HQ 0223114 - Quota of milk under the Canada Free Trade Agreement for milk entered into a foreign trade zone or bonded manufacturing warehouse; Article 404, Canadian Free Trade Agreement - United States International Trade Commision Rulings

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HQ 223114

September 18, 1991

FOR-2-03: WAR-2-01: QUO-2; ENT-7-07-CO:R:C:E 223114 SR

CATEGORY: ENTRY QUOTA FTA FOREIGN TRADE ZONE

Mr. David O. Elliott
Barnes, Richardson & Colburn
475 Park Avenue South
New York, N.Y. 10016

RE: Quota of milk under the Canada Free Trade Agreement for milk entered into a foreign trade zone or bonded manufacturing warehouse; Article 404, Canadian Free Trade Agreement

Dear Mr. Elliott:

This is in reference to your letter dated April 1, 1991, concerning quota under the Canada Free Trade Agreement (FTA) for milk entered into a Foreign Trade Zone (FTZ) or bonded manufacturing warehouse.

FACTS:

The merchandise at issue is Canadian milk in skim or condensed form that is admitted into a foreign trade zone or entered into a bonded warehouse. This milk is used in the manufacture of infant formula. Some of the infant formula is exported to Canada.

ISSUE:

Whether Canadian milk in a U.S. foreign trade zone will be subject to quota under the Canadian Free Trade Agreement if it is reexported to Canada.

LAW AND ANALYSIS:

The FTA does not bestow any change to the laws unless the change is specifically stated in the Agreement. There is no general language in the FTA that would affect the application of quota to goods imported from Canada. The quotas on dairy products have remained the same under the FTA; however, in future negotiations, where subsidy and quota programs are addressed, dairy quotas may change.

You question the meaning of the language in Article 404, of the Free Trade Agreement. Article 404 provides as follows:

1. Goods imported into the territory of a Party (including goods imported in bond or qualifying for benefit under a foreign trade zone, inward processing, or similar program) and subsequently exported to the territory of the other Party, or incorporated into, or directly consumed in the production of, goods subsequently exported to the territory of the other Party, shall be subject to the customs duties of the Party applicable to goods entered for consumption in the customs territory of that Party prior to their export to the territory of the other Party. Such duties shall not be reduced, eliminated or refunded by reason of such exportation, and their payment shall not be deferred upon such exportation.

3. Goods exported to the territory of the other Party from a foreign trade zone or similar area shall be subject to the applicable customs duties of the Party maintaining the foreign trade zone or similar area as though the goods were withdrawn for domestic consumption.

4. Paragraphs 1, 2 and 3 do not apply to: . . .
c) dutiable goods originating in the territory of the other Party that are imported into the territory of the Party and subsequently re-exported to the territory of the other Party, or incorporated into, or directly consumed in the production of goods subsequently exported to the territory of the other Party.

Article 404, of the FTA, does not address the issue of quota. Paragraph 1 of Article 404, FTA, provides that goods from a third country that are entered into the U.S. (or Canada) which are manufactured into another product cannot receive drawback (or other benefits) if they are exported to Canada (or the U.S.). This is to prevent a company from importing an article and manufacturing it into another article which could enter Canada free of duty as an American good, and also receive drawback on the article. If this were allowed duty would never be paid on the original article. This rule prevents foreign manufacturers, primarily auto manufacturers, from using the zones to circumvent tariffs that would, in effect, provide a subsidy for foreign parts entering the Canadian market.

Paragraph 3, of Article 404, offers similar protection concerning goods in Foreign Trade Zones. Duty must be paid to the U.S. on goods in a U.S. Foreign Trade Zone that are exported to Canada. This is to prevent goods from circumventing tariffs.

However, neither of these paragraphs apply to the facts at issue because paragraph 4(c) provides that paragraphs 1 and 3, of Article 404, FTA, do not apply to goods that originate in Canada that are imported into the U.S. (or vice versa) that are re- exported to Canada.

You also questioned the meaning of the language in the Statement of Administrative Action (SAA), House Document 100- 216, page 180, which reads as follows:

3. Drawback

Article 404 ends duty drawback on exports between the United States and Canada as of January, 1, 1994, with limited exceptions. These exceptions include goods exported in essentially the same condition on exportation as on importation, and dutiable goods originating in the United States or Canada if they are incorporated into, or directly consumed in the production of, goods subsequently exported back to the other FTA partner. This latter provision is transitional, since the duties to which it applies are scheduled to be phased out. . . .

The first exception mentioned is for goods imported from a third country that would be applicable to receive same condition drawback. These goods can receive drawback in the United States because they could not be considered American goods and would pay duty upon entry to Canada (or vice versa). The second exception is for goods originating in Canada or the U.S. that are exported to the other country and are eligible to receive manufacturing drawback upon return to their country of origination. These goods are still eligible for manufacturing drawback. However, since duties are to be phased out, then drawback will no longer be applicable.

HOLDING:

Article 404 of the FTA does not change the status of goods entered into a FTZ if the goods originated from Canada. Only goods that have been imported into the U.S. from a third party,
that are to be exported to Canada are to be considered as though they are withdrawn for consumption

Sincerely,

John Durant

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