Exporting Duty Free To The United States
The Commonwealth of the Northern Mariana Islands is unique in its relationship with the United States, a relationship which eventually evolved out of the flames of World War II and a relationship entirely different from any other territory associated with the United States. While the people of the Northern Marianas are United States citizens and the American judicial system prevails it is important to realize that the Commonwealth is the only entity under the American Flag that controls its own immigration and customs.
Because of this fact, the United States immigration and customs authorities consider the Commonwealth a foreign country simply because it controls such entry. In spite of their proximity to Asia – in all of the islands' 476 years of recorded history – the only time the islands have been under the control of an Asian nation (Japan) was the thirty year period between the world wars, (1914 to 1944). For the other 400 odd years, at least until 1978 when the islands became self-governing, they were controlled by western nations, first Spain, then Germany and later by the United States under the auspices of the United Nations. Indeed, the United States still exercises control over defense and those federal laws that apply within the Commonwealth. This unique relationship between the United States Government and the Commonwealth stems from the fact that the islands were never recognized as a permanent possession of any nation since they were taken from defeated Germany by the Allied Powers during World War One. Subsequently assigned to Japan under a mandate from the League of Nations, the islands' status did not change after they were occupied by United States armed forces in 1944. Indeed, since their purchase by Germany from Spain in 1899, and their assignment to Japan for administration in 1920 by the League of Nations, the Northern Marianas had no political identity among the countries of the world.
From the time of Germany's loss of the islands they were never regarded as a permanent colony within the exclusive sovereignty of any nation, except, of course, by Japan when it left the League before the outbreak of World War Two. At the conclusion of the Second World War the United States, not desiring to appear as having annexed the islands by virtue of "victor's rights", placed the islands under the supervision of the Security Council of the newly formed United Nations. As the Marianas where considered to be within a strategic area of the western Pacific they were to be overseen through the Security Council where the United States had veto power, rather than the U.N. General Assembly. The people of the Marianas were encouraged to choose their future political status from several options. These included: maintaining the status quo and remaining a Trust Territory; selecting independence; or becoming affiliated with the United States, either through a relationship of free association or a commonwealth status based upon a negotiated agreement which later became known as the Covenant.
The Covenant describes the relationship agreed upon between the people of the Northern Marianas and the United States Government. No other United States territory or insular possession has a similar relationship. Alaska, Hawaii, Puerto Rico, the Virgin Islands, American Samoa, Guam and other Pacific possessions were all acquired under circumstances far different than that of the Northern Marianas. For a nation to acquire additional territory, a government must either annex an area by force of arms or by purchase from a sovereign government.The Northern Marianas was not a permanent legal possession of Japan at the time of the war as it had only been entrusted to Japan under a mandate by a group of countries through their organization – the League of Nations. Therefore, the United States could not strip territory from defeated Japan at the conclusion of hostilities since the islands were never recognized as a permanent legal possession of Japan in the first place. The people of the Northern Marianas, by 78.8 percent of the votes cast in a plebiscite held on June 17, 1975, elected to accept a negotiated Covenant with the United States. This became U.S. Public Law 94-241 when enacted by the United States Congress and became effective on April 1, 1976, a little more than 30 years after the end of World War Two. United States citizens residing in the Commonwealth are denied the right to vote in presidential elections nor are they represented in the United States Congress by an elected representative. This is, of course, inconsistent with the fundamental premise of democracy, namely, that the right to govern rests on the assent of those governed.
At any rate, in negotiating the Covenant relationship between the United States and the Northern Mariana Islands the United States agreed to permit duty free entry into the United States of certain “qualified” products manufactured In the Commonwealth. A summary of the legal mechanism permitting such exports has been summarized as follows: Headnote 3 (a) – U. S. Tariff Schedule Headnote 3 a is a provision within the United States Customs regulations which permits certain “qualified” products manufactured in the Northern Marianas to be exported into the United States Customs territory duty free. The benefits of Headnote 3(a) ( duty free entry into the United States) provides the only real economic link the Commonwealth's private export sector has with the United States. Without this entry to the U. S. market it is unlikely that the two economies would have any meaningful nexus at all – with only a one-way street of imports from the U. S. flowing to the Commonwealth. The continued benefit of Headnote 3 (a) is essential if the CNMI is to develop light manufacturing endeavors such as: pharmaceuticals, bags and luggage, small electrical components, soap and detergents, sporting goods, toys, jewelry and several other products. Asian businesses seeking access to markets in the United States and those participating nations of G.S.P. have an advantage when locating in the Commonwealth which U.S. firms establishing in the islands that seek entry into Asian markets do not have. Businesses located in the Commonwealth qualify for preferential treatment when exporting their products to the United States. Under Section 603(a) of the Covenant, the Commonwealth is not included within the customs territory of the United States. General Headnote 3(a) of the Revised Tariff Schedules of the United States permits articles grown, manufactured, or produced in the Northern Mariana Islands to be imported into the customs territory of the United States free of duty if 70 percent or less of the value of the product is derived from foreign materials. If more than 70 percent of the value of the product is derived from foreign materials, the product is subject to the usual duties. For certain articles – notably textiles and wearing apparel – only 50 percent or less of the value may be derived from foreign material in order to qualify for duty free treatment.
General Headnote 3(a) addresses only the issue of whether a product of the Northern Mariana Islands may be imported into the customs territory of the United States free of duty; it does not address the circumstances under which products of the Commonwealth may be admitted into the customs territory of the United States free of quota restrictions or other non-tariff barriers. Quotas affecting imports from the Commonwealth into the customs territory of the United States have been imposed thus far only with respect to sweaters of third country manufacture assembled in the Commonwealth for export to the United States. Generally, imports into the Customs Territory of the United States under Headnote 3 (a) are not subject to quota limitations. While the United States Government can impose a tariff or quota at any time – when a particular product is restricted from the U. S. market by quotas – it may be economical to assemble such products in the Northern Marianas using materials from another country. The Harmonized Tariff Schedule of the United States (USITC Publication #2333) available from the U.S. Government Printing Office, Washington, D.C.20402, lists several thousand products eligible for duty free treatment when exported into the United States Customs Territory providing certain product qualifications are met. This comprehensive document consists of several hundred pages and twenty two sections. Qualifying For Duty Free Treatment In order for a product to qualify for duty free treatment under the GSP it must be: included on the GSP list; must be from a designated beneficiary country or area; the beneficiary area must be eligible for GSP treatment with respect to a particular product; the value added requirements must be satisfied; the article must be imported directly into the U. S. from the beneficiary area; a certificate of origin form (#3229) must be provided and the importer must have requested GSP treatment. Value Added Requirement The sum of the cost or value of materials produced in the Commonwealth plus the direct cost of processing must equal at least 35 percent of the appraised value of the article at the time of entry into the United States. All those costs, whether directly incurred in, or which can be reasonably allocated to: the growth, production, manufacture or assembly of the merchandise including; actual labor costs, fringe benefits, on-the-job training, cost of engineering, supervisory, quality control and similar personnel, etc. and other items not directly attributable to the merchandise under consideration or are not "costs" of manufacturing, including profit and general expenses and business overhead (such as administrative salaries, insurance, advertising, etc.), are not allowable costs in meeting the 35 percent requirement.
The foreign value limitation test to determine the 50 or 70 percent foreign value limitation for articles manufactured in the Commonwealth compares the actual purchase price of the foreign materials imported into the Northern Marianas (plus transportation costs) and the final appraised value in the United States determined in accordance with the value provisions of U. S. tariff laws. Direct Shipment Direct shipment provisions also apply under Headnote 3 (a). Generally, in order for assembled articles to be considered manufactured or produced in the Commonwealth, the component parts of foreign origin used in the assembly must be shipped from the foreign country in separate shipments so as to constitute entireties. The constituent parts must arrive in at least two different shipments and by separate carriers. To obtain a ruling on a particular product, requests should be directed to: U. S. Customs Service, Office of Regulations and Rulings, Washington, D. C. 20229. A detailed description of the rules may be examined in Part 177 of the Customs Regulations – 19CFR. Export Assistance Under Section 603 (d) of the Covenant, the United States has an obligation to seek from foreign countries favorable treatment for exports from the Northern Marianas and to encourage other countries to consider the Northern Marianas a developing territory. This obligation on the part of the United States may possibly result in trade advantages for the Commonwealth as there is a waiver provision in the General Agreement on Tariffs and Trade which could allow preferential treatment of goods exported from the Northern Marianas. Under article 26 7653 (b) certain articles shipped from the United States to the Commonwealth are free of certain federal excise taxes. Section 604(a) of the Covenant does permit the United States to levy excise taxes on goods manufactured, sold or used, or services rendered in the Northern Marianas in the same manner and to the same extent such taxes are applicable within Guam. The proceeds from such taxes, when and if imposed, will be given the Northern Marianas Government by the federal government. The Commonwealth, if it so desires, can rebate the funds to the business source. This is permitted under Sections 602(a) and 703(b) of the Covenant. General System Of Preferences (G.S.P.) In 1984 the U.S. Congress extended the duration of the program for the General System of Preferences (G.S.P.). Manufacturers in the Commonwealth while benefiting from Headnote 3 (a) are also eligible for the export benefits provided by this program. Of the numerous nations which are signatory to the Generalized System of Preferences, Australia, New Zealand and Japan are the closest countries to which Commonwealth manufacturers of qualified products can benefit from reduced import tariffs in the recipient countries. With the exception of certain products, tariff reductions of up to fifty percent are allowed.
The import regulations from countries participating in the G.S.P. program vary depending upon the country. Information on these regulations may be obtained by contacting the custom authorities in the importing countries. More than 2,700 product categories of exports from developing areas are listed as being eligible under the G.S.P. program. There are value added requirements and, in some cases, quota restrictions.Generally for a business to benefit from the GSP its product would normally be subject to a high duty in the importing country and the component costs should be considerably lower that those within the country to which the product is to be exported. Eligible articles are identified in the Tariff Schedules of the United States and the designated countries listed there-in. Ineligible articles under the GSP are generally "import sensitive" products which, if allowed free access into the U. S. could disrupt domestic production. These articles have a high U. S. import duty.