Do you Know the Way to San Jose, or Tegucigalpa?

CAFTA is a done deal. Last night, the House passed it in a very close 217 to 215 vote. When the President signs it, and the U.S. makes some official notifications, the agreement will come into effect. To make life easy on everyone, this might be timed to happen January 1, 2006, but it could be sooner. Part it depends on whether the other parties have completed their legislative process and made their notifications.

CAFTA covers the U.S., Costa Rica, Honduras, El Salvador, Nicaragua, Guatemala, and the Dominican Republic. This will likely be an economic blip on the radar. Apparently, this region exports less to the U.S. than the exports of Virginia. But, the sugar and textile trades fought hard against it along with various labor groups and those who fear the steady march toward a one-world government.

For the Bush administration, it is a big win. It shows they can get trade deals done, it shows a commitment to rewarding democratic reform, and it might even help to open some markets to U.S. goods which is, after all, what trade deals used to be about before geopolitics became the foundation for many trade decision.

The text of the agreement is here and the implementing legislation is here.

The real question for companies is going to be how to integrate a compliance program into its existing system. Most big companies have set up NAFTA systems that treat U.S., Mexican,and Canadian content as originating. Now, here comes a new agreement and the originating country mix has to change. Plus, the certification and verification process is different. Don't forget that you might need a system that is capable of doing an analysis for Australian, Jordan, Singapore, or Chile as well. What about Bahrain and Morocco? This is getting to be a bit like playing four Monopoly games simultaneously with slightly different house rules for each game. Seems like it would be a good idea to have one over-arching trade regime that works to reduce duties in an orderly multilateral fashion.

Oh wait, there is a WTO meeting coming up.

Don't Try This At Home

I am a gadget guy. I use a tablet PC, have an MP3 player, and a WiFi network. I am only lacking for an HD TV and a hybrid car. I also carry (or carried) a Treo 650 smartphone, which I love(d)and for which I am in mourning.

To make a longish story short, do not mix the following: a grande coffee with sugar, a Treo smartphone, and a small sink on a boat. Boats move. Coffee tips. Gravity does its thing. Your phone, marinated in sugar-infused coffee up to two hours will become a surprisingly soggy mess. When dry, it becomes a sticky mess.

According to PalmOne, Treos subjected to liquid damage are not repairable. So, following instructions I found on line, I squirted plastic-safe contact cleaner into the keyboard. No dice. The unit turns on but the keyboard has about as much play in it as a brick. The keys just don't move.

Figuring I cannot make matters any worse, I have ordered a set of small Torx wrenches to open the thing up, thereby voiding my warranty, which is no good anyway since this is not a factory defect, normal wear and tear, or anything but me forgetting the fundamental laws of physics. I'm hoping that when I open it, there will be a big gunky spot I can clean with a toothbrush and get back to business. If not, I'm going to have to go back to Sprint and explain why I need to buy another $500 phone. I'm sure they won't mind.

The CIT Reaches for False Claims Act Cases

Here is an interesting tidbit: Suddenly, the U.S. Court of International Trade has jurisdiction to hear cases brought under the False Claims Act by the United States. These actions involve civil claims against a party that (in the case of something before the CIT) made a false statement to the United States that resulted in a reduction in customs liability. Technically, this is a "reverse false claim." Until now, most people would have expected these cases to be handled in the district courts.

Often, False Claims Act cases arise via a whistleblower who files on behalf of the United States. That is a qui tam action. The case at the CIT, however, was not a qui tam action but was brought directly by the U.S. As a result, the CIT held that the case falls within its grant of exclusive jurisdiction. Essentially, the Court treated the action like a regular old boring customs penalty case.

The case, U.S. v. Universal Fruits & Vegetables, is a quick read. The result seems right. It will be interesting to see whether this develops into a new area of practice for the court and the bar.

Really Simple What?

On the advice of people who know better than me, I have set up an RSS feed from this site. Click the Feedburner button on the right side of the page for some info. Everything I know about RSS, I learned here.

The relevant links are:

Atom: http://customslaw.blogspot.com/atom.xml
Feedburner: http://feeds.feedburner.com/CustomsLaw

There are supposedly many good RSS news readers available including this one, which I am not vouching for. I'll try it too and see how this works.

To Mac and Back

Saturday is the start of the greatest fresh-water yacht race in the world--the Chicago Yacht Club's Race to Mackinac. The course is up the length of Lake Michigan and across to Michigan. It is something like 335 miles, but that is generally as the crow flies. Sailboats rarely get to go in a straight line. The normal approach is either to hug the western shore and try and cross near the top of the lake or cross right away and hug the eastern shore. It all depends on wind and whether you prefer Wisconsin to Michigan. In either case, the strategy is to take advantage of coastal winds rather than get stuck in the middle of the lake with no wind. Figure on two or three days on the water.

In the end, you are at Mackinac, which is inexplicably pronounced "Mackinaw," for lots of beer and assorted nautical high jinks. It's not much of a spectator sport, but it must be fun to take part.

How Much Care is Reasonable?

The main thing Customs says about avoiding liability as an importer is to "exercise reasonable care." What the heck does that mean?

Customs has put out a lot of information about reasonable care (including this). Generally, reasonable care is equal to the amount of care a reasonably prudent importer in a similar situation would exercise. That, of course, is a bit circular as Joe importer generally can't tell what a reasonable Jane importer would do. To help, Customs has provided a bunch of examples of what constitutes evidence of reasonable care. These examples (usually in the form of questions) include:

1. Using an expert (including lawyers like me) to assist in compliance activities.
2. Having a competent individual in the organization to review compliance procedures.
3. Providing your expert with complete information about the importation before the merchandise applies.

So far, so good. But, sometimes this breaks down. For example, how does an importer exercise reasonable care when making a GSP entry? This is what Customs says:

If you are claiming a conditionally free or special tariff classification/provision for your merchandise (e.g., GSP, HTS Item 9802, NAFTA, etc.), How have you verified that the merchandise qualifies for such status? Have you obtained or developed reliable procedures to obtain any required or necessary documentation to support the claim?

For GSP, there isn't much in the way of required documentation. The "Form A" that used to be required is now extinct. All you need is to make the claim. That counts as a promise that you can prove it if asked. The vast majority of times, the entry will get through Customs just fine. But, what happens in an audit? The auditor will ask what have you done to "verify" the claim. Usually, the answer is that you asked the supplier. But, to Customs, that is not enough.

Let's imagine that scenario.

You: Look, we need to confirm that your product qualifies for GSP.

Supplier: It does.

You: How do you know?

Supplier: Trust me.

You: Not good enough. I need to know that 35% of the value comes from [fill in your favorite beneficiary developing country].

Supplier: I can't tell you my cost of production. You will know my profit.

You: Customs says I need this info.

Supplier: Here is a spreadsheet. Please go away.

You: Can you show me proof of payment at the prices shown on the spreadsheet?

Supplier: We can show you proof of payment at any price you like.

And so it goes in a standoff. You want to make entry and you want to do it right, but there might be no way to be sure enough to satisfy reasonable care. Trusting your supplier without more probably is not enough. So, what do you do?

Well, one approach, is to go visit the supplier (or have an agent do it). Make sure the product is made where it is supposed to come from. Are the right number of machines there with sufficient employees? Ok, so they can make it. Now, ask about the supplier's suppliers. Can you see receiving records? Then ask whether you can see proof of payment for just enough materials to satisfy the 35% requirement. That might be enough.

This is not a magic formula. It is really nothing more than a possible approach. There are plenty of other ways to do it. You need to be creative and you need to work with the supplier. Sitting back and relying on the supplier's word alone, though, is definitely not a good strategy.

Uh Oh, TiVo!

Well, not really TiVo which is a registered trademark of TiVo, Inc. and I don't want to mess with them. What I really mean is "Uh Oh, I purchased a competing product manufactured by Sony Corp. which is wholly unrelated to TiVo, Inc. and TiVo-brand hard-drive-based personal digital video recorders." Unfortunately, that is harder to rhyme.

See, I have an LL.M. in intellectual property law and these things make me nervous. Plus, I feel for any company with a brand whose name is so ubiquitous that it moves toward becoming the generic term for the product. Companies like Xerox, DaimlerChrysler (makers of Jeep-brand vehicles), Johnson & Johnson (Band-Aid brand bandages) and Kimberly-Clark (Kleenex brand tissues). Keep up the good fight, TiVo. Don't go the way of aspirin.

Anyway, I got one of these gizmos because I don't have cable and don't watch much TV. Makes sense? It does to me. You see, when I do want to watch something, I get really annoyed when I miss it because someone took the tape out of the VCR or, just as likely, I screwed up programming the VCR. Or-- in that special circle of hell reserved for the people at WTTW, the PBS station here in Chicago--when something interesting inexplicably moves around the schedule.

The unit I bought has the bonus feature of being able to transfer programs not locked down by a copy protection signal to a DVD for my enjoyment elsewhere. We'll see how this works out. Right now, I am not sure what 85% of the buttons on the remote do.

CBP Strikes Back!

Wouldn't it be nice if buried deep in the fine print of your employment contract there was a clause that says when you disagree with the instructions from your supervisor, you can disregard them? Image that.

Now assume that your employment contract is the United States Constitution. Your supervisor is the federal court system. You are Customs.

Turns out that Customs has essentially that authority. It comes from 19 USC § 1625(d) and 19 CFR § 177.10(d). Those two provisions give Customs the authority to "limit the application of" the decisions of the Court of International Trade and the Court of Appeals for the Federal Circuit to the specific entries before the court in a specific case. In other words, when Customs loses a case or does not like the reasoning of a case, it can say: "Well, you win on that entry but we will not apply that decision anywhere else. Possibly not even to the next entry of the same stuff."

To its credit, Customs doesn't exercise this authority often, but it did so in the June 29, 2005 Customs Bulletin where it limited the application of Park B. Smith, Ltd. v. United States. That case involved the question of whether table linens and rugs decorated with holiday themes were classifiable as "festive articles." If so, they would be entitled to duty-free entry.

After it was clear that the Courts disagreed with CBP, Customs went to the WCO for an amendment to the Explanatory Notes to the Harmonized System to "clarify" not change the scope of the relevant provision to exclude the goods from the festive articles provisions. So, future festive articles cases will have a different Notes and, potentially a different result. Of course, that assumes that a change in the Notes is enough to change the outcome of the case when the fundamental language of the HS hasn't changed at all. Which, of course, is a questionable proposition.

Given the change in the Explanatory Notes, this is a reasonable application of CBP's magic get-out-of-jail-free card. But, it just seems wrong.

Bad Parenting 101

Today is Saturday, but I needed to take care of some things at work. So, I rode into the office. I am not on the Lakeshore path very much on the weekends. All I can say is "Oh, the humanity!" There are too many people to ride comfortably. Including a bunch of groups of runners in training who seem not to understand the concept of "single file." I used to be one of them. I wish I could again, but my knees disagree. Now, I just want to get them the heck of what I call "the bike path."

I was going about 16 MPH when I came upon a knot of traffic. I slowed and discovered the slow down was caused by a small boy--maybe 6 years old--on a bike with training wheels following behind his Dad. Normally, that might be cute, but in traffic it was a bit dangerous. Still, we must share the trail and do so with a smile. I did exactly that with a polite "On your left," as I passed. But, to my horror, I discovered that the Dad, who was not wearing a helmet, was carrying a small girl--maybe four--on his handle bars. She also had no helmet. Yikes.

Suddenly, I am an Environmental Lawyer

Yesterday, CBP published a Federal Register notice completing a project we started about five years ago. The idea was to interpret the NAFTA rules of origin in a way that encourages the recycling of industrial equipment in North America by granting NAFTA-originating status to the reclaimed parts.

The typical scenario is this: You make locomotives. Turns out, no one wants to throw out old locomotives. They are difficult to get to the curb and the trash guys have a hard time tossing them into the truck. Instead, you take apart old locomotives, collect any useful parts you can, fix them up as necessary, and use them in your service and repair operation. Anything that is left is scrap. That is called "remanufacturing."

The problem is that your remanufacturing operation might be in Canada or Mexico and it is going to cost you money in duties to get the old locomotive or parts there and the fixed up parts back here. One solution is to apply the NAFTA rules and say that when you disassembled the locomotive, you had a tariff shift sufficient for at least some of the recovered parts to qualify as originating. Other parts might also require a specified amount of Regional Value Content, which you can account for through the cost of repair.

This analysis seemed simple enough (at least to me). But, there was a problem: tariff shifts for NAFTA purposes need to come from "production" in North America and the definition of "production" did not very clearly include disassembly (although it does include "processing"). So, we went to Customs with a proposal to change the rule to make parts recovered through a remanufacturing process originating for NAFTA purposes.

There was a little give and take and then lots of silence. We knew we were on the right track because rules like this popped up in newer free trade agreements like Chile and Australia. Well, now Customs has issued a notice saying that "production" includes disassembly as long as you are not starting with a new product. That seems like a good result.

The downside is that this is a unilateral interpretation. It is not at all clear to me that the Canadians or Mexicans will accept it. As a result, there might be divergent processes for completing Certificates of Origin. That needs to be worked out, but this is a good start.