Tuesday, October 23, 2007

From the News

It is funny how market segments you might not think of as "industries" in and of themselves can sometimes turn into important players in the trade debate. Take, socks, for example. This article discusses the plight of a Canadian company that invested in a sock factory in Honduras in part to take advantage of access to the U.S. market afforded under the CAFTA-DR. Unfortunately for them, there is now a lobbying battle going on over whether socks should be subject to safeguards. Under the safeguard provisions of most free trade agreements, a party can put duties back onto a newly duty-free product if there has been a surge in duty-free imports causing harm to domestic producers. The point of safeguards is to serve as an escape valve for the unintended consequences of free trade agreements. The problem is that imposing safeguards has a negative impact on U.S. investments in Honduran sock factories and also on U.S. cotton growers who supply those factories. This is why trade negotiations are complicated and why you can't just clone a velociraptor and expect it to go smoothly: too many variables.

I don't really have much to add to this story. Chris Walla is in a band called Death Cab for Cutie, which, despite the heavy metal name, is a probably more of a power pop band. It seems someone crossed from Canada to the U.S. with a hard drive containing music files belonging to Walla. CBP apparently seized the merchandise as a commercial importation that was not properly declared. According to CBP, this had something to do with entering at the wrong port although I am not sure why one could not properly declare it at any port, but I rarely deal with passenger issues. Walla seems to have gone a bit ballistic and unfairly tarred CBP with the spectre of a political motive. Walla has the data, if not the HDD and, I assume, everyone is now playing nice.

Lastly, CBP pushed out another notice on how to support a claim under an FTA. If you read this blog reasonably often, you know this is making me nuts. This one relates to textiles and includes this gem:

Upon the request of CBP, importers who make trade preference claims for textiles and wearing apparel must provide sufficient records to substantiate their claims that goods meet the preference rule of origin for a country that has a FTA or legislated trade program.

The document then goes on to detail the documents necessary to support a yarn-forward, fabric-forward, cut to shape, or other rule of origin. According to CBP, importers should gather affidavits in support of these claims.

I get it: CBP wants importers to do this as part of exercising reasonable care. I also get that it makes verification much easier for CBP if they can get to the importer rather than the have to deal with the exporter. Finally, I get that CAFTA-DR, Australia, Chile, and other agreements have this sort of importer centered certification. But it is not true for NAFTA. Unless I missing something fundamental, NAFTA remains an exporter-based verification system.

I have said this before, but it strikes me that the U.S. should go back to Canada and Mexico and ask to change the rule to be consistent with the other trade agreements. I suspect Canada and Mexico are not interested. If that is true, maybe we should all proceed with the rules that were negotiated and let the importer rely on a reasonable review of the information within the four corners of the Certificate of Origin and leave it to the exporter to prove the claim.

I am willing to be convinced that I am wrong about this. If I am missing something, let me know.

Thursday, October 18, 2007

C-TPAT Validations in China

Here's news: Customs and Border Protection has finally secured the ability to have its people do C-TPAT validation in China. Until now, CBP has planned to rely on private third parties to conduct the validations. Now, CBP personnel will do it. I'm not sure that there is much practical significance to this but it does alleviate the concern about business proprietary information being in private hands.

By the way, for Google purposes, C-TPAT is the Customs-Trade Partnership Against Terrorism.

Product Safety

Lately, I have lots of conversations about food and product safety. Everyone knows this is a big deal issue. Here is a recent example. It crosses all kinds of interests from child welfare, to public health, to international trade. The question I get is whether it is a Customs law issue. Clearly it is not one of the core legal areas of customs compliance. By that I meaning it does not impact classification, value, duty assessments, etc. But, to the extent you are trying to fill contracts or secure the release of merchandise, any hang up in Customs immediately becomes a "customs law issue."

What you need to keep in mind is that Customs and Border Protection is the border enforcement arm for dozens of other government agencies including FDA and CPSC. An importation that is contrary to U.S. law is subject to seizure and forfeiture. That means you might lose your merchandise. There is also the possibility that your entry documents contain material false statement or omissions (such as the fact that the stuff is admissible). If so, you are subject to penalties for negligence, gross negligence, or fraud. Because there may be no revenue impact, the violations might result in very high penalties (20% or 40% of value for negligence).

A more common problem is the nasty "Notice to Redeliver." This is a notice from Customs that they want you to get the merchandise back to them. Often, that is impossible because it is long gone from the importer's control. When that happens, Customs can institute a liquidated damages action against your bond. This can be an expensive proposition and will make your surety very unhappy. This, by the way, is completely separate from a product recall notice.

A lot of what happens in these cases, from a customs lawyer perspective is working with the port to figure out if there really is a violation and what can be done to fix it. We like to ask questions like "How did CBP test for lead paint?" and "Is that the test industry would accept as accurate?" Assuming the product has a problem, we help negotiate a means of correcting it if possible. Maybe the issue is just a label and not a defective device. Can it be re-labeled and released? If not, you might be sunk.

The other side of this issue is the commercial relationship. If you bought rubber ducks from a supplier and end up losing them because they are covered in lead paint, the question is who is liable for your loss? Did you properly spec the product so that the supplier agreed to produce a lead-free duck? That is a breach of contract case. Who is liable for any injury your product might have caused? That has to do with indemnification and jurisdiction. Assuming you have pushed some liability onto the supplier, how will you collect? If China, Vietnam, El Salvador or some other country is your forum, is there a reasonable chance you will be able to collect in local courts? A lot of companies select the U.S. as the forum for enforcement. If you do that, will you ever be able to get access to the supplier or any of its assets in the U.S? This all relates the transaction, which is why you need a good deal lawyer negotiating your deal.

When your stuff gets hung up in customs, you need a good customs lawyer.

Sunday, October 14, 2007

Gross

Yesterday, I had to visit a Halloween store to find the all important Ninja Ice Wolf costume. Yes, it is part of the culture of violence in America. Yes, it is far more materialistic than the happy hobo, zombie, or greaser costumes we used to cobble together as a kid. I've decided to lower the bar of my moral outrage and let my principles float. While there, I scoured the shelves looking for festive articles from a customs classification perspective. As far as I am concerned everything in that store is a festive article.

Two things struck me as a I wandered among the decapitated ghouls, gravestones, and ghosts: Halloween is far more extreme than when I made the rounds of my neighborhood with my friends and a pillowcase for candy. The gore factor is very much ratcheted up. I guess this is the trickle-down of Hollywood special effects and makeup technology. But it is not just the realism, it is also the context. Look at this picture I took with my cell phone; it depicts a plastic human brain and a plastic severed hand packaged like meat at a butcher shop. There were hearts available as well. The nutrition label says that they are from the Cannibal Meat Market. I gather these are festive holiday decorations.

I'm not saying this is the end of western civilization. Nor am I calling for industrial self restraint or regulation. I really don't care that much. I just think it is an interesting example of how taste changes and how what once would have been considered way over the line is now available for retail consumption. Same goes for what can best be described as the fetishization of Halloween.
The second thing is that I wonder what must the Chinese factory workers must think of us? I have no idea how widespread the American version of Halloween is these days. Have the commercial haunted house and CD of eerie noises been globalized? Surely, the workers putting these body parts on Styrofoam trays must think the U.S. is a bizarre and blood-thirsty culture. To the limited extent I care, I can only hope their image of the U.S. at Halloween is tempered by reruns of this.

Wednesday, October 10, 2007

Costa Rica Ratifies CAFTA-DR/ Peru Vote

Sunday's vote narrowly passed the CAFTA in Costa Rica. USTR Schwab had this to say on the occasion:

The United States welcomes the outcome of the Costa Rican referendum on the free trade agreement that Costa Rica signed with the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, and the United States (CAFTA-DR). "We believe, and history confirms, that countries that open their markets have greater success in generating economic growth and development. We are pleased that Costa Rica will be joining the other CAFTA-DR countries in reaping the benefits of greater regional economic integration and market opportunities that the CAFTA-DR provides. "We look forward to working with the Government of Costa Rica as it completes the necessary steps to implement the agreement, so that the CAFTA-DR can enter into force for Costa Rica as soon as possible.


Apparently, a Senate vote is scheduled for next week on the proposed U.S.-Peru FTA. The draft agreement has already been approved by the Senate Finance Committee and the House Committee on Ways and Means.

Monday, October 08, 2007

And Now We Wait . . . .

Yesterday, Costa Ricans went to the polls to vote on a referendum on implementing the CAFTA. As we previously discussed, there have been massive demonstrations against the agreement. Let the counting begin.

In the meantime, Exxon Mobile and Murphy have given notice of their intention to pursue NAFTA Chapter 11 arbitration against Canada. The issue is interesting because it relates to performance requirements and dovetails with litigation that is still pending in Canada. The basic issue is that the NAFTA originally allowed Canada to continue certain existing performance requirements. However, in 2004, the Canada-Newfoundland Offshore Petroleum Board imposed certain research requirements or, in the alternative, payments into a fund. Exxon and Murphy claim the new requirements are illegal performance requirements and violate a number of NAFTA provisions including:

  • Article 1106 on performance requirements
  • Article 1108 which prevents the amendment of grandfathered measures to create additional requirements

Here is a Reuters article on the claim. This will be interesting to watch.

I've been on the road a bit. When I get back, I'm sure there will be more to post.

Wednesday, October 03, 2007

Chris Hayes Recants, I Guess

There is still no NAFTA Superhighway. But, Chris Hayes, who wrote a piece on the myth of the superhighway for The Nation, has apparently had second thoughts about the Security and Prosperity Partnership. Here is an exchange on the topic from his blog, which includes a link to his original article. I am not at all sure what to make of it. Even though it goes against my basic anti-conspiracy theory premise, I am putting it here in an effort to continue dialog (or possibly to fill space).

Quick Items

A Mayan statute was seized at O'Hare in Chicago. Here is the NPR story.

Birds were recently seized from hunters after a bird flu outbreak in Canada.

Bloggers are reporting major anti-CAFTA demonstrations in Costa Rica leading up to the referendum on Oct. 7. Some report marches of as many as 150,000 demonstrators. This Rueters report says 100,000.

Tuesday, October 02, 2007

Ford Update

The District Court in El Paso has issued a decision denying Ford's motion to dismiss the complaint against it for failing to produce NAFTA backup documents. [I'll post a link when I have one. Feel free to put a link in comments.] Customs and Border Protection had issued an administrative summons to Ford requesting the documents. Ford refused to produce them on the grounds that the documents are not (a)(1)(A) entry documents. Instead, they are backup documents the certifying exporter is required to keep. Ford even pointed to one of CBP's internal manuals, which expressly stated that the importer is not required to keep backup to the CO.

I am in London right now and without certain resources I often employ when crafting blog posts. Chief among those is absolute sobriety and sleep. Still, here goes: In administrative law, there is a principle that an agency action should be reviewed based on its underlying actual rationale, not a post-hoc rationale dreamed up by agency counsel for purposes of litigation. This is a bit like that. Everything about NAFTA verification practice up until now has been focused on the exporter. If you want proof, look at this presentation CBP uses. Compare the line item for Verification Notification for each agreement. See what it says? NAFTA is exporter based. The other agreements are importer based. That is a meaningful distinction based upon exactly what everyone thought the agreement was supposed to mean. That meaning was embodied in the Certificate of Origin (at Field 11), which put the onus on the exporter to maintain records and prove the validity of the CO. While you are at it, look at 19 CFR 181.72 relating to the method used to conduct verifications. You can see that it is focused entirely on the exporter/producer, which makes sense as that is the party that actually knows the origin of the merchandise.

Granted, the regulation says that inquiries to importers are not precluded. The regulation on Certificates of Origin also says the the importer is required to keep related records. But that does not seem like it should be enough to switch the burden of recordkeeping away from the party that expressly agreed to shoulder it. Which, by the way, is what the District Court held when it refused to dismiss the case.

Everyone knows that NAFTA was set up with the exporter being the primary recordkeeper. Having apparently had second thoughts, Customs created the later FTAs with different language that does put the obligation on importers. If Customs wants that to be case, it should change the rule rather than litigate for the result. Using the general recordkeeping requirements and some vague invocation of "reasonable care" doesn't change what the spirit and the letter of the Agreement says and the reasonable expectations of the trade community. Everyone out there who is interested enough to read this post should thank Ford for fighting this fight.

By the way, nay sayers, I am not arguing that there is never a reasonable care obligation to reject a NAFTA CO. There are plenty of COs that fail the red-face test. Often, importers should exercise caution and go back to the exporter/producer for clarification or correction. That is not what we are talking about here. As far as I know, these COs looked fine on their face.

Last thing: How mad is CBP? This whole thing could have been averted by simply conducting a verification of the supplier. If the supplier does not have the records to support the certificates, Customs is well within its rights to deny the claims. End of conflict.