Pencil Importer Says Commerce Conflated Prefabrication and 'Substantial' Processing in Scope Ruling
The Commerce Department wrongly determined in a scope ruling that an importer's pencils hadn’t been substantially transformed in the Philippines solely because a Chinese-origin input, wooden slats, were custom-manufactured for use in pencil production, that importer said in a motion for judgment Nov. 8 (School Specialty v. U.S., CIT # 24-00098).
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“A brightline test that only looks to whether certain inputs have undergone some level of prefabrication make no logical sense in the present case,” it said.
Pencil importer School Specialty said in its motion that the department had predetermined that any prefabrication of an input results in a lack of substantial transformation, then applied that incorrect standard to its pencils.
It said its pencils were made using raw wooden slats, graphite, colored cores, ferrule and eraser from China, and lacquer, glue and packaging materials from the Philippines.
Plus, the primary labor turning the raw materials into pencils occurred in the Philippines, it said. It explained that the raw wooden slats pencils were grooved, then glued and compressed together around colored cores using machinery in that country. These “dried pencil sandwiches” were then put through a “pencil shaping machine” that cuts them into their recognizable hexagonal or round shapes, and finally sanded, varnished, sharpened, stamped and attached to erasers.
“Until the core is placed within the grooved wooden slats, the functionality of a pencil is not achieved," the importer said.
But, in its scope ruling, Commerce found that the pencils weren’t substantially transformed after their inputs’ prefabrication in China because the “intended use” of the inputs was use as pencils, School Specialty said. And, it said, the department also “illogically combined its analysis of the 'physical characteristics' factor with its analysis of 'essential characteristics,'” concluding that the raw wooden slats had the essential character of the finished pencils.
But Commerce didn’t point to any authority showing that custom-made inputs can’t be substantially transformed in another country, it said. The department's own regulations don’t allow this either, it said -- rather, they work the other way around, only allowing Commerce to consider the “intended end-use of the downstream product” under review.
When looking at physical transformation, the department also failed to discuss the significant construction process that occurs in the Philippines, School Specialty said. Instead, it only looked at “finishing steps,” such as varnishing or painting, that were done in a different building in the Philippines after pencil construction was complete, the importer said.
“Commerce’s blatant avoidance of the numerous manufacturing steps that occur in the Philippines, and the physical changes that result, was clearly unreasonable,” it said.
It also found that the manufacturing process in the Philippines wasn’t “highly sophisticated” due to the prefabrication of the wooden slats, “appear[ing] to reason that the mere existence of upstream processing, the ‘prefabrication in China,’ precluded weighing the ‘sophistication of processing’ factor in favor of substantial transformation,” School Specialty said.
The department did find that the inputs were of a different “class or kind” than the finished merchandise, but it didn’t explain why that didn’t weigh against its final determination, the importer added.