Appealed from: Court of International Trade.
Friedman, Kashiwa, and Miller, Circuit Judges.
This is an appeal from a decision of the Court of International Trade holding that the imported merchandise, pillowcases, was a "product of Hong Kong" subject to an assessed duty rate of 34% ad valorem and not a "product of" the Peoples Republic of China which would cause the merchandise to be assessed with 90% ad valorem duty. We affirm.
The parties stipulated to the following facts. The imported merchandise consists of pillowcases shipped from Hong Kong to the United States. The pillowcases were produced from percale, a cotton fabric, woven in China into a bolt of cotton. In China the bolts of fabric (piece goods) were stenciled with: (1) an embroidery design, (2) cutting marks, and (3) a scalloped edge. The piece goods were then embroidered on the embroidery design and shipped to Hong Kong. In Hong Kong the piece goods were cut into individual pieces of fabric at the inked cut marks. One edge of the fabric was cut and scalloped with colored thread on the inked scallop marks. The pieces were then folded in half and two of the sides were sewn together. The merchandise was then moistened with water and a whitener, pressed, folded, packaged, and sent to the United States. Appellee also stipulated that it had no knowledge of the time, cost or labor comparisons for the processes performed in Hong Kong and China; that it purchased the merchandise exported from China; and that it was unaware of any use of the merchandise other than to be made into pillowcases.
Upon importation into the United States, the pillowcases were classified under item 363.01 Tariff Schedules of the United States, such classification not being contested. However, pursuant to General Headnote 3(e) the merchandise was assessed at a column 2 duty rate of 90% ad valorem as a "product of" China, whereas appellee, the importer, asserts that the merchandise should be assessed at a column 1 duty rate of 34% ad valorem as a product of Hong Kong. The pertinent statutory provisions provide:
General Headnotes and Rules of Interpretation:
3. Rates of Duty. The rates of duty in the "Rates of Duty" columns numbered 1 and 2 of the schedules apply to articles imported into the customs territory of the United States as hereinafter provided in this headnote:
(e) Products of Communist Countries. Notwithstanding any of the foregoing provisions of this headnote, the rates of duty shown in column numbered 2 shall apply to products, whether imported directly or indirectly, of the following countries and areas pursuant to section 401 of the Tariff Classification Act of 1962, to section 231 or 257(e)(2) of the Trade Expansion Act of 1962, or to action taken by the President thereunder:
China (any part of which may be under Communist domination or control).
(f) Products of All Other Countries. Products of all countries not previously mentioned in this headnote imported into the customs territory of the United States are subject to the rates of duty set forth in column numbered 1 of the schedules.
Relying on case law interpreting Section 5 of the Trade Agreement Extensions Act of 1951 and Presidential Proclamation 2935, 16 Fed. Reg. 7635, the predecessor provisions to General Headnote 3(e),*fn1 the trial court found that the imported merchandise was a product of Hong Kong. In reaching this conclusion, the court found that the processes performed in Hong Kong caused a change in the "character and identity" of the merchandise and that the pillowcases were articles "different in appearance, identity, and use" from the bolt of cloth. Despite the government's arguments, the court found decisions construing the marking statute, applying a "substantial transformation" test, and General Interpretive Rule 10(h) not to be controlling. The court, ...