Background
The United States–Bahrain Free Trade Agreement grants preferential tariff treatment to qualifying goods. As relevant here, a product must be a new or different article of commerce produced in Bahrain or the United States, and at least 35 percent of its appraised value must derive from materials produced or processing performed in one or both countries.
JBF Bahrain imported biaxially oriented polyethylene terephthalate film manufactured in Bahrain using third-country inputs. Customs denied duty-free treatment because those inputs had not undergone two substantial transformations—first into an intermediate good and then into the finished film—and therefore their cost could not count toward the 35-percent threshold. After Customs denied JBF’s protest, JBF sued and the parties filed cross-motions for partial summary judgment on the governing legal standard.
JBF relied on a Customs regulation incorporating a tariff-shift approach referenced in a side letter exchanged by the United States and Bahrain. The government argued that General Note 30 of the Harmonized Tariff Schedule of the United States, which has statutory force and uses a substantial-transformation test, controlled instead.
The Court’s Holding
The court held that General Note 30 requires a third-country input to undergo a double substantial transformation before its cost may count toward the agreement’s 35-percent value-content requirement. Congress did not enact or incorporate the side letter, and the presidential proclamation implementing the agreement likewise did not incorporate it. Because Customs’s regulation purported to replace the statute’s substantial-transformation standard with a tariff-shift test, the agency exceeded its authority and the conflicting regulation was invalid.
The court alternatively held that JBF would lose even if the regulation’s tariff-shift standard applied. The regulatory framework would require two tariff shifts: one when the foreign input becomes an intermediate good and another when that intermediate good becomes the final product. JBF’s theory requiring only the first shift misread the regulations.
The court therefore denied JBF’s motion for partial summary judgment and granted the government’s cross-motion for partial summary judgment. It directed the parties to file a joint status report within 30 days.
Key Takeaways
- Third-country inputs count toward the Bahrain agreement’s 35-percent value-content threshold only if they undergo two substantial transformations.
- A Customs regulation cannot replace the unambiguous rules-of-origin standard established by the HTSUS, which has statutory force.
- Even under the alternative tariff-shift framework urged by JBF, both the intermediate and final production stages would have to produce qualifying tariff-classification changes.
Why It Matters
The decision emphasizes that statutory rules of origin control over inconsistent agency regulations, even when the regulation reflects a side letter negotiated alongside a free-trade agreement. Importers cannot rely on such a regulation to obtain preferential treatment when Congress and the implementing HTSUS provision adopted a different standard.
For goods manufactured with third-country materials under the Bahrain agreement, importers must establish each required transformation in the production chain. Showing only that a foreign input became a qualifying intermediate product is insufficient.