Shipped Directly Means…Shipped Directly

Mark Neville | February 18, 2007 | Free Trade Agreements
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Goods qualifying under a Free Trade Agreement (FTA) are treated differently from other goods. One of the hallmarks of the FTAs in place is that the economic benefit of duty-free or reduced duty treatment is strictly limited—by treaty, statute and regulations. The benefit of an FTA is reserved for those goods which qualify under the applicable rules of origin.

Transport-LogisticsGoods qualifying under a Free Trade Agreement (FTA) are treated differently from other goods. One of the hallmarks of the FTAs in place is that the economic benefit of duty-free or reduced duty treatment is strictly limited—by treaty, statute and regulations. The benefit of an FTA is reserved for those goods which qualify under the applicable rules of origin.

In order to achieve certain other goals as may be set forth in its foreign relations agenda, the United States is willing to forego customs duties on imports of qualifying goods. That is why the rules of origin of each FTA spell out in detail what goods will qualify. Some of those rules make it difficult for goods made in the FTA country with non-qualifying parts or materials (i.e., the parts or materials had previously been imported into the FTA country) to qualify. It can be frustrating to see an importer’s bid for FTA benefits not succeed if the goods fail to qualify.

Given the strictness of the rules of origin and understanding that they are designed to ensure that the economic benefit is conferred on the FTA partner, such failures may be expected. Nothing can be more frustrating than to witness an otherwise qualifying entry be denied those FTA benefits because the goods were not shipped directly to the United States.

Shipped Directly Criterion

Trade laws that only confer benefits to goods that qualify under specific rules of origin also require that the goods are imported directly into the United States. In broad terms, the rules specify that only emergencies that threaten the cargo will excuse the goods being transshipped through an intermediate country.

For examples we could start with the Generalized System of Preferences (GSP), the regulations that clearly remove most goods from GSP consideration if they are transshipped through an intermediate country. The GSP generally only permits loading and unloading and other activities necessary to preserve the articles in good condition. (19 CFR 10.175.)

Each FTA contains a requirement that the qualifying goods be imported directly into the United States. In the case of NAFTA, the origin rules make it clear that a good is not an originating good if it is withdrawn from customs control outside the NAFTA territories or if it undergoes further production or other operation outside the NAFTA territories beyond that which is required to preserve the good. (19 CFR Pt. 181, App. Section 16.) We have an excellent example of how things can go wrong in the context of the FTA with Chile.

In the case of this FTA, the rules of origin (at General Note 26 (b) to the Harmonized Tariff Schedule) specify that a good will qualify only if each non-originating material undergoes an applicable change in tariff classification as set out in the rules.

Tariff Shift for Non-Originating Materials

Consider the question of dressed sheepskin from Spain that was shipped to Chile where it was cut to shape and sewn into shearling jackets. Such a tariff shift for the Spanish-origin materials (from heading 4302 to heading 4303, HTS) would qualify the shearling jackets as being eligible for the FTA tariff preference.

But what if the jackets had not been exported directly to the United States? What if, instead, these jackets were packed in bulk and shipped first from Chile to Canada? In Canada, they were then offloaded and unpacked, inspected, vacuumed, pressed, placed on hangers and individually bagged. Would such a fact pattern be consistent with the US/Chile FTA rules?

This begs the question: What are the US/Chile FTA rules about direct shipment? The rule is quite specific and is quite consistent with the rules that apply to other FTAs and tariff preference programs. The rules (19 CFR 10.463 (a)) state that

A good that has undergone production necessary to qualify as an originating good under this note shall not be considered an originating good if, subsequent to that production, the good undergoes further production or any other operation outside the territory of Chile or of the United States, other than unloading, reloading, or any other process necessary to preserve the good in condition or to transport the good to the territory of Chile or of the United States.

In short, otherwise qualifying goods will lose their FTA eligibility if they are transshipped via an intermediate country instead of being sent directly to the United States from Chile. Thus, it would seem that the handling of the jackets in Canada would oust them from FTA treatment.

In fact, this is exactly the fact presented to Customs in 2005 by a broker on behalf of its customer. In response to the ruling request, CBP replied that the merchandise did not qualify for preferential treatment under the FTA because the operations in Canada are more than unloading, reloading or any other process necessary to preserve the goods in good condition. Ruling number L84820 (6/6/05).

Not to be outdone, the broker promptly applied to CBP for reconsideration of this ruling. The ensuing ruling issued by CBP Headquarters (ruling number 563304 (5/18/06) recited the arguments made by the broker in more detail.

The broker claimed that the vacuuming and pressing were operations necessary to preserve the garments in good condition so as to make them saleable. As was originally implied by the facts, the second ruling specifically referred to the fact that the initial ruling request had noted that the jackets had been tightly packed when shipped from Chile to save on shipping costs. Further, hangers at this first stage would have left undesirable impressions on the garments. The broker also contended that the vacuuming and pressing, which cost some $5 per garment, were not “production” and should be seen merely as “processes” necessary to preserve the goods in good condition and thus permissible under the origin rules.

CBP rejected the arguments on the strength of the facts presented. The operations in Canada were clearly beyond those permitted under the transit and transshipment rules.

Conclusion

CBP takes a strict approach to the transshipment rules. The bottom line as shown in the rulings: somebody may have saved a few bucks on shipping, but the importer had to pay duty at the full four percent duty rate. The lesson: whatever you are planning to do, do it in Chile, before it is shipped, or in the United States, after it is received. It is hard enough to qualify for the tariff preference; it is a crying shame that the tariff preference could be lost on these bases!

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