositive question before the court was whether the operations performed on the subject steel sheet, described as a continuous hot-dip galvanizing process, substantially transformed the sheet. The process involved two steps: annealing, undertaken to restore the steel's ductility lost in a previous cold-rolling, and galvanizing, or dipping the steel in a pot of molten zinc to improve its resistance to rust. The court held, based on the totality of the evidence, that the continuous hot-dip galvanizing process substantially transformed the subject steel sheet.

The present case is analogous to Ferrostaal in that the described annealing and galvanizing operations effect the requisite changes necessary for a finding of a substantial transformation. Like Ferrostaal, the steel in the present case is subjected to a continuous hot-dip galvanizing operation. First, the steel is subjected to an annealing process which is the controlled heating and cooling of the steel in a furnace, which makes the steel sheet less strong but more ductile. As stated in your April 26, 1991 letter, annealing does not change the chemical composition or dimensions of the steel, but affects distribution of carbon and nitrogen. The steel then enters into a pot of molten zinc or aluminum-zinc alloy in a galvanizing process which provides protection against corrosion, thereby extending the life of the steel. Consistent with the Ferrostaal decision, we find that the manufacturing operations performed in Guam result in the substantial transformation of the steel into a product of Guam for purposes of General Note 3(a)(iv), HTSUS.

The estimated cost information you have provided indicates that the cost of the foreign hot-rolled steel coils imported into Guam will not exceed 70% of the appraised value of galvanized steel strip to be imported into the U.S.

Regarding the applicability of voluntary restraint agreement (VRA) certification requirements, as this program is administered by the U.S. Department of Commerce, we recommend that you contact the Office of Agreements Compliance, International Trade Administration, U.S. Department of Commerce, Washington, D.C. 20230, telephone number (202) 377-3793, for the VRA requirements applicable to these articles of metal.

HOLDING:

The hot-rolled steel coils imported into Guam are substantially transformed into articles which are the manufacture or product of the insular possession for purposes of General Note 3(a)(iv), HTSUS. Accordingly, the steel strip processed as described in your submission will be entitled to duty-free entry under this special tariff program, assuming it satisfies the 70% foreign value limitation and is imported directly from Guam to the U.S.

Sincerely,

John Durant, Director
Commercial Rulings Division

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