Thursday, December 28, 2006

NAFTA Conspiracies: All Smoke No Fire

Sorry, I have to do this.

I use Google Alerts to keep up on NAFTA related news. A large portion of what I get relates to the impending merger of the U.S., Canada, and Mexico into a North American Union and the resultant loss of the American way of life. Go to YouTube and search for video relating to the Security and Prosperity Partnership of North America. Watch videos relating to the North American Union. You will find the shameful and shameless Lou Dobbs fomenting fear and resentment with a non-story relating to the loss of America to a European Union-style North American meta-nation. This is all supposed to happen before 2010.

If you watch these videos and read the equally uninformed web sites and blogs decrying the NAU, one thing quickly becomes clear: although it seems very important to them, these people do not have the faintest idea what sovereignty means. That includes Lou Dobbs who uses a position of media power to whip up strong emotions in well meaning patriotic Americans who may not have access to or the time to consider the information he is ignoring. Shame on him and on CNN for giving him a respectable outlet for his views.

Sovereignty is the exclusive right to exercise supreme political (e.g. legislative, judicial, and/or executive) authority over a geographic region, group of people, or oneself. Keep that definition (which comes from Wikipedia) in mind.

Let's look at some of the key evidence for this mysterious and evil NAU.

NAFTA

NAFTA is a trade agreement permitting the duty-free movement of originating goods between the U.S., Canada, and Mexico. Among other things, it also promotes strong protections for intellectual property and includes side agreements on labor and the environment. It is not a treaty signed by the President and self-executing on the advice and consent of the Senate alone. Rather, it was implemented in a legislative package voted on by both the House and Senate (although in a somewhat limited fast-track mode). Thus, it is entirely domestic U.S. law, not a treaty and not part of any international common law.

Regarding the flow of goods, NAFTA does not remove any significant constraints on the admissibility of merchandise. Basically, it eliminates duties and fees to promote commerce in North America. If NAFTA goods violate U.S. health, safety, environmental, or other legal requirements, they will be barred at the border. For goods, NAFTA does not open the border.

NAFTA has an similarly limited impact on the movement of labor. Basically, the immigration provisions of NAFTA permit only the temporary entry of professionals for business purposes. The Agreement defines professionals through a laundry list of job titles and professional degrees. Nothing in the NAFTA encourages the movement of day laborers either legal or illegal and it does not change the rules with respect to citizenship or permanent immigration.

The part of the NAFTA that gets the most bad press is Chapter 11, which involves the resolution of disputes between foreign investors and the member states. Chapter 11 has been called a secret appellate body with the power to overturn U.S. laws. It is nothing of the sort. Under Chapter 11, a U.S. investor in Canada or Mexico is entitled to treatment no worse than a similar domestic investor in those countries. Same goes for Canadian and Mexican investors in the U.S. That means that the U.S. agreed in the NAFTA not to pass laws that discriminate against Mexican and Canadian investors. In addition, the parties agree to act consistent with international law including "fair and equitable treatment." It prevents a NAFTA party from using regulatory means to expropriate a NAFTA foreign investment or unfairly benefit its own investors.

When a NAFTA arbitration panel finds a violation of these terms, there is absolutely no impact on the underlying regulation, law, or other measure. Take the worst example. Let's say a Mississippi jury awards a half a billion dollars in a claim against a Canadian investor. The Canadian investor then files a NAFTA Chapter 11 claim saying the jury verdict and the subsequent appeals bond requirements violate NAFTA. If the NAFTA panel finds for the Canadian, the Mississippi judgment is not reversed--it stands as the law of Mississippi. Further, the appeals bond rule stands. The NAFTA decision is not a final appeal for the Canadian. All it means is that the U.S. has agreed to make the Canadian whole as a result of the violation. This actually happened although ultimately the Canadian claim was dismissed on procedural grounds.
The sovereignty of Mississippi was never at risk, nor was the sovereignty of the United States. That is because, ultimately, there would have been no impact on the Mississippi rules. Further, the U.S. could, if chose not to pay the Canadian, either accept a possible trade sanction from Canada or withdraw from the NAFTA entirely. The choice remained with the U.S. There is no NAFTA army to enforce these decisions. There is no NAFTA court that can reverse or bind a U.S. court. There is no NAFTA parliament to write laws binding on the U.S. This is not a North American Union.

Security and Prosperity Partnership of North America

This is a non-starter, conspiracy-wise. The SPP amounts is a discussion among the relevant leaders in the U.S., Canada, and Mexico to work together to facilitate legitimate trade in an environment of enhanced security. Mexico and Canada are two of our most important trading partners. The economies of these three neighbors are inextricably linked by companies, big and small, doing business across the borders. America's biggest companies produce goods in all three nations, relying on skilled and unskilled workers, and selling to consumers throughout North America and the world. It is too late to pretend we are not in an environment in which economies prosper through trade. We must recognize that there are comparative advantages at work. Mexico has an advantage in labor; the U.S. in technical innovation, marketing, and services; Canada in natural resources. The SPP is intended to maximize the benefits of the linked economies by promoting a secure environment in which to operate.

The SPP is not a secret organization. Information about it is accessible on its web site. The people managing the SPP have been pretty open about their goals and accomplishments to date. Still, there seems to be much suspicion surrounding efforts directed at border security and facilitation and the harmonization of regulations.

On border issues, the SPP agenda states that its goal is to "reduce the cost of trade" through the efficient movement of goods and people. This will be done by tweaking NAFTA rules of origin and eliminating minor differences in external tariffs. Regarding people, the focus is on facilitating the movement of "business persons." These are measures designed to help industry prosper, which should, in turn, help individuals throughout North America prosper.

On regulatory issues, the objective is to lower the cost of doing business by eliminating redundant or conflicting requirements. Think about this rationally for a minute. If the U.S. FDA tests a drug and finds it to be safe and effective, it can go on the market in the U.S. Does it make a lot of sense for Health Canada and the Mexican authorities to do the same testing? If we trust the process, no it doesn't. Are there mistakes in the U.S. drug approval process? Yes, and there will be in the future. The issue for SPP is whether there is common regulatory ground on which the three countries can agree so as to eliminate cost and uncertainty to business. This is a big issue for businesses large and small. It affects everything from how consumer goods are labeled to whether a car is considered safe for the road. Harmonizing rules eliminates costs and barriers to export markets. That's a good goal.

And, it does not affect our sovereignty. As long as U.S. law requires FDA certification for drugs, unapproved, misbranded, and adulterated drugs and food products will be barred from admission to the U.S. If the U.S. decides that it wants to accept Canadian drug approvals, that will have to go to Congress and the President for approval and implementation. Nothing the SPP does can bypass that legal requirement. The U.S. remains in control of its laws and its borders.

Saying that the SPP somehow translates into a corporate internationalization of the U.S. is the same as saying that the U.S. is prohibited from regulatory cooperation with our neighbors and allies. Efforts to clean up the Great Lakes, for example, or eliminate trade in ozone depleting chemicals, or deliver the mail are not examples of a creeping loss of sovereignty. They are evidence of U.S. efforts to engage the rest of the world to solve practical problems and improve the quality of life for everyone.

The NAFTA Superhighway

Some have argued that efforts to improve the roads linking the U.S., Canada, and Mexico are part of the secret effort to merge the countries. The effort, to improve transportation at least, is not secret. Its supporters have a web site. It is not even new. The roads involved already exist in the form of I35, I29, and I94. And, there is no proposal for anything called the NAFTA Superhighway. The effort simply is to improve the infrastructure of the middle United States to rapidly distribute legal goods and people throughout North America. The business people supporting this effort are doing so through a not-for-profit institution that is collecting funding and lobbying appropriate legislatures.

This argument is ridiculous and probably racist. Detroit is in dire need of improved infrastructure to handle traffic crossing into and out of Canada. Discussions are underway for the building of new bridge. No one is arguing that the possible influx of Canadian truckers is a threat to our way of life.

Security at the land borders is important. The border with Mexico presents unique problems rampant including illegal immigration and narcotics smuggling (although it should be noted that those problems also exist to a lesser degree on the northern border). These troubling issues need to be addressed. Improving the logistical capacity of the borders is not incompatible with law enforcement or with sovereignty.

The Amero

This is an academic discussion that escaped into the wild. When law professors and economists compare the NAFTA to the EU, usually for purposes of explaining what NAFTA is not, the discussion naturally turns to the Euro, the common currency of the EU. Some academics, including Herbert Grubel of Simon Frasier University and Robert Pastor of American University, have proposed the creation of the Amero as a common North American currency. Former Mexican President Vicente Fox appears to have supported the creation of a single currency as part of a more integrated North America.

While there is a certain tendency to consider a single currency as the logical next step in the integration of North America, there is no actual movement in that direction. Instead, the situation on the ground, so to speak, is that most international business done in North America uses the U.S. dollar. The U.S. economy continues to dominate the region. There is no good reason for the U.S. to give up its currency. We are not Italians trading away the lira.

There is a slightly better argument for the middle ground known as dollarization. Under this approach, Mexico or Mexico and Canada would adopt the U.S. dollar as their own currency, thus giving up the control of their own monetary policy. This is, at best, a long shot. To protect its cultures, Canada does not even permit free trade in U.S. movies and television. It is unlikely to drop the loonie for a currency with pictures of U.S. presidents.

Those who oppose the North American Union and the Amero are shadow boxing. They are tilting at windmills of their own creation. The U.S., Canada, and Mexico need to work together to secure a robust environment of legitimate trade and legal immigration. A healthy North American economy is good for all of us.

Lou Dobbs and the others who believe in the conspiracy to create a North American Union will, of course, argue that I am naive and just believing the government's party line. They see efforts at promoting trade and security, and academic "what if?" discussions as sinister clues to the occult hand of globalization controlled by stateless corporations or "international elites" (with its own racist overtones). They will say that my job depends on NAFTA and globalization. That last bit is partly true, but trade lawyers can do quite well in protectionist environments as well.

What is at stake here is rationality and, frankly, the truth. Rational businesses operating in North America need an efficient border crossing system and robust logistical links. Everyone in the region needs security. Recasting governmental and private sector efforts to improve business conditions and border security as a conspiracy to trade away United States sovereignty is at best silly and, at worst, a calculated effort to scare people for personal or political gain.

Tuesday, December 26, 2006

Where is Mandatory AES?

International Trade Today, put out by Broker Power, Inc., ran an interesting piece on December 19th in which Census sources indicated that the final rule on the mandatory use of the electronic Automated Export System (AES) for filing export documents remains a goal for the future. Census claims it will make a push for adoption of the electronic system in 2007 and will encourage large paper filers to make the switch voluntarily.

More ominous, Broker Power reports that Census is going to begin "visits" to AES users. These visits will be used to determine the procedures in place at compliant companies and to "assist" those in need of compliance improvements. That assistance might include referral of violations to the relevant agency (i.e., Custsoms, BIS, or State).

AES filing is something everyone will have to get used to--eventually. You may as well get started on a voluntary basis. At least look at the online training tools.

Thursday, December 21, 2006

It's NAFTA Time: Free Gifts!

Here, have a NAFTA CO.

The start of a new year is always exciting for the folks responsible for maintaining NAFTA compliance. Same goes for all the other new free trade agreements. That is because everyone is scrambling to get NAFTA certificates of origin from suppliers. Or, you might be one of those unfortunate people getting your arm twisted by a customer who wants a NAFTA CO yesterday.

Here are a couple tips. At the end of this post, I'll give you a free tool to help. I promise.

Tip Number 1: Tell Your Broker What is Going On

Most NAFTA COs will expire December 31. If you are an importer who is used to claiming NAFTA status for your merchandise and don't have a replacement CO, you can't make the claim on January 1. Remember, NAFTA works on the assumption that you have a valid CO in your hand at the time of the claim. The other FTAs are a little different in this regard, but just go with me here. So, if you don't let your broker know that Acme Tools of Tijuana did not give you a new CO (or that you changed suppliers to Acme Tools of Beijing), your broker might go merrily along making claims. Each of those claims is a violation.

The right thing to do is provide your broker with a a list of products covered by COs and a list of those previously covered but no longer certified. The broker can them make appropriate claims. As suppliers get their act together and give you COs, you can go back and make a post-entry NAFTA claim within one year of the date of importation.

Tip Number 2: There Are No Shortcuts

There is no "rule of thumb," or "default rule" that says if you have 50% North American content, your goods qualify. Some rules do not care in the slightest what the regional value added is. Some rules are based entirely on the tariff classification of materials and the finished article. These are the tariff shift rules. And among tariff shift rules for similar goods, the required shift may be different.

Each and every time you do the analysis, flip open your HTS to the NAFTA notes and confirm your rule of origin.

Tip Number 3: A=Audit

Simply put, preference criterion A is almost always wrong. This rule of origin requires not a single atom of material in the product comes from outside of North America. If you are in the mineral or agricultural industries, look at preference A because it might apply. For everyone else, move to preference B.

More important, if you receive a CO with A as the preference criterion, question it. If you bought coal or corn, it may be right.

Tip Number 4: Use the Form

The NAFTA CO is a well designed form. It communicates exactly what the customs authorities of the importing country needs to know. Not coincidentally, it also tells your customers what they want to know for their own analysis (except for traced values). So use it, even for domestic transactions. The fact that it lists an importer and exporter does not matter for domestic transactions. Treat "importer" as buyer and "exporter" as seller. You can even mark up the form if you want. That is fine. The form will not be used to support a claim in Canada or Mexico if it shows an "importer" and "exporter" both in the U.S.

While we are talking about the form, note that there are instructions on the back. They are actually pretty good. If you are just getting started, that is a useful place to look. If your customer faxed or e-mailed only the front, click the link at the top of this post for a full form.

Tip Number 5: Click Here

The link in the heading above leads to a short article and a checklist on the Barnes/Richardson web site that can be used to help complete or review NAFTA COs. The article is handy although I think the new forms permit dates in the American mm/dd/yy format. How's that for cultural imperialism?

Happy NAFTA-fest to all and to all a good night.

Wednesday, December 20, 2006

Pres. Signs GSP and other Trade Measures

So GSP survives for another 2 years with some new restrictions on Competitive Needs Limits. The restrictions are supposed to help the lesser developed of the beneficiary developing countries benefit from GSP as opposed to the larger economies like Brazil, India, and Thailand. One has to wonder how that is going to work. It seems more likely that if those countries lose GSP either for certain commodities or entirely, that trade will most likely shift to China rather than, say, Nepal, Columbia or Benin.

I'll let my day job do the talking on this one: click here. Sorry for taking the lazy way out.

Bird Lovers Nabbed at Border

Update: I fixed this link so that it points to the relevant story.

There is not much to say about this story. It is illegal to fail to declare merchandise entering the U.S. That includes live birds. And, if you go to Canada just to purchase 25 pounds of bird seed, expect to be searched.

Monday, December 18, 2006

Counterfeits in Court

An interesting case involving allegedly counterfeit goods came out of the CIT last week. The merchandise involved was PDA accessories including chargers and keyboards. Lots of goods issues were raised including one of my favorites: how is Customs supposed to determine the manufacturer's suggested retail price of counterfeit goods? Another issue was whether it is possible to counterfeit the "flying Windows" mark on a keyboard or--as plaintiff maintained--is using that mark protected "fair use" because it is effectively a requirement for all Windows based keyboards.

Unfortunately, these meaty issues were not resolved because Judge Stanceu dismissed the case on procedural grounds. In summary, the Court found there was no valid protest of the exclusion of the merchandise. Thus, there was no jurisdiction under 1581(a). The Court also found no jurisdiction under 1581(i) because the restriction on the importation of counterfeit goods is not an embargo under 19 USC sec. 1526(a) and no valid protest was filed which could be reviewed under 1581(i)(4). Further, because the challenged determination did not relate to revenue from "imports or tonnage," (i)(1) did not apply. But, the Court found the restriction to be an embargo created by sec. 1526(f) and that it did not relate to health and safety. Thus, it found jurisdiction under 1581(i)(4). It's confusing. Read the decision.

Unfortunately, jurisdiction is not enough. The plaintiff also needs to plead a case on which the CIT has the ability to grant relief. Relief, in this case, requires a final agency action and Customs had not yet decided whether it would seek to enforce its notice of penalty. Thus, it retained some level of discretion on how to proceed. Furthermore, if Customs did proceed with a penalty action, that would be a de novo case rather than review of an agency determination under 1581(i). Thus, no relief was available under (i).

All of which is a preface to what I want to talk about: that darned MSRP question. The penalty for importing counterfeits is based on the value of the merchandise if it were genuine. That raises an interesting question. What is the MSRP of "the merchandise if genuine" when the merchandise is made of cheap materials, by unskilled workers and not at all what the trademark holder would ever sell? Since, the genuine article would never be this lousy, there is no "merchandise if genuine" against which to measure the value of the fake. Get it? Fake shoes selling for $30 might be worth, in terms of labor, materials, profit, etc. $20. Putting a counterfeit famous trademark on them makes them more valuable because either the consumer or the public that seems them on the consumer is being duped into believing that they are expensive shoes. But, it seems that what the law requires is for Customs to figure out the value of these same $30 shoes if they were genuine. That, however, is not what happens. Instead, Customs (with the help of the trademark holder) finds a superficially similar genuine article and uses that as the MSRP. This results in possibly inflated penalties.

Sadly, the issue did not get addressed in this case. It is one of those things that is just going to have to wait for the right set of facts to come along.

The Fruits of International Trade


What the heck is this? It made its way to the produce department in my grocery store but it was not labeled. On top are kiwis; below are prickly pears. That ugly thing in the middle may or may not be edible. Whatever it is, I can almost guarantee that it is here as a result of international trade and I bet it passed through Customs.

Wednesday, December 13, 2006

Softwood Lumber Ends

Not with a bang, but with a whimper. Read about it via the CBC here.

With a few more details, the story is this: The Coalition for Fair Lumber Imports had challenged the NAFTA Chapter 19 dispute resolution process as violating the U.S. Constitution. Unfortunately for this interesting claim, in October the U.S. and Canada entered into a settlement of the softwood lumber dispute. As a result, there was no controversy before the Court to decide and the Court dismissed the action as moot. You can read that here.

Want to know why Chapter 19 might be unconstitutional? I have no idea what the parties to the actual case were arguing. But, I can tell you the argument most commonly raised. It has to do with the appointments clause of the Constitution. Article II, Section 2 gives the President the power to appoint "Judges of the supreme Court, and all other officers of the United States . . . ." This extends to all so-called Article III judges. Prior to NAFTA, antidumping and countervailing duty disputes were always heard by the U.S. Court of International Trade and then the Court of Appeals for the Federal Circuit. In NAFTA, the parties agreed that disputes involving Canada, Mexico, and the U.S. would instead be sent to arbitration. The arbitrators are chosen by the parties from a roster. The U.S. hoped that the roster would contain a number of retired federal judges and it does. But it also contains professors and trade lawyers and, in theory, could include the guy who runs the animal shelter down the street. These are not people who have been appointed by the President with the advice and consent of the Senate and yet they are doing judge work. Thus, the argument goes, it is unconstitutional.

I'm not so sure. This is an agreement between the nations to enter into arbitration rather than go to court. That happens in commercial agreements all the time. Arbitration is, by definition, not court so you don't need a judge. The wrinkle is that this agreement means that private parties, who had not choice in the matter, to give up review by an officer of the United States (i.e., a judge). In other words, the private party is forced out of Court and into arbitration making the decision of a U.S. governmental agency effectively beyond judicial review.

Unfortunately, we won't know the answer to this question until someone else gets fed up with the Chapter 19 process and tries to topple the whole house of cards.

Friday, December 08, 2006

Friday Travel

I was trying to post more regularly, and I will continue to do so. Today, I was traveling and not able to do it until now. At this point, I want nothing more than to vent and to invest in anyone working to perfect the Star Trek style transporter thus eliminating the need for cars and planes.

It is cold here in Chicago. Thus, I was not at all happy when I found myself at 6:00 AM, in five degrees of cold, in the dark, on the side of the Edens Expressway (at Peterson for the locals), with a flat. I was headed to O'Hare to catch a 7:00 plane. This, it turns out, was not a pull-into-the-nearest-gas station-for-air-and-limp-to-the-airport kind of flat. No, it was a gaping-hole-in-the-sidewall, riding-on-the-rim kind of flat. I have no earthly idea what happened. There was no way I was driving on this thing. If I were either Starsky or Hutch, I would assume that someone shot out my rear wheel.

Keep in mind, I was going to visit a client and was (as the client later put it), in "full lawyer." So, in my nice blue suit, tie, and overcoat, I started rummaging for the spare and tools. Again, this is in the dark and no, I do not have a flashlight in the car (thanks for asking). I found the jack and pulled the spare out without trouble. Getting the shredded tire off was not much of a problem either. The problem was trying to line up the spare over the bolts IN THE DARK, wearing gloves, but having no feeling whatsoever in my fingers. It took me many tries including a couple of adjustments to the jacked height of the car. Eventually, I got it done, hand tightened the lug nuts, and lowered the car. With the car down, I tightened up the nuts and tossed everything back in the trunk and went on my way.

Off I went. Total delay, about half an hour and no damage to my suit. Clearly, however, I would miss my plane. Ten minutes later, as they warmed up, my hands were hurting badly and I wondered whether I would lose my fingertips. Arriving at O'Hare, however, I was relieved to find my flight delayed by 40 minutes and I was able to board. So was the screaming infant, the non-stop talker with the Bluetooth headset, and the guy who is not clear on the concept of "please take your seat." Bluetooth guy was so rude to whoever he was talking to, I would be surprised if he were not routinely pummeled at work. His conversation consisted of repeating the sentence, "We are looking at the same numbers but you are too stupid to understand them. " At least I made it to my meeting able to blame the airline for my being late.

On the way home, I had no such luck. We boarded on time and then sat for two hours waiting for "air traffic delays" into O'Hare. What a pain. Luckily, I had Mary Roach's book Spook with me for an interesting read. Now I am home, tired, and ready to go to NY on Monday. Pray for my better travels. Please.

Monday, December 04, 2006

Simon Says, Wait for a Release

Customs just announced beefed up penalties for taking your merchandise before it is officially released. That sounds like a crazy thing, but it happens. Usually, this is the fault of the carrier or broker trying to look like a hero by getting the goods to you. After all, it is not often that the importer actually shows up at the port to pick up the goods.

The penalties are pretty substantial. Here is the gist of it (which are published in the guise of "mitigation guidelines"):


A first violation may be mitigated upon payment of an amount
equal to the lesser of: 1) 75% of the domestic value of the merchandise,
removed or delivered without authorization and/or examination,
or 2) a flat sum between $10,000 and $25,000, as determined at
CBP’s sole discretion.

A second violation may be mitigated upon payment of an amount
equal to the lesser of: 1) 75% of the domestic value of the merchandise,
removed or delivered without authorization and/or examination,
or 2) a flat sum between $25,001 and $50,000, as determined at
CBP’s sole discretion.

Third and subsequent violations may be mitigated upon payment
of an amount equal to the lesser of: 1) 75% of the domestic value of
the merchandise, removed or delivered without authorization and/or
examination, or 2) a flat sum between $50,001 and $75,000, as determined
at CBP’s sole discretion.

The lesson here? Customs takes this seriously. There must have been some issues at the ports that prompted this change. So, be sure that any pressure you place on your carrier, broker, or other agent at the port is coupled with an instruction the be sure the merchandise is properly released.

The other lesson here? It pays to keep your eye on the Customs Bulletin. Thanks, Rick, for pointing it out.