WhatÍs new about ïnew and differentÍ

WhatÍs new about ïnew and differentÍ

A proposed change in Customs and Border Protection's approach to "rules of origin" will affect a long-standing but obscure exception to the Jones Act, the set of laws that restrict domestic maritime commerce to U.S.-flag, U.S.-built vessels owned and operated by qualified U.S. citizens.

The "new and different" product exception to the Jones Act applies when a product is shipped from the U.S., transformed into a new and different product in another country, and then shipped back to the U.S. For the transformation into a new and different product, both legs of that journey must be aboard a qualified Jones Act vessel.

Customs in July proposed to replace its case-by-case approach to this exception with a generic standard based on changes in tariff classification. This not only could alter where the exception applies, but raises doubt about the applicability of previous Customs rulings on "new and different" products.

The classic "new and different" situation arose in the late 1970s with the delivery of Alaskan crude oil to Amerada Hess Corp.'s refinery in the U.S. Virgin Islands in a foreign-flag vessel. Hess intended to refine the oil in the Virgin Islands and deliver the gasoline and other products to the continental U.S. in other foreign-flag vessels.

The issue of whether the Jones Act applied to those shipments was resolved in the 1978 case, American Maritime Ass'n v. Blumenthal. The U.S. Court of Appeals for the D.C. Circuit held that the test to determine whether the voyage was continuous between two U.S. points was whether the merchandise leaving the foreign intermediate point was "physically, chemically and usefully different from the original crude oil."

Since that ruling, Customs has applied the "new and different" standard in a variety of situations. The deciding factor in oil and fuel situations, for example, has usually been whether the merchandise changes specification in the foreign country under standards employed by the American Society for Testing and Materials. Mere blending of fuel components generally does not change ASTM classification and therefore does not generate a "new and different" product. Nor does gasification of liquefied natural gas.

Customs has reached similar conclusions for other merchandise. For example, it has determined that Hawaii cattle shipped to Mexico, where they undergo "several industry-recognized stages of development" before entering the U.S., are "new and different" from the cows shipped from Hawaii.

Customs uses country-of-origin determinations on imports for a variety of purposes, including admissibility into the U.S., applicability of duty and eligibility for preferential trade programs. Customs has occasionally looked to country-of-origin rules for guidance when making Jones Act-related determinations. Customs has been careful, however, to point out that the two approaches are not the same.

The agency's proposal would merge the analyses by including Jones Act determinations under uniform rules that Customs proposed to govern its determinations of country of origin.

Customs' proposal would replace case-by-case judgments regarding substantial transformations with a uniform method. That method was first proposed in 1991 but was adopted only for imports from Canada and Mexico, and for textile products. Under those rules, Customs judges whether a product is new and different based on whether it has changed tariff classification or has undergone a "tariff shift" as a result of processing outside the U.S.

Customs believes that judging transformation based on tariff shifts is "more objective and transparent" than the current process and will result in "greater predictability in determining the country of origin of imported merchandise." Not everyone agrees.

The American Association of Exporters and Importers expressed concerns about the proposed rule. The AAEI said widespread use of the NAFTA-related rules of origin have been rejected in the past, and it questions whether a tariff-shift model will increase predictability or reduce country-of-origin disputes.

The AAEI also has concerns about the application of the tariff-shift model to the Jones Act. It said that mere blending may change a tariff classification but until now has been considered insufficient to change the product into something "new and different."

Customs did not indicate that it intended to change prior rulings, and the proposed rule-making contains no provision for "grandfathering" prior rulings. The AAEI has suggested that Customs go back to the drawing board.

Customs' intention to proceed is evidenced by the publication of its proposed rule, but it remains to be seen whether this matter will receive priority in a new administration.

Charlie Papavizas is a partner at Winston & Strawn. He can be contacted at 202-282-5732, or at cpapavizas@winston.com.