U.S. Customs and Border Protection (“CBP”) recently issued a final rule on the origin of recovered parts resulting from the disassembly of used goods for purposes of the North American Free Trade Agreement (“NAFTA”).

NAFTA Rules of Origin: Background

NAFTA provides favorable duty rates for goods imported by and between NAFTA countries. In order for this preference to apply, the goods to be imported must have originated in the territory of a NAFTA party. In general, a good wholly produced or obtained in a NAFTA country may be deemed an “originating” good. However, even if a good is produced from non-originating materials, the good may still gain originating status if the good is produced in a NAFTA country and its production satisfies any applicable tariff classification change and regional value content (RVC) requirements of the NAFTA Annex 401 rules of origin.

Although Annex 401 sets forth rules regarding the circumstances under which the production of a good results in a tariff change and any RVC level required to confer origin, the rules do not address the origin of parts and components resulting from the disassembly of a good.

To address this issue, CBP published a notice of proposed rulemaking in March 2003 setting forth a proposed rule that would treat the disassembly of a used good as “production” for rules of origin purposes. CBP adopted the rule, with some changes, as final on June 30, 2005. The rule is effective on August 1, 2005.

Provisions of the new rule

The final rule adds a new section 181.132 on disassembly of goods to the U.S. NAFTA regulations, 19 C.F.R. Part 181. Section 181.132(a) provides that disassembly is considered an origin-conferring form of production so long as the NAFTA rules of origin are also satisfied. In other words, the disassembly must result in an applicable tariff change and RVC as set forth in Annex 401 in order for the part to have “originated” in a NAFTA country. Since the disassembly itself counts as the “production” necessary to the place-of-origin analysis, this rule makes it possible for a recovered part of a used good to originate in a NAFTA country even if the good to be disassembled is considered non-originating.

Subsection (b) makes clear that disassembly of new goods will not be treated as “production” when determining the origin of a part. Thus, mere disassembly of a new, non-originating good does not satisfy the production or rule of origin requirements and therefore does not change the part’s non-originating status.

Notable Issues

First, this regulatory change only affects disassembled goods being imported into the U.S. CBP has noted that the adoption of this change by all NAFTA parties is still in the discussion and development process.

Second, the fact that this regulatory change involves “production” for rules of origin purposes necessarily invokes the requirements of Annex 401.

Since the rules of origin must be satisfied in order for origin-conferring production to have occurred, it is likely that there will be circumstances where a part recovered from a disassembled good will not meet the required tariff change. Many parts may fall under the same tariff heading as the disassembled good itself, and may not constitute a “change” sufficient to alter the part’s origin.

Further, determining the value of a particular recovered part may be difficult where the rules of origin set forth an RVC requirement. CBP has suggested that the value of the used good and the cost of disassembly should be allocated and spread over the disassembled parts. Despite any difficulty in valuation of the part, compliance with the rules of origin make RVC determination necessary in some cases.

As a result of CBP’s strict adherence to Annex 401, some recovered or remanufactured goods will simply fail to meet the tariff change and/or RVC requirements and will not be entitled to favorable NAFTA-originating status.

Conclusion

CBP’s new regulation remains untested. Although adopted in hopes of encouraging recycling, reuse and remanufacturing of goods, application of the new regulation is likely to be difficult and, in many instances, uncertain.

The NAFTA rules of origin were designed to address circumstances involving the assembly of products. Because of this, these rules do not apply easily to goods in the disassembly process.

A better approach would be to treat the disassembled parts as goods that were harvested, extracted, or otherwise “wholly obtained” from the territory in which the used good was disassembled. This would confer origin on parts resulting from a disassembly operation in a NAFTA country without regard to the complicated rules applicable to non-originating goods. Despite this alternative, it is CBP’s view that such an interpretation would require a change to the underlying Agreement and that the new regulation provides a more immediate solution.

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