HQ 224123: Substitution Same Condition Duty Drawback Under the UnitedStates-Canada Free Trade Agreement (CFTA); 19 U.S.C. 1313(j)(2);19 U.S.C. 1313(n); Article 404 of the CFTA; Sections 204(a) and204(c) of the United States-Canada Free-Trade Agreement Imple-mentation Act of 1988, Pub. L. No. 100-449, September 28, 1988

Native CBP ruling rendition. Applicability is fact-specific; modification/revocation relationships and original publisher date are retained. Publisher sentinel year0001 means unknown date, not a historical legal adoption.

                            HQ 224123

                          June 22, 1993

DRA-4-CO:R:C:E 224123 JRS          

CATEGORY:  Drawback

John M. Peterson, Esquire
Neville, Peterson & Williams
39 Broadway
New York, New York 10006

RE:  Substitution Same Condition Duty Drawback Under the United
States-Canada Free Trade Agreement (CFTA); 19 U.S.C. 1313(j)(2);
19 U.S.C. 1313(n); Article 404 of the CFTA; Sections 204(a) and
204(c) of the United States-Canada Free-Trade Agreement Imple-
mentation Act of 1988, Pub. L. No. 100-449, September 28, 1988

Dear Sir:

     This is in response to your request for a ruling dated August
7, 1992, on the above-referenced subject matter (Your File: 1629-
01). 

FACTS:

     No facts were submitted.  However, a background scenario of
general facts was presented as follows.

     A United States company imports certain duty-paid goods
(designated merchandise) into the United States.  The company also
produces or acquires in the United States certain other domestic
or imported goods which are "fungible" with the designated
merchandise.  The company exports this "substituted" merchandise
to various destinations, including Canada, and claims substitution
same condition drawback in accordance with 19 U.S.C. 1313(j)(2),
designating the imported, duty-paid merchandise as the basis for
the drawback claim, and complies with all other statutory and
regulatory requirements.  

     You ask, on or after January 1, 1994, may the United States
continue to pay substitution same condition drawback under 
19 U.S.C. 1313(j)(2) with respect to substituted merchandise
exported from the United States to Canada.  Because the position
asserted in the penultimate paragraph of your brief appears to
contradict the position stated in the concluding paragraph as well
as the body of the brief, it is unclear whether your argument is
that all substitution same condition drawback is excepted from the
CFTA's ban on duty drawback or whether only certain drawback
eligible goods are saved from the ban. 

ISSUE:

     Whether all substitution same condition drawback claims made
pursuant to 19 U.S.C. 1313(j)(2) are excepted from the CFTA's ban
(see 19 U.S.C. 1313(n)) on duty drawback for bilateral trade on
and after January 1, 1994.

LAW AND ANALYSIS:

     Section 204(c)(3) of the United States-Canada Free Trade
Agreement Implementation Act (102 Stat. 1851, Pub. L. No. 100-449,
September 28, 1988) added new subsection (n) to section 313 of the
Tariff Act of 1930 (19 U.S.C. 1313(n)) in order to make the
necessary change to the current drawback law to implement the
provisions of the United States-Canada Free Trade Agreement (CFTA). 
19 U.S.C. 2112 note section 204(c)(1988).  

     Section 313(n) of the Tariff Act of 1930, as added by Pub. L.
No. 100-449 (19 U.S.C. 1313(n)), specifically states: 

     For purposes of subsections (a), (b), (f), (h), and
     (j)(2) of this section, the shipment on or after January
     1, 1994, or such later date as may be proclaimed by the
     President under section 204(b)(2)(B) of the United
     States-Canada Free-Trade Agreement Implementation Act of
     1988, to Canada of an article, except an article made
     from or substituted for, as appropriate, a drawback
     eligible good under section 204(a) of such Act, does not
     constitute an exportation.  (Emphasis added).

     It is clear from the plain language of the statute itself and
the statute's specific reference to subsection (j)(2) that
substitution same condition drawback (19 U.S.C. 1313(j)(2)) is
eliminated but for the limited exception of an appropriate drawback
eligible good as provided for in the CFTA.
     
     As referenced by 19 U.S.C. 1313(n), section 204(a) of the
Implementation Act, in turn, references the language of the CFTA's
article 404.  Section 204(a) of the Act generally provides that the
term "drawback eligible goods" means goods provided for under
paragraphs 4, 5, and 8 of article 404 of the Agreement, or goods
other than those referred to in paragraphs 4, 5, and 8 that the
United States and Canada agree are not subject to paragraphs 4, 5,
or 8.  

     Please note that Article 404(2), CFTA (which states that the
prohibition against drawback also applies "where the imported goods
are substituted by domestic or other imported goods exported to the
territory of the other Party, ...") explicitly rejects the general
applicability of the substitution same condition drawback law of
19 U.S.C. 1313(j)(2).

     Paragraphs 4, 5, and 8 of Article 404 of the CFTA qualify the
general prohibition on duty drawback between the United States and
Canada as set forth in paragraphs 1 and 2.  These exceptions
include:

     o    goods under bond for transportation and exportation to
          the other country, or goods exported in the same
          condition on exportation as on importation (but they
          would not benefit from the FTA tariff treatment)(Article
          404(4)(a))[19 U.S.C. 1313(j)(1)], 

     o    goods that are deemed to be exported from one country 
          to the other country or goods incorporated into, or
          directly consumed in the production, of such goods, by
          reason of delivery to a duty-free store; used as stores
          or supplies on a ship or aircraft; or used in joint
          projects of the two countries where the goods will
          eventually become the property of the importing country
          (Article 404(4)(b)),
 
     o    dutiable goods of the United States or Canada if they
          are incorporated into, or directly consumed in, the
          production of goods subsequently exported back to the
          original exporting FTA partner (Article 404(4)(c))[This
          provision is transitional because it applies to duties
          that are scheduled to be phased out], 
 
     o    goods that are rejected for failure to meet sample or
          specifications (Article 404(5))[19 U.S.C. 1313(c)], and

     o    goods where both parties agree to maintain duty drawback
          which currently consists of (1) imported citrus products
          and (2) fabric imported from a third country and made
          into apparel that is subject to the most-favored-nation
          tariff rate when exported to the other party (Article
          404(8)(a) and (b)).


     It appears that it is your assertion that neither the CFTA
nor the implementing legislation preclude the payment of
substitution same condition drawback on goods exported to Canada
after that date.  Your reasoning is that although paragraphs (1)
and (2) of Article 404 of the CFTA exclude all types of direct and
substitution drawbacks for both manufacturing and same condition,
the specific reference to Paragraph 2 in the introductory clause
of Article 404(4)(which lists the exceptions to the elimination of
drawback), is a clear indication that all same condition drawbacks,
including substitution same condition drawback, are excepted from
the general termination of drawback benefits under the CFTA.  

     We do not find merit in your interpretation of the Article
404(4) of the CFTA.  Your argument regarding the admittedly
imprecise drafting of referencing paragraph 2 in the introductory
clause to Article 404(4)(i.e, "Paragraphs 1, 2 and 3 do not apply
to:") cannot overcome the plain meaning of 19 U.S.C. 1313(n) or
the reading of subparagraph 4(a) which only saves direct
identification same condition drawback (19 U.S.C. 1313(j)(1)) from
elimination (see Article 404(4)(a)).

     Our interpretation of the phrase in 19 U.S.C. 1313(n), "except
an article made from or substituted for, as appropriate, a drawback
eligible good" permits 2 exceptions to the general drawback
restriction and allows substitution same condition drawback only
on:  (1) citrus products (subparagraph 8(a)) and (2) fabric sourced
by the United States or Canada from a third country which is
transformed into apparel and subsequently exported to the other
country where it is subject to the most-favored-nation tariff
(subparagraph 8(b)).  Section 204(b)(1) of the Act gives the
President the authority to determine which citrus products and
textile products will continue to receive drawback when exported
from the United States to Canada.  See 19 U.S.C. 2112 note section
204(b)(1)(1988).

HOLDING:

     Unless both the United States and Canada agree to delay the
application of Article 404 of the United States-Canada Free Trade
Agreement until some time after January 1, 1994 (see section
204(b)(2)(B) of the United States-Canada Free-Trade Agreement
Implementation Act of 1988), the drawback elimination provisions
will apply to claims for substitution same condition drawback
pursuant to 19 U.S.C. 1313(j)(2) made on or after January 1, 1994,
except for such drawback eligible goods as delineated in Article
404(8) of the CFTA (i.e., imported citrus products and certain
textiles).

                               Sincerely,




                               John Durant, Director
                               Commercial Rulings Division