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HQ 556150


December 2, 1991

CLA-2 CO:R:C:S 556150 LS

CATEGORY: CLASSIFICATION

Mr. Arthur Haber
Arthur Haber Associates, Inc.
Suite B-12
100 East Palisade Avenue
Englewood, New Jersey 07631

RE: Applicability of duty exemption under U.S. Note 2(b), Subchapter II, Chapter 98, HTSUS, to footwear produced in Honduras; T.D. 91-88; C.S.D. 89-27(4); 555788; 555742; 555189; 067823

Dear Mr. Haber:

This is in response to your letter of July 23, 1991, requesting a ruling on the eligibility for duty-free treatment under U.S. Note 2(b), subchapter II, Chapter 98 of the Harmonized Tariff Schedule of the United States (HTSUS), of two types of footwear produced in Honduras.

FACTS:

You have requested a ruling on the following two products:

(1) A shoe manufactured in Costa Rica and Honduras wholly of U.S. products

U.S. origin chemicals are exported to Costa Rica from the U.S. and are compounded there into polyvinyl chloride (PVC) pellets. The pellets are sold to a factory in Honduras where they are used to inject soles for the shoes. This factory then manufactures the shoes wholly of U.S. components and materials.

(2) Canvas tennis shoes

Cotton canvas combined with cotton drill is imported into the U.S. from China. In the U.S., the canvas is cut into different shapes and forms. The canvas pieces are then shipped to Honduras where they are stitched together and further manufactured into a canvas tennis shoe using other components and ingredients, all of U.S. origin.

ISSUE:

Whether the two shoes are eligible for duty-free treatment under U.S. Note 2(b), subchapter II, Chapter 98, HTSUS.

LAW AND ANALYSIS:

Section 222 of the Customs and Trade Act of 1990 (P.L. 101- 382) amended U.S. Note 2, subchapter II, Chapter 98, HTSUS (hereinafter "Note 2(b)") to provide for duty-free treatment of articles, other than certain specified products, which are assembled or processed in a Caribbean Basin Initiative beneficiary country (BC) wholly of fabricated components or ingredients (except water) of U.S. origin. This amendment was effective with respect to goods entered on or after October 1, 1990.

Specifically, Note 2(b) provides as follows:

(b) No article (except a textile article, apparel article, or petroleum, or any product derived from petroleum, provided for in heading 2709 or 2710) may be treated as a foreign article, or as subject to duty, if-

(i) the article is--

(A) assembled or processed in whole of fabricated components that are a product of the United States, or

(b) processed in whole of ingredients (other than water) that are a product of the United States, in a beneficiary country; and

(ii) neither the fabricated components, materials or ingredients, after exportation from the United States, nor the article itself, before importation into the United States, enters the commerce of any foreign country other than a beneficiary country.

As used in this paragraph, the term "beneficiary country" means a country listed in General Note 3(c)(v)(A), HTSUS. Both Honduras and Costa Rica are designated BCs.

In Headquarters Ruling Letter (HRL) 555742 dated November 5, 1990, we held that footwear is not considered a textile or apparel article and, therefore, is eligible for duty- free treatment under Note 2(b).

I. Eligibility of shoes manufactured from U.S. origin chemicals and other ingredients and components

The shoes you have described are eligible for duty-free treatment under Note 2(b) because they are processed wholly of components and/or ingredients of U.S. origin in beneficiary countries, Costa Rica and Honduras. See HRL 555742 (footwear made in the Dominican Republic by various processes, which included assembling the footwear upper to a thermoplastic rubber sole created by an injection molding process, was eligible for duty-free treatment under Note 2(b)).

II. Eligibility of canvas tennis shoes

To qualify for Note 2(b) duty-free treatment, an eligible article must be assembled or processed in a BC entirely of components or ingredients that are a "product of" the U.S. A "product of" the U.S. is an article manufactured within the customs territory of the U.S. Foreign-made articles or materials may become products of the U.S. if they undergo a process of manufacture in the U.S. which results in their substantial transformation. See, e.g., sections 10.12(e) and 10.14(b), Customs Regulations (19 CFR 10.12(e) and 10.14(b)). Thus, before we can rule on the eligibility of the shoes for duty-free treatment under Note 2(b), we must determine whether the cotton canvas combined with drill, imported into the U.S. from China, and subsequently cut into different shapes and forms, is considered to be substantially transformed into a "product of" the U.S.

Section 12.130, Customs Regulations (19 CFR 12.130), governs the determination of the country of origin of textile or textile products. A textile or textile product will be considered to have undergone a substantial transformation if it has been transformed by means of substantial manufacturing or processing operations into a new and different article of commerce. See 19 CFR 12.130(b). A new and different article of commerce will usually result from a manufacturing or processing operation if there is a change in: (1) commercial designation or identification; (2) fundamental character; or (3) commercial use. 19 CFR 12.130(d)(1).

According to section 12.130(d)(2), the following will be considered in determining whether merchandise has undergone substantial manufacturing or processing operations: (1) the physical change in the material or article; (2) the time involved in manufacturing or processing; (3) the complexity of the operations; (4) the level or degree of skill and/or technology required; and (5) the value added to the article in each country or territory.

Section 12.130(e)(1)(iv), Customs Regulations (19 CFR 12.130(e)(1)(iv)), states that a textile article or material usually will be a product of a particular country if the cutting of the fabric into parts and the assembly of those parts into the completed article have occurred in that country. With respect to whether the cutting of fabric to shape, in and of itself, changes the fabric's country of origin, we have consistently held that such an operation constitutes a substantial transformation if the cutting creates defined patterns or shapes suitable for use as components in an assembly operation. See HRLs 067823 dated June 2, 1982, 555189 dated June 12, 1989, and C.S.D. 89-27(4) (HRL 554929 dated November 3, 1988). Therefore, we find that the cotton canvas and drill imported into the U.S. from China, and subsequently cut into various shapes and forms necessary to construct the canvas tennis shoe, is substantially transformed into a "product of" the U.S. for purposes of Note 2(b). See HRL 555788 dated September 9, 1991.

With respect to the operations performed in Honduras, we believe that the assembly of the canvas pieces and the further processes performed in the manufacture of the canvas shoe, using only U.S. origin components and ingredients, are encompassed by the operations specified in Note 2(b)(i).

We further note that in T.D. 91-88 dated October 18, 1991, we determined that footwear and parts of footwear, made at least in part of textile materials, are eligible articles under Note 2(b), regardless of whether they are subject to textile agreements.

HOLDING:

Based on the information submitted, we find that both shoes manufactured in BCs wholly of U.S. origin components and ingredients are entitled to duty-free treatment under Note 2(b), provided (1) they do not enter the commerce of any foreign country, other than a BC, before importation into the U.S., and (2) the applicable documentation requirements set forth in Headquarters telex 9264071 dated September 28, 1990, (copy enclosed) are satisfied.

Sincerely,

John Durant, Director
Commercial Rulings Division

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