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HQ 561605




July 20, 2000

MAR-O5 RR:CR:SM 561605 BLS

CATEGORY: MARKING

Ronald A. Oleynick, Esq.
Holland & Knight LLP
2100 Pennsylvania Avenue, N.W.
Washington, D.C. 20037-3202

RE: Eligibility for duty-free treatment under the GSP of certain plywood products; country of origin marking requirements

Dear Mr. Oleynick:

This is in reference to your letter dated December 28, 1999, on behalf of Greenline Forest Products, Ltd. (“GFPL”), requesting a ruling concerning the eligibility for duty-free treatment under the Generalized System of Preferences (GSP) of certain plywood products imported from Thailand. You also ask that we address the country of origin marking requirements for such products.

FACTS:

You state the following:

GFPL is involved in the production of a number of wood products including moldings and doors, and in the sale of decorative hardwood plywood. GFPL sells its products in the United States and Canada to boat manufacturers.

The product at issue is ¼”, ½”, and ¾” tropical veneer decorative hardwood plywood, which GFPL purchases from the producer in Thailand, Metro Veneer Company (“Metro”). Decorative hardwood plywood is used by the marine building industry for interior finish woodworking on yachts. Tropical wood has long been used for these applications due to its durability, lightweight and ability to withstand a wet or continually damp atmosphere.

Decorative hardwood plywood is made of a core of tropical plywood and two face veneers of tropical wood. The veneer is what adds the value to the product in terms of cost and aesthetic desirability.

The cores are three, five, or seven “ply” plywood, depending on the thickness of the core (three ply – ¼”, five ply – ½”, and seven ply – ¾”), each ply not exceeding 6 mm in thickness. The plys are cut from tropical wood, and glued

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and pressed together so that the grain of the wood in each runs at 90 degrees to two immediately adjacent plys. The cores are of mixed tropical wood.

The decorative hardwood plywood industry refers to the finished product by reference to the outer or ‘face” ply veneers. Therefore, teak plywood refers not to a plywood that is composed of all plys of teak, but of a product that has a teak veneer outer ply and a core of tropical wood. Depending on use, decorative hardwood plywood is produced as either “one-sided” or “two-sided.” One sided refers to plywood that has one outer or face ply (the “front”). The other outer or face ply (the “back”) of so-called one sided plywood will consist of a veneer of equal or better grade than the front; however, it will be of a species that is less expensive than the front ply. One-sided plywood is used in applications where the back is not normally seen (e.g., bulkhead walls or the sides of cabinets).

Two-sided plywood refers to plywood that has two face “plys” of the same grade and value. Such a product would be used where both sides of the board would be visible (e.g., thin walls made of just one sheet of plywood or cabinet doors where the inside of the door, when opened, will be in full view).

The plywood cores are either constructed in Thailand or imported into Thailand from various countries in Southeast Asia. At present, most of the cores are being imported from Malaysia, however, the source changes depending on supply availability and market conditions. You have telephonically advised that the teak logs from which the veneers are produced may also originate in Thailand or in another country in Southeast Asia.

Production of Teak Veneers

The teak veneers used as the front ply in one-sided teak decorative hardwood plywood are produced in Thailand by Metro as follows:

1) Raw teak logs are cut to specified lengths and stripped of their bark. They are then placed in steam baths for softening in preparation for cutting.

2) Next, the logs are cut into veneer of a specified thickness by one of a variety of methods. For example, rotary cutting, the most common method, involves centering each log in a lathe and turning it against a broad cutting knife, which is set into the log at a slight angle.

3) After the veneer is cut, a clipper trims the veneer to a specified width and removes defects. The trimmed veneer is placed in a drying chamber, where its moisture content is reduced to a level that will permit further manufacture. 3

Finally, sheets that are less than full size are dry-clipped and joined together to form full size 4x8 foot sheets of veneer referred to as "faces."

The finished plywood product (assembly of core and veneers) is produced by a multi-step process, which includes sanding, gluing, heat-treating, and pressing. At a meeting with this office on April 27, 2000, you stated that the core is both filled and sanded during this operation. Samples of the core and veneer were also submitted.

ISSUES:

1) Whether the decorative plywood is eligible for duty-free treatment under the GSP upon importation.

2) What are the country of origin marking requirements for the imported plywood product?

LAW AND ANALYSIS:

GSP

Under the GSP, eligible articles the growth, product or manufacture of a designated beneficiary 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 performed in the BDC, is equivalent to at least 35 percent of the appraised value of the article at the time of its entry into the U.S. See 19 U.S.C. 2463(b).

Under General Note 4, Harmonized Tariff Schedule of the United States (HTSUS), Thailand is a designated BDC for purposes of the GSP. The articles to be imported are properly classifiable under subheading 4412.13.40, HTSUS, which provides for “Plywood, veneered panels and similar laminated wood: Plywood consisting solely of sheets of wood, each ply not exceeding 6 mm in thickness: With at least one outer ply of tropical wood Not surface coveredOther.” Articles imported from Thailand classified under this provision are eligible for GSP treatment.

Where an article is produced from materials imported into the BDC, the article is considered to be a "product of" the BDC for purposes of the GSP only if those materials are substantially transformed into a new and different article of 4
commerce. See 19 CFR 10.177(a)(2). In the case of materials imported into a BDC, the cost or value of those materials may be counted towards the 35 percent requirement only if the imported material is first substantially transformed into a new and different intermediate article of commerce which is then used in the BDC in the production of the final imported article.

The test for determining whether a substantial transformation has occurred is whether an article emerges from a process with a new name, character or use, different from that possessed by the article prior to the processing. See Texas Instruments v. United States, 69 CCPA 152, 156, 681 F.2d 778,782 (1982). In determining whether the combining of parts or materials constitutes a substantial transformation, the issue is the extent of operations performed and whether the parts lose their identity and become an integral part of a new article. Belcrest Linens v. United States, 741 F.2d 1368, 1373 (Fed. Cir. 1984). If the combining process is merely a minor one which leaves the identity of the imported article intact, a substantial transformation has not occurred. Uniroyal, Inc. v. United States, 542 F.Supp.1026, 1029 (CIT 1982), aff'd, 702 F.2d 1022 (Fed. Cir. 1983)

Scenario No. 1 - Plywood Core of non-Thai Origin, Teak Veneer of Thai Origin

In general, Customs has also determined that laminating, coating and encapsulating generally does not result in a substantial transformation. See HRL 557931 dated August 30, 1995, affirming upon reconsideration HRL 557034/557072 dated July 14, 1993 (laminating paper through the gluing/pressure melting of a thin layer of polypropylene did not constitute a substantial transformation); and HRL 730034 dated January 8, 1987 (joining of silk-screened metal sheets with a foil-laminated board and the minor cutting of those sheets was not a substantial transformation.) See also HRL 734907 dated May 12, 1993 (Canadian-origin vinyl bonded with foam in the U.S. to produce foam-bonded vinyl did not constitute a substantial transformation for country of origin marking purposes. In that case, Customs pointed out that the operations performed in combining these materials were simple and did not require a great deal of skill or time, and the vinyl still had the appearance and texture of vinyl after being bonded with the foam.)

In this scenario, the plywood core is imported into Thailand where it is bonded with the teak veneers of Thai origin to form the decorative hardwood plywood product. The lamination process in the instant case does not appear to be a complex operation and the plywood core does not

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lose its identity during this process, as it serves as the heart or “core” of the teak hardwood product. Therefore, we find that the plywood core does
not undergo a substantial transformation in Thailand when bonded with the teak veneer.

Accordingly, as the imported plywood product under this scenario is not considered to be a "product of" the BDC, it is not eligible for duty-free treatment under the GSP upon importation.

Scenario No. 2 - Teak Logs of non-Thai Origin, Core of Thai Origin

In general, Customs has held that cutting or shaping materials to defined shapes or patterns suitable for use in making finished articles, as opposed to mere cutting to length or width which does not render the article suitable for a particular use, constitutes a substantial transformation. See, e.g., Headquarters Ruling Letter (HRL) 555702 dated January 7, 1991 (steel plates dedicated to use in the final article by cutting, folding, binding, scraping, etc., considered substantially transformed components) and HRL 553574 dated August 15, 1985 (aluminum strip cut to length, punched and/or drilled with holes, and notched, which gave the strip a specific shape or pattern, was substantially transformed.)

In Headquarters Ruling Letter (HRL) 555338 dated July 10, 1989, wooden logs from Nicaragua were imported into Costa Rica and cut into lumber measuring two by six, two by eight, and two by ten feet, and in random lengths ranging from eight to 24 feet, and then made into doors. In that case, Customs found that the logs underwent a substantial transformation resulting from the conversion of the logs into lumber of specific dimensions, with a different name, character, and use than that possessed by the logs. (Customs also held that the logs underwent a second substantial transformation, as a result of processing the lumber, an intermediate product with numerous uses, into wooden doors.) See also HRL 554649, dated July 15, 1987 (spruce and hemlock in log form which are cut into two by fours or two by sixes, trimmed, edged, planed, and chemically treated or kiln dried are substantially transformed for purposes of the Caribbean Basin Economic Recovery Act (CBERA)).

In this scenario, teak logs are imported into Thailand where they are processed into veneers, which are then bonded to plywood cores of Thai origin. We find that the processing of the raw teak logs into the final product, the decorative teak plywood, which includes stripping the bark from the log, cutting veneer panels to specific dimensions, and bonding the veneers to the plywood

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cores, constitutes a substantial transformation of the imported logs, as the hardwood plywood has a different name, character, and use than that possessed by the logs. The issue which we must now address is whether, during the production of the imported plywood product, the teak log used to create the finished article is substantially transformed into an intermediate article of commerce, the teak veneer, which itself is substantially transformed into the final article. If so, the cost or value of the teak log imported into Thailand may be included as BDC material for purposes of the 35 percent value-content calculation.

We have held that, for purposes of the GSP, an assembly process will not work a substantial transformation unless the operation is "complex and meaningful." See C.S.D. 85-25, 19 Cust. Bull. 544 (1985). Whether an operation is complex and meaningful depends on the nature of the operation. In making this determination, we consider the time, cost, and skill involved, the number of components assembled, the number of different operations, attention to detail and quality control, as well as the benefit accruing to the beneficiary developing country (BDC) as a result of the employment opportunities generated by the manufacturing process.

In Texas Instruments. Inc. v. United States, 681 F.2d 778 (Fed. Cir. 1982), the court implicitly found that the assembly of three integrated circuits, photodiodes, one capacitor, one resistor, and a jumper wire onto a flexible circuit board (PCBA) constituted a second substantial transformation. It would appear that the assembly procedure which took place in Texas Instruments does not achieve the level of complexity contemplated by C.S.D. 85-25. However, as the court pointed out in that case, in situations where all the processing is accomplished in one GSP beneficiary country, the likelihood that the processing constitutes little more than a pass-through operation is greatly diminished. Consequently, if the entire processing operation performed in the single BDC is significant, and the intermediate and final articles are distinct articles of commerce, then the double substantial transformation requirement will be satisfied. Such is the case even though the processing required to convert the intermediate article into the final article is relatively simple and, standing alone, probably would not be considered a substantial transformation. See HRL 071620 dated December 24, 1984 (in view of the overall processing in the BDC, the materials were determined to have undergone a double substantial transformation, although the second transformation was a relatively simple assembly process which, if considered alone, would not have conferred origin).

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As applied to the instant case, we note that the teak veneer may be used for applications other than for plywood products, such as furniture requiring teak veneers, and is a product that is bought and sold commercially.

Accordingly, consistent with HRLs 555683 and 555156 and the court's holding in Texas Instruments, we find that the assembly of the teak veneer with the Thai-origin core to form the imported plywood product results in a second substantial transformation of the teak veneer. Although we believe that the assembly operation in the instant case, which involves gluing, heat treating, pressing and sanding may not be complex enough to constitute a substantial transformation by itself, nevertheless, we are of the opinion that the overall processing operations, i.e., stripping bark from teak logs, cutting the logs to create veneers of specific dimensions, removing defects and de-moisturizing, gluing, heat treating, etc., performed in Thailand are substantial.

Further, we believe that the processes involved in creating the imported plywood product are not the type of "pass-through" operations, which Congress intended to prohibit from receiving GSP benefits. "The provision would not preclude meaningful assembly operations utilizing foreign components, provided the assembly is of significance to the local economy, meets the 35% local content rule, and results in a new and different article." H.R. Rep. No. 98-266, 98th Cong., 1st Sess. 13 (1983). Based on the foregoing analysis and consistent with our prior rulings, we find that the teak logs used in the production of the instant plywood product undergo a double substantial transformation.

Country of Origin Marking

Section 304 of the Tariff Act of 1930, as amended (19 U.S.C. 1304), provides that, unless excepted, every article of foreign origin imported into the U.S. shall be marked in a conspicuous place as legibly, indelibly, and permanently as the nature of the article (or container) will permit, in such manner as to indicate to the ultimate purchaser in the U.S. the English name of the country of origin of the article.

Part 134, Customs Regulations (19 CFR Part 134), implements the country of origin marking requirements and the exceptions of 19 U.S.C. 1304. Section 134.1(b), Customs Regulations (19 CFR 134.1(b)), defines "country of origin" as the country of manufacture, production, or growth of any article of foreign origin entering the U.S. Further work or material added to an article in another country must effect a substantial transformation in order to render such other country the "country of origin within this part.

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In accordance with our findings, above, the plywood core imported into Thailand will not undergo a substantial transformation when processed into decorative plywood in Thailand. Therefore, the country of origin of the core will be the country where the core was produced. The country of origin of the teak veneer produced in Thailand from imported or Thai logs will be Thailand. Accordingly, in regard to Scenario No. 1, the imported product must be marked to indicate the two countries of origin. The country of origin of the imported product in Scenario No. 2 is Thailand and it must be so marked.

HOLDING:

Plywood Cores of non-Thai Origin

1) Plywood cores imported into Thailand will not undergo a substantial transformation when bonded with teak veneers of Thai origin to form decorative plywood. Therefore, as the plywood core will not be considered a “product of” Thailand, the decorative plywood products will not be eligible for duty-free treatment under the GSP when imported into the U.S.

As the plywood cores are not considered a product of Thailand, the country of origin of the cores will be the country in which they are produced. Thus, the imported plywood product must be marked to indicate its two countries of origin (Thailand and the country of origin of the core).

Teak Logs of non-Thai Origin, Cores of Thai Origin

2) Teak logs imported into Thailand will undergo a double substantial transformation in the production of decorative plywood, which involves processing the logs into veneers and bonding the veneers to plywood cores of Thai origin. Therefore, the finished plywood will satisfy the "product of" requirement and the cost or value of the teak logs may be counted as BDC material in calculating the 35% value-content requirement. As a result, the decorative plywood will be entitled to duty-free treatment under the GSP, provided the 35% value-content and “imported directly” requirements are satisfied. Whether the 35 percent test is met must await actual entry of the merchandise.

The country of origin of the imported plywood product in Scenario No. 2 is Thailand. The product must be marked accordingly.

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A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the Customs officer handling the transaction.

Sincerely,

John Durant, Director

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