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HQ 556932


January 14, 1993

CLA-2 CO:R:C:S RAH

CATEGORY: CLASSIFICATION

Mr. Leslie Alan Glick
Porter, Wright, Morris & Arthur
1233 20th Street, N.W.
Washington, D.C. 20036-2395

RE: Eligibility of certain nuts, bolts, rivets and screws for duty-free treatment under the GSP; Pickling; Drawing of Steel Rod; Threading; Forming of Drawn Wires; Die- forming; Heat Treatment; Zinc Plating

Dear Mr. Glick:

This is in response to your letter of September 15, 1992, requesting a ruling on whether steel imported into Mexico and made into fasteners satisfies the double substantial transformation test, thereby allowing the value of the steel to be included in the 35 percent value-content requirement under the Generalized System of Preferences (GSP).

FACTS:

Your client manufactures nuts, bolts, rivets, washers and screws (cumulatively referred to as "fasteners") in Mexico from steel rod imported into that country. The fasteners are then sold in Mexico or exported to the United States.

You describe the manufacturing of the raw materials (ferrous and non-ferrous metal alloys and many plastic materials) in a seven step process. In the first stage of the processing, the raw material's (steel rod) oxidation is removed through a pickling process. A concentration of hydrochloric acid and water is first used to wipe off all impurities and rust from the steel rod. Next, the rod is immersed in a concentration of lime and water to clean the rod and prevent contamination of the zinc phosphate tank. An oxalic acid and water preparation is used to remove residues of hydrochloric acid and make the rod ready for the zinc phosphate coating. The rod is submerged in a mixture of zinc phosphate, sodium nitrite and water to give the rod a coating of zinc phosphate. You state that this prevents the rod from rusting when it is in stock and simplifies the second process. The rod is then rinsed with water and is immersed in a solution of metallic soap and water to lubricate it and make it easier for it to pass through the drawing die.

In the second stage of the manufacturing process, the steel rod is drawn to wire rods ranging from 4-9 millimeters, 5.5-17 millimeters, and 17-28 millimeters. You contend that the wire drawing itself constitutes one substantial transformation and creates new and different articles (wire rods). You also state that the unthreaded drawn wires have been used as automobile steering equipment and gear handles and, thus, have a different use in commerce.

The third stage involves threading the wire rod by passing it through threading machines. You contend that the threaded wire rods can be used to make locking instruments and fasteners, which make the threaded wire rods intermediate products and independent articles of commerce.

The fourth stage involves the forming of the drawn wires. Fastener manufacturing is achieved by a variety of means such as hot-forging, cold-heading, and molding. The processing involves punching in four dies for fitting and alignment. The fasteners produced at this stage are sold as spare parts, hand tools, including pins, rivets and sockets, which can be subsequently made into bolts, screws or nuts. You also claim these fasteners are independent articles of commerce.

The fifth stage entails manufacturing the specific types of threaded and unthreaded fasteners. In the manufacture of the threaded screws, the first step is to prepare the die to specification. Next, the fastener goes through a female die fitting, pitch alignment, diameter adjustment, and is measured by a thread gauge. The thread of the nut is made by tapping. The process commences with tooling preparation. Then, the fasteners are placed in a feeding track to feed the threading machines and are threaded by the machines that perform the tapping function.

An alternative, sixth stage, involves the threading of bolts or tapping of nuts to produce fasteners or threaded rods that are actual products sold in commerce. You state that they can be sold to companies that manufacture fasteners, as well as to other buyers.

Finally, the seventh stage of the manufacturing process consists of the heat treatment of the formed fasteners. The fasteners are fed into the heat treatment machine. The fasteners are initially quenched, by rapid heating and cooling in water at hot and cold temperatures. This is done to increase their hardness. Because of the instability of the products after quenching, the fasteners are then sent for tempering to stabilize their structure. You state that tempering helps to reduce the heat-stress caused by the quenching process, and also reduces the hardness of the fasteners. You assert that the mechanical properties and character of the fasteners are altered at this stage, and a substantial transformation occurs.

For certain items, a zinc plating of the fasteners takes place as a last step in the manufacturing process. You state that it, like hot-dip galvanizing, protects the fasteners against oxidation, and that it affects the physical properties of the fasteners resulting in yet another substantial transformation.

ISSUE:

Whether the processing of steel rod in Mexico into fasteners (nuts, bolts, rivets, washers and screws) constitutes a double substantial transformation, whereby the cost or value of the steel rod may be counted toward the 35 percent value content requirement under the GSP.

LAW AND ANALYSIS:

Under the GSP, eligible articles the growth, product or manufacture of a designated beneficiary developing country (BDC) which are imported directly into the customs territory of the U.S. from a BDC may receive duty-free treatment if the sum of (1) the cost or value of materials produced in the BDC, plus (2) the direct costs of the processing operations in the BDC, is equivalent to at least 35 percent of the appraised value of the article at the time of entry. See 19 U.S.C. 2463(b).

Mexico is a designated BDC. See General Note 3(c)(ii)(A), Harmonized Tariff Schedule of the United States (HTSUS). Therefore, the fasteners and unthreaded wire will receive duty- free treatment if they are classified under a GSP-eligible provision, are considered to be "products of" Mexico, are imported directly into the United States, and the 35 percent value-content requirement is satisfied. Merchandise is considered the "product of" a BDC if it either is wholly the growth, product or manufacture of a BDC or has been substantially transformed there into a new or different article of commerce. 19 U.S.C. 2463(b)(2). A substantial transformation occurs "when an article emerges from a manufacturing process with a new name, character, or use which differs from that of the original material subjected to the process." The Torrington Company v. United States, 764 F.2d 1563, 1568 (Fed. Cir. 1985). An "article of commerce" is one that is readily susceptible of trade, and is an item that persons might well wish to acquire for their own purposes of consumption or production. Id. at 1570.

If an article is comprised of materials that are imported into the BDC, the cost or value of those materials may be included in calculating the 35 percent value-content requirement only if they undergo a "double substantial transformation" in the BDC. See, section 10.177(a), Customs Regulations (19 CFR 10.177(a)); Azteca Milling Co. v. United States, 703 F. Supp. 949 (CIT 1988), aff'd 890 F.2d 1150 (1989). That is, the imported materials must first be substantially transformed in the BDC into a new and different constituent material which is then used to produce the eligible article which is subsequently exported to the United States. Headquarters Ruling Letter (HRL) 055591, dated August 22, 1978.

You argue that the drawing of the rod constitutes a substantial transformation because it amounts to a change in character of the rod by reducing the rod significantly in diameter and giving it different fundamental properties, including yield, hardness and elongation. You also claim that the processing of the rod limits the use of the rod to the manufacture of products requiring those dimensions.

We disagree with your argument that the drawn wire rod is a substantially transformed constituent material. The court in Superior Wire v. United States, 669 F. Supp. 472 (CIT 1987), aff'd, 867 F. 2d. 1409 (Fed. Cir. 1989), held that the drawing of wire rod into wire through a multi-stage process did not constitute a substantial transformation of the wire rod. The court found that there was no significant change in the use or character of the wire, and only a relatively insignificant change in name. Moreover, the court found that the operations performed on the wire rod were minor rather than substantial and concluded that the "wire rod and wire may be viewed as different stages of the same product." Id. at 1414. See HRL 555705 dated August 26, 1991, in which we held that the drawing process of copper wire, whereby the wire is reduced through a multi-stage process from a diameter of 14 AWG (approximately .064 in.) to a diameter ultimately of 36 AWG (approximately .005 in.) did not constitute a substantial transformation.

A test recognized by the courts as indicative (although not dispositive) of a substantial transformation is whether the manufacturing process results in a transition from producers' goods to consumers' goods. Midwood Industries v. United States, 62 Cust. Ct. 499, 313 F. Supp. 951 (1970). The facts in question are similar to Superior Wire in that there is no clear change from a producer good to consumer good when the rod is drawn. The primary use of the rod, without further manufacturing, has not significantly changed with the drawing. Furthermore, there is no significant change from a product suitable for many uses to one fit for only a few uses. Like the copper wire in Superior Wire, the steel rod in this case dictates the final form of the finished wire rod, as the basic properties of the wire rod are predetermined by the undrawn rod. Moreover, no significant change in the composition of the wire rod occurs between the stages of drawing.

You also contend that threading the wire rods by specialized machinery results in another substantial transformation. In Headquarters Ruling Letter (HRL) 734186 dated October 24, 1991, we held that steel pipe exported to Mexico where it was cut to length and threaded at both ends and imported into the United States for use as nipples did not constitute a "product of" Mexico. See also T.D. 87-46 and T.D. 67-249(12) (cutting to length and threading of steel pipe is not a substantial transformation and will not be deemed to change its country of origin).

You further argue that another intermediate product is created in the die-forming stage where the rods are made into specific fasteners. It is in this stage of manufacturing that we find the first substantial transformation of the steel rod into a new and different article of commerce. In HRL 085535 dated December 28, 1989, we held that wire rod drawn into wire and converted to nails constitutes a single substantial transformation. See HRL 055722 dated August 14, 1979 (the manufacture of tungsten carbide plunged tool blanks from rough tungsten carbide rod resulted in a single substantial transformation).

Finally, you state that the heat treatment, which consists of quenching and tempering the finished fasteners, also amounts to a substantial transformation. We have held that heat treatment which is not extensive or complex, and does not transform or narrow the uses of the article is not a substantial transformation. See HRL 555103 dated February 2, 1989 (solution quenching and annealing stainless steel bars and wire rod, which maximizes softness, ductility, and corrosion resistance in the steel, does not constitute a substantial transformation, where steel retains its multi-functional utility); HRL 730648 dated August 14, 1987 (stainless steel pipe which is annealed, restraightened and pickled is not substantially transformed). We are not convinced that the heat treatment in question is sufficiently extensive or complex to substantially transform the name, character or use of the fasteners.

Finally, zinc plating is not the type of operation which constitutes a substantial transformation. See C.S.D. 91-7 (HRL 732159 dated September 7, 1990) (gold plating of jewelry is not a substantial transformation).

Based on the foregoing analysis, we find that the seven step processing of the steel rod into fasteners results in a single substantial transformation. Accordingly the cost or value of the steel rod may not be counted toward the 35 percent value-content requirement for purposes of the GSP.

HOLDING:

The seven step processing of imported steel rod in Mexico, which consists of pickling, drawing, threading, die-forming, threading of bolts and tapping of nuts, heat treatment and, in some cases, plating, collectively constitute a single substantial transformation. Accordingly, because the steel rod is not substantially transformed into an intermediate article of commerce in Mexico, the cost or value thereof may not be counted toward the 35 percent value-content requirement of the GSP.

Sincerely,

John Durant, Director
Commercial Rulings Division

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