Friday, April 27, 2007

Foreign Trade Zones and NAFTA

This is a bit advanced, but it is interesting. There are probably people out there who have had the bright idea to double up on duty savings by producing NAFTA goods in a foreign trade zone. If you are doing that, be careful.

First, you need to understand FTZs a bit. For those who might not know, an FTZ is a specially designated area that is considered to be legally outside of the customs territory of the United States. FTZs are supposed to be reasonably close to ports of entry and are often divided into sub-zones for different users and purposes. FTZs are usually "granted" to a public or quasi-public entity like a Port Authority. The overall operation is then granted to some private entity. The agency in charge of all this is the Foreign Trade Zones Board though Customs and Border Protection does the heavy lifting on enforcement.

The beauty of a foreign trade zone is that importers can move goods into the zone and not make a customs entry until the goods are withdrawn for consumption. The importer has the option (assuming appropriate paper work has been done) of entering the merchandise either in its condition as admitted to the zone or its condition as withdrawn.

This has lots of benefits. First, if the duty rate on the foreign parts is higher than on the finished article (a so-called duty inversion), it makes sense to pay duty on the finished article. If there is no duty inversion, the importer can still benefit from the cash flow advantage of deciding when and how it wants to make the entry. Lastly, merchandise in a foreign trade zone is exempt from local property taxes.

An FTZ is not, however, a lawless no-man's-land. Being outside the customs territory does not make an FTZ a suitable location for your narcotics factory, unlicensed casino, or other illegal operation. The privilege only relates to the customs laws.

So, getting back to my original point, a clever strategy for a non-NAFTA producer might be to import all of the parts of some product into a zone and manufacturer the finished good there in a way that satisfies the NAFTA rule of origin. No duty on the parts going in and no duty on the NAFTA goods coming out. Perfect!

Except that the NAFTA negotiators figured that out. The NAFTA Implementation Act, at 19 USC 3332(a)(2)(A), says that the tariff-shift and regional value content means of qualifying your NAFTA goods does not apply to merchandise produced in a foreign trade zone if the goods are withdrawn from the zone for consumption. Customs figured it out too. In HQRL 961266 (Jun. 4, 1998)(sorry, I can't find a link) they applied this rule to sets of car seats and strollers. And, if you tried to export the goods from the zone to Canada or Mexico, the NAFTA drawback limitations kick in. So, in a technical sense, they got you coming and going.

Consider that a heads up for the next time you start brainstorming for duty savings ideas. Don't try this.

Monday, April 16, 2007

Comic Confusion

This is one of those off-topic posts I promised. It is about comic books and includes a Star Trek reference. Feel free to move on.

Recently, I was in a comic book store. That is not really news. I do that occasionally. I go in with the intention of buying something for the six year old and come out with a few for myself. Don't scoff, it's art and epic literature, really.

I have a terrible problem in the comic book store. I get confused. I don't know what to read. I have fond memories of major and minor superheros (no Archie's in my house) from Superman and Spider-Man to Metal Men and Daredevil. So, I am attracted to their recent titles. But, when I flip through them, I realize I have no idea what the heck is going happening. In some cases, I don't even know who the hero is anymore. There have been a number of Flashs and Green Lanterns over the years. Batman's sidekick Robin has moved on to become Nightwing and there is a new kid named Tim Drake living at Stately Wayne Manor. That is, unless you are reading one of the books in which Batman is a brooding loner vigilante. Captain America, of course, is dead; at least as dead as a superhero gets.

There is more to it than that. It seems that any given character can exist in several incarnations. For example, there appears to be a difference between the X-Men and Ultimate X-Men story lines. Ditto for the Amazing Spider-Man, Ultimate Spider-Man, Friendly Neighborhood Spider-Man, and Sensational Spider-Man. Over on the DC side, there is a newly formed Justice League of America (with Black Canary in charge) but also a JLA series, a Justice Society of America, and something called "I Can't Believe It's Not the Justice League." At one point, there was a Justice League Europe and, of course, the Teen Titans who should not be confused with the Super Friends.

So I stand in the store staring at the shelves. I have been reading the new Justice League of America series although I am finding it a bit confusing. Where is Martian Manhunter? I guess he is busy with his cameo appearance on Smallville.

DC launched a new Atom series. When I looked through the first few issues, I was shocked to find that Ray Palmer was nowhere to be seen. Instead, the blue and red tights are on Ryan Choi. OK, but where is Ray? I know he was upset when his estranged wife killed Elongated Man's wife, Sue Dibny, and then Tim Drake's (Robin) father and tried to kill Lois Lane. Did Ray retire? The reason the new Atom series is interesting is that it is close to the beginning. I could jump in without losing much.

Which is not true of the Marvel Civil War series. After I heard that Captain America was killed, I took an interest in the series, which has been going on for a while. I'd like to catch up, but don't see how that could happen. Plus, each hero seems to have a Civil War series going. Check out Marvel's attempt to recap here. Same goes for the DC series 52. It sounds interesting but I don't think I can catch up. Maybe Marvel will publish the whole thing in a hardcover edition.

It looks as if DC is about to launch something big on May 8. That might give me an opportunity to start another series. I feel like I should start reading at issue 1. Maybe I am putting too much emphasis on the issue number. Aquaman #50 seems to be the start of a new storyline.

Aquaman is very confusing to me. In my head, he is the fish monger of the Justice League. He is a hero of dubious usefulness. But, he isn't in the Justice League anymore. He seems to be off on his own undersea adventures. I suspect he harassed Power Girl and got kicked out, but I don't know that for certain. I also would like someone to explain to me why he seems to go from having a regular hand, to a giant harpoon, to a blue hand.

Finally, I can't understand the need Marvel and DC seem to have to introduce variations on a popular heroes. I get that it is brand extension right from the marketing text book. Why take the risk of introducing an entirely new product when you can leverage the popularity of an existing one? That is why we have Coke, Diet Coke, Coke Zero, Lime Coke, Vanilla Coke, and Coca-Cola Blak. But do we need that in comic books?

Brand extensions in comic books seems to focus on adding a female version, kid version, or female-kid version of the established male heroes. There is a long history of this stretching from Supergirl and Batgirl to Spider-Girl who is apparently the future daughter of Spider-Man. Other super kids are Wonder Girl (click the link for a picture of the young Debra Winger), Iron Lad and, no kidding, Hulkling.

Which brings me to my last object of curiosity: She-Hulk. Poor Jennifer Walter. She is a lawyer who works for Goodman, Lieber, Kurtzburg & Holliway in NY. Jennifer received an unfortunate blood transfusion from her uncle Bruce Banner. Now, she can transform into the She-Hulk who just so happens to be the most attractive green woman this side of the Orion slave trade.

What to do? The length and detail of this post makes me think I am spending too much time worried about this. But, it strikes me that DC and Marvel are spreading themselves too thin. There must be other people as confused as I am. They must be losing out on some sales. I guess I should pick up a copy of Crime and Punishment or The Grapes of Wrath. At least you know where they start and end. On the other hand, I just saw an ad saying "The search for Ray Palmer" starts May 9, 2007. Maybe that's the place to jump in.

Thursday, April 12, 2007

Fungibles (For Nick)

Corrected for typos:

This is in response to Nick who wants to know how disjunctive marking of some goods will fit with a claim under an FTA. My short answer is that Nick is opening up a big can of worms, but there are answers in the FTAs.

NAFTA is pretty clear that where fungible goods are commingled before entry, the importer can still make a claim for the originating parts of it if the importer applies one of several acceptable accounting systems to determine origin. Those systems are:

Direct Identification: That means, effectively, not commingling the goods and somehow physically segregating (or at least identifying) the originating and non-originating materials. So, you need your supplier to divide the car load of wheat into Canadian wheat and everything else. The Canadian wheat gets NAFTA treatment (including origin marking) and everything else gets non-NAFTA treatment (although you might have to run through the NAFTA marking rules to make sure that the other wheat is not "goods of a NAFTA country.").

LIFO or FIFO: Got a big tank of crude oil in Mexico? If you want to make NAFTA claims on the content, you can apply the "last in first out" rule or the "first in first out" rule. Basically, this requires that you track the origin of your additions to and subtractions from the tank and treat the origin of what you ship according to your records. You also need to account for your opening inventory. Assume you start with 100 originating gallons in a tank and later add 25 non-originating gallons. If you ship 50 gallons, under LIFO 25 gallons are originating (because the last in are the first out) and 25 gallons are non-originating. Again, you certify, mark, and enter accordingly. [Yes I know you don't mark crude oil. I'm just making a point here.] Under FIFO, all 50 gallons are originating because the 100 first gallons of crude in were all originating so the first 50 out will be as well.

Averaging: What I am about to do is a gross oversimplification. You get what you pay for. Say your opening inventory is 75% originating and 25% non-originating. The next time you make a shipment, it is considered to be 75% originating and 25% non-originating. Over the course of the next few months, you sell some stuff and you buy some stuff. You have to track the origin of what you put in the mix and then, at the end of the quarter, you reset your ratio of originating to non-originating. Let's say it is now 60% originating and 40% non-originating. You apply that ratio going forward for the next quarter. And so it goes. Lovely. Enjoy the record keeping.

CAFTA-DR has similar language but only specifies segregation, LIFO, and FIFO. Beyond that, the certifier can use an accounting system that is consistent with GAAP.

So, it is not impossible to handle mixed fungible goods from both an origin and marking perspective. It is just a pain.

Saturday, April 07, 2007

Protest Woes

Here's something else that strikes me as interesting: Avecia, Inc. v. United States (CIT Slip Op. 07-41). Basically, the issue is whether a protest filed at and denied by the wrong port give the Court of International Trade subject matter jurisdiction to review the denial on the substance.

The regulations are clear that the protest should be filed with the port director whose decision is being protested. 19 C.F.R. sec. 174.12(d). The statute requires that "the appropriate customs officer" decide the protest, but it does not specify who that officer is. It could be an officer at another port.

Further, the jurisdictional statute giving the court the power to review denied protests doesn't say anything about where that protest had to be filed. From this, the court found that the place of filing regulation was beyond the "metes and bounds" of the subject matter jurisdiction of the court. Customs, through its protest regulations, cannot modify the court's jurisdiction.

This is fundamentally right. The court's jurisdiction is set by statute. No Customs regulation can change it. The statute says that the CIT gets to review denied protests. That means that there needs to be a valid protest. The court seems to hold that there was a valid protest here. It was just filed at the wrong port and that violated the regulation. But, the regulation does not state the consequences of misfiling at the wrong port and does not say that the port director at the wrong port cannot act on the protest. If the regulation said something like that, the case would be a lot harder even though I suspect the decision would have been the same. Jurisdiction is the purview of Congress to be interpreted by the courts. Agency regulations don't really have any say in it.

I'm Back

I've been away, I assume you noticed. But, I was not completely out of touch with the world of customs law. A few interesting things have happened.

One thing of note is Customs & Border Protection ruling W968421 (Jan. 9, 2007). It is a marking ruling. I have not discussed marking much in this blog. So, we should look at some background first.

All articles of foreign origin imported into the United States must be marked with their country of origin. The marking must be permanent and conspicuous. There are specific requirements for how certain products need to be marked. For example, pipes and similar articles should generally have the country of of origin die sunk or molded into the product. Generally, the product itself should be marked although in some circumstances it is permissible to mark the container. There are lots of exceptions to the marking requirements including goods that will be further processed in the U.S., goods imported by the purchaser, goods too small to be marked, etc.

The tricky thing with marking is usually figuring out the right country of origin. For most things, the country of origin is the country in which the goods last underwent a "substantial transformation." A substantial transformation occurs where there is processing that results in a change in name, character or use. Note that it is not a change in name, character, AND use as sometimes turns up in rulings. So, if Ukrainian flour is imported into Italy where it becomes pasta, the country of origin is Italy. But, if a Ukrainian rocking chair is sent to Italy where it is painted, it stays a Ukrainian rocking chair.

Often, the substantial transformation test requires a judgment call. That leads to some ambiguity and, of course, problems for importers who just want to know the "right" answer. In the NAFTA, the parties tried to deal with this by having more objective rules primarily based on tariff shifts. Similar rules apply to most textiles and apparel. Beyond that, you are stuck with substantial transformation.

On problem with all marking is that importers often source from multiple countries. For example, a honey importer probably does not care where the honey comes from and might mix it all together in a big vat before bottling for retail sale. The question that has come up is whether it is appropriate to mark that bottle as "Product of U.S., China, or Argentina." Generally, Customs has held that so-called "disjunctive marking" is not permitted. The reason for this is that it does not actually inform the consumer of the origin of the item being purchased.
Over the years, though, Customs has found several exceptions to this rule. That is what happened in W968421. The merchandise was integrated circuits that have several countries of origin and are commingled for commercially valid reasons. Customs looked back at several cases where a disjunctive ruling was permitted. For example, in a 2002 ruling involving integrated circuits Customs permitted disjunctive marking where it found that the goods were commingled to facilitate testing and repacking. In other cases involving fasteners, Customs permitted disjunctive marking where it was not economically feasible to segregate the commingled goods. But, if the fasteners were never commingled and the importer knew the country of origin, no exception was permitted (see HQ 735482).

In W968421, this is what Customs said:
In this instance, you indicate that the assemblers commingle the semiconductor devices in the shipping containers for commercial reasons. You have pointed out that the semiconductor chips are fungible and that it is expensive and burdensome to segregate the inventory of semiconductor chips from the different countries by their country of origin. Based on this practice, a shipping container can have products from China and Malaysia commingled together. Consequently, requiring each shipping container that contains commingled products to be marked with the specific country of origin combinations that is actually inside the container would add significant expense and delay to the distribution of AMD"™s products. Therefore, in accordance with the analysis set forth in T.D. 75-187 and HQ 562308, we find that the proposed marking "Product of China, Korea, Malaysia or Taiwan" is an acceptable country of origin marking that satisfies the requirements of 19 U.S.C. 1304 for indicating the country of origin of AMD"™s semiconductor devices that are the subject of this ruling.
This is a good result for the importer. Kudos to the lawyers on that. But, I have a question for Customs: In what fungible bulk product circumstance would this not apply? It seems that it would add significant expense and delay to try and segregate blended honey, wheat, screws, lock washers, or anything else that is truly fungible and many things that are not fungible.

Maybe, this is a good result for lots of importers.