[author: Brian E. McGill]

In a July 2015 decision, the Court of International Trade rejected the Department of Commerce's determination of country of origin in a high-profile scope proceeding involving unfinished Oil Country Tubular Goods (OCTG) products known as "green tubes" produced in subject country China, but finished in non-subject country Indonesia. Bell Supply Company v. United States, Slip Op. 15-73 (July 9, 2015). The court found that Commerce's use of the "substantial transformation" test to determine whether the finishing operations performed in Indonesia were sufficient to change the origin of the green tubes produced in China was contrary to the statute. The court reasoned that Congress, in creating anticircumvention provisions that addressed third-country processing, precluded Commerce from concluding that the finished OCTG was subject merchandise based on a substantial transformation analysis.

The scope of the OCTG investigations included both finished and unfinished OCTG. Because of a Customs origin ruling finding that green tube finishing operations changed the origin of the finished OCTG, the petitioning companies sought confirmation from Commerce that, under Commerce's precedent, the green tubes from China finished in Indonesia remained of Chinese origin and were subject merchandise. Commerce refused to give a generalized, blanket statement including OCTG finished in a third-country, reasoning that some finishing operations might be so extensive, costly, and transformative to the unfinished tube that a substantial transformation occurred, creating a product with a new origin. But in considering the specific facts at issue, Commerce found that the processing in Indonesia did not constitute a substantial transformation. Among other findings, Commerce stated that "the process of producing unfinished OCTG in China was at least as sophisticated as the processes for heat treatment and end finishing." Moreover, Commerce found that "it was the production process for manufacturing unfinished OCTG, not the subsequent finishing processes, that determine the green tube's ultimate use as OCTG."

Importer Bell Supply appealed the scope ruling. Commerce and the U.S. producers that intervened in support of Commerce's decision explained that the scope finding was not of the type involving whether the finished product physically met the description of the scope definition. See 19 C.F.R. 351.225(k). There was no dispute that it did. Accordingly, Commerce argued that its regulations governing scope determinations and the U.S. Court of Appeals decision in Duferco Steel, Inc. v. United States, 296 F.3d 1087, 1097 (Fed. Cir. 2002), interpreting the framework for a Commerce scope analysis, were not applicable. Instead, the scope determination was being made with respect to origin. The regulations governing whether the physical description of the scope encompassed the merchandise were simply not relevant. The scope ruling turned instead on application of Commerce's long-standing substantial transformation analysis to establish the finished OCTG's origin.

The court found that Commerce's approach was unlawful. The court observed that, in 1988, Congress passed a suite of four provisions intended to combat circumvention of trade relief. These provisions covered (1) goods finished in the United States; (2) goods finished in third countries, (3) later-developed merchandise, and (4) merchandise with minor alterations. See 19 U.S.C. § 1677j. The court found that by enacting the second provision, Congress precluded Commerce from addressing third-country finishing operations in any other manner. Slip Op 15-73 at 25 (the provision "forecloses Commerce's discretion to employ a substantial transformation analysis in such cases"). The legislative history of the provisions evinces no such Congressional intent. Rather, the court reached that conclusion based on its own plain reading of the statute, rejecting and refusing to defer to Commerce's long-standing statutory interpretative framework. The court concluded that to hold otherwise "would render {the anticircumvention provision} superfluous." Slip Op. 15-73 at 29.

The court's decision is the second recent decision striking down application of the substantial transformation analysis in the context of third-country finishing operations. In another important decision involving assembly of cups and cones into bearings, a different judge also expressed disapproval of Commerce's interpretative framework. See Peer Bearing-Changshan v. United States, Slip Op. 14-62 (June 10, 2014). But that holding was simply one of several in complex administrative review litigation and did not receive wide public comment. The Bell Supply decision, in contrast, is focused entirely on the origin ruling question and likely will receive greater attention, particularly given the high profile nature of the OCTG litigation. Both decisions overturn almost thirty years of Commerce practice in which the anticircumvention provisions and the substantial transformation origin test have co-existed.