Use of nonoriginating fiber for yarn to produce otherwise originating apparel; Eligibility for preferential tariff treatment under DR-CAFTA

HQ H296285 July 10, 2018 OT: RR:CTF:VS H296285 EGJ CATEGORY: Classification Linda M. Weinberg Barnes & Thornburg, LLP 1717 Pennsylvania Ave NW, Suite 500 Washington, DC 20006-4623 RE: Use of nonoriginating fiber for yarn to produce otherwise originating apparel; Eligibility for preferential tariff treatment under DR-CAFTA Dear Ms. Weinberg: This is in response to your request of March 9, 2018, on behalf of your client, Coats Honduras (“Coats”), for a ruling by U.S. Customs and Border Protection (“CBP”) on the outcome of using certain nonoriginating fibers for spun and core spun yarn to produce sewing thread for garments made in the territory of parties to the Dominican Republic – Central America – United States Free Trade Agreement (“DR-CAFTA”). According to your submission, the garments to be assembled in the territories of DR-CAFTA parties are eligible for preferential tariff treatment, unless the use of nonoriginating fibers precludes them from eligibility. FACTS: The ruling request pertains to two types of yarn produced by Coats in Honduras: (1) staple spun or spun yarn made of cotton, polyester, or aramid fibers; and (2) core spun yarn consisting of polyester fibers spun around a polyester filament core. Both thread products are sold to apparel manufacturers within the DR-CAFTA region, which use the thread in the production of apparel for import into the United States. Currently, Coats uses fibers from the DR-CAFTA region in the production of its yarn. However, Coats is contemplating a potential sourcing change whereby the company would procure fibers from non-DR-CAFTA countries for use in its yarn production. Coats notes that the polyester filament core used in the core spun yarn would continue to originate in the DR-CAFTA region. For both products, Coats spins the constituent fibers to produce multiple-ply yarns. Coats then twists the yarns into a “Z” twist, dyes them, lubricates them, and rewinds them onto cones weighing not more than 1,000 grams. Set forth below is a detailed description of the processes performed in Honduras to produce both spun and core spun yarn: The staple fiber will be run through a carding process to open the individual fibers, remove impurities and dust, to orientate the fibers and to form a sliver; The staple fiber sliver, when of natural origin, (i.e., cotton) will be subjected to a combing process to remove short unwanted fibers; The staple fiber sliver will be processed through roving frames to draft the material to the required linear density and to slightly twist it in preparation for spinning; For spun products, the staple fiber roving will be subjected to a spinning process to convert it to the desired linear density and insert a twist resulting in a single yarn; For core spun products, the staple fiber roving and the core filament will be subjected to a spinning process to convert it to the desired linear density and insert a twist resulting in a single yarn; The single yarns will be run through a clearing process to reduce fault levels; The single yarns will be subjected to a plying process which involves combining together two or more single yarns to form plied yarns; The plied yarns will be twisted into a “Z” twist. This process involves taking a spool of multiple-ply yarn as described in “f” above and inserting a twist to the ply/plies in the “Z” direction. The product would come off the twisting equipment onto either a dye-tube prepared for dyeing and finishing or onto a support made ready for the final winding and/or lubrication process; Some of the plied yarns will be dyed to a shade per the customers’ specifications as requested; The plied yarns will have a sewing thread lubricant applied. The types and amount of lubricants used by Coats on this product are typical of those used in the industry to dress sewing thread; The yarns will be rewound from a package onto supports such as cones or tubes weighing not more than 1,000 grams; and, These supports will then be packaged for sale to DR-CAFTA region garment producers. The aforementioned process describes how the fibers are spun into yarns which will be used as sewing thread. Coats asserts that the spun yarns can be used in DR-CAFTA-qualifying apparel because the constituent fibers have been spun in Honduras. With regard to the core spun yarns, the core filament has been extruded in a DR-CAFTA country, and the thread has been further finished in Honduras. Coats asserts that the products covered by this request are sewing threads classifiable under headings 5204, 5401, or 5508, Harmonized Tariff Schedule of the United States (“HTSUS”), and yarn classifiable under heading 5402, HTSUS, which will be used as sewing thread. ISSUE: Will garments which are otherwise eligible for preference under DR-CAFTA be precluded from eligibility if they are assembled with thread manufactured in Honduras from nonoriginating fibers? LAW AND ANALYSIS: The Dominican Republic--Central America--United States Free Trade Agreement (“DR-CAFTA” or “Agreement”) was signed by the governments of Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, and the United States on August 5, 2004. The DR-CAFTA was approved by the U.S. Congress with the enactment on August 2, 2005, of the Dominican Republic-Central America-United States Free Trade Agreement Implementation Act (the “Act”), Pub. L. 109-53, 119 Stat. 462 (19 U.S.C. 4001 et seq.). General Note (“GN”) 29, HTSUS, implements the DR-CAFTA. GN 29(b) sets forth the criteria for determining whether a good (other than agricultural goods provided for in GN 29(a)(ii)) is an originating good for purposes of the DR-CAFTA. GN 29(b) states: For the purposes of this note, subject to the provisions of subdivisions (c), (d), (m) and (n) thereof, a good imported into the customs territory of the United States is eligible for treatment as an originating good under the terms of this note if – (i) the good is a good wholly obtained or produced entirely in the territory of one or more of the parties to the Agreement; (ii) the good was produced entirely in the territory of one or more of the parties to the Agreement, and – each of the nonoriginating materials used in the production of the good undergoes an applicable change in tariff classification specified in subdivision (n) of this note; or the good otherwise satisfies any applicable regional value content or other requirements specified in subdivision (n) of this note; and the good satisfies all other applicable requirements of this note; or (iii) the good was produced entirely in the territory of one or more of the parties to the Agreement exclusively from originating materials. Garments which are eligible for preferential tariff treatment under the DR-CAFTA are subject to that eligibility under GN 29(b)(ii)(A), which requires consideration of GN 29(n)/Ch. 61/Rule 4, GN 29(n)/Ch. 62/Rule 4, and GN 29(n)/Ch. 63/Rule 2. Rule 4 to Chapters 61 and 62 provides, in pertinent part, as follows: [A] good of this chapter … containing sewing thread of heading 5204, 5401 or 5508 or yarn of heading 5402 used as sewing thread shall be considered originating only if such sewing thread or yarn is both formed and finished in the territory of one or more of the parties to the Agreement (emphasis added). Rule 2 to Chapter 63 provides, in pertinent part, as follows: [A] good of this chapter containing sewing thread of headings 5204, 5401, or 5508 or yarn of heading 5402 used as sewing thread, shall be considered originating only if such sewing thread or yarn is wholly formed in the territory of one or more of the parties to the Agreement (emphasis added). Yarns “wholly formed in the territory of a party to the Agreement” are defined at GN 29(d)(ii)(B) as follows: A yarn is wholly formed in the territory of a party to the Agreement if all of the production processes and finishing operations, starting with the extrusion of filaments, strips, film or sheet, and including slitting a film or sheet into strip, or the spinning of all fibers into yarn, or both, and ending with a finished yarn or plied yarn, took place in the territory of a party to the Agreement (emphasis added). “Sewing thread” of headings 5204, 5401 and 5508 is defined by Note 5, Section XI, HTSUS, as follows: For the purposes of headings 5204, 5401 and 5508, the expression “sewing thread” means multiple (folded) or cabled yarn: Put up on supports (for example, reels, tubes) of a weight (including support) not exceeding 1,000 g; Dressed for use as sewing thread; and With a final “Z” twist. As the instant merchandise is multiple-ply yarn, put up on supports not exceeding 1,000 grams, is dressed for use as sewing thread and is finished with a “Z” twist, we find that both the spun and the core spun yarns are classifiable as sewing thread by application of Note 5 to Section XI. Note 5 to Section XI describes sewing thread classifiable under headings 5204 (“Cotton sewing thread, whether or not put up for retail sale”), 5401 (“Sewing thread of man-made filaments, whether or not put up for retail sale”), and 5508 (“Sewing thread of man-made staple fibers, whether or not put up for retail sale”), HTSUS. You also note that some of the yarn products at issue here are classifiable under heading 5402, HTSUS, which provides for “Synthetic filament yarn (other than sewing thread), not put up for retail sale, including synthetic monofilament of less than 67 decitex.” You state that the yarn classifiable under this heading is used as sewing thread, even though it is not classifiable as sewing thread. With regard to preferential tariff treatment, you correctly note that Rule 4 to Chapters 61 and 62 states that sewing thread, or thread of heading 5402, HTSUS, which is used as sewing thread, must be “formed and finished” in the territory of a party to the Agreement. However, Rule 2 to Chapter 63 and GN 29(d)(ii)(B) refers to yarns that are “wholly formed” in the relevant territories. In Headquarters Ruling Letter (“HQ”) W968453, dated January 19, 2007 (issued to Coats North America), we discussed the different terminology at length. As the definition of “wholly formed” in GN 29(d)(ii)(B) accounts for both formation and finishing, we find that the instant spun yarns and core spun yarns must meet the definition of a “wholly formed” yarn so as not to preclude otherwise DR-CAFTA eligible apparel from eligibility. Under GN 29(d)(ii)(B), a yarn is wholly formed in a DR-CAFTA country if “all of the production processes and finishing operations … starting with the extrusion of filaments … or the spinning of all fibers into yarn, or both, and ending with a finished yarn or plied yarn” took place in the country. With regard to the spun yarn, we note that Coats spins nonoriginating fibers into a single yarn in Honduras. Coats then combines two or more single yarns to form plied yarns. Coats puts these yarns onto a twisting machine and inserts a Z-twist into them. Coats also dyes the yarns, lubricates them and winds them onto a cone or a tube. Coats sells the finished thread to garment producers in the DR-CAFTA territories. As the nonoriginating fibers are spun into yarns and are finished into thread in Honduras, the use of these fibers will not disqualify garments which are otherwise eligible for preferential tariff treatment under DR-CAFTA. With regard to the core spun yarns, we note that the filament core is extruded in the territories of the DR-CAFTA. In Honduras, Coats spins the filament together with nonoriginating fibers to form a single yarn. Coats plies the single yarn together with other single yarns to form a multiple-ply yarn. The plied yarns are placed onto a twisting machine and have a Z-twist inserted into them. Coats also dyes the core spun yarn, lubricates it, and winds it onto a cone or a tube. Coats sells the finished thread to garment producers in the DR-CAFTA territories. As the core spun yarn has its core filament extruded in the DR-CAFTA and is spun together with nonoriginating fibers to form yarn in Honduras, the core spun yarn will not disqualify garments which are otherwise eligible for preferential tariff treatment under DR-CAFTA. Based upon the analysis set forth above, the use of both the spun and core spun yarns would not preclude otherwise qualifying garments from being originating garments for purposes of receiving preferential tariff treatment under the DR-CAFTA. HOLDING: The use of the subject spun and core spun yarns as sewing thread would not preclude otherwise qualifying garments from being originating garments for purposes of receiving preferential tariff treatment under the DR-CAFTA. 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 CBP officer handling the transaction. Sincerely, Monika R. Brenner, Chief Valuation and Special Programs Branch