Wednesday, May 28, 2008

First Sale, the Farm Bill, and Bad Parenting

This is for Paul, who by posting a comment here, prompted me out of my blog stupor. I was planning a satirical rant about how I have this awful day job that gets in they way of my blogging. I was going to explain my goal to emulate now-professional bloggers like Heather Armstrong (AKA Dooce) or parlay my blogging success into a book deal like Jessica Hagy (of Indexed) and, more important, a shot on the Today Show.

But, I can't. I'm beat. I've had a fair amount of substantive work going on. Those of you who follow the court decisions may know that I am headed up to the CAFC. Thus, I won't comment on that. I've also just gotten out a complicated perfection of a prior disclosure and have a number of investigations going on. I am not complaining. Really. I am happy and don't have a horrible day job. I like my job. As a result, it sometimes get in the way of blogging.

In particular, for those of you who have been reading for a long time, it gets in the way of the off topic, funny posts. I have heard, as an alien once said to Woody Allen, "We liked your early, funny work." I'll try to spice things up when I can.

Which brings me to the Farm Bill.

This is a great example of what is wrong with the legislative process in DC. Here we have a Farm Bill. Technically, it is the Food, Conservation and Energy Act of 2008. The law covers a million things related to agriculture include agricultural trade. The table of contents mentions softwood lumber, although I can't quite figure out why. There is also a section on unused merchandise drawback.

But, drum roll please, the important part for us is section 15422(d), which says:

It is the sense of Congress that the Commissioner responsible for U.S. Customs and Border Protection should not implement a change to U.S. Customs and Border Protection's interpretation (as such interpretation is in effect on the date of the enactment of this Act) of the term `sold for exportation to the United States', as described in section 402(b) of the Tariff Act of 1930 (19 U.S.C. 1401a(b)), for purposes of applying the transaction value of the imported merchandise in a series of sales, before January 1, 2011.

That, my friends, is Customs and Border Protection getting a time out from Congress. It is Congress saying, "put that first sale change on hold until we have a chance to look into it. Oh, and when that happens, there will be a new administration, a new congress, and likely a new Commissioner."

To facilitate this review, Congress also mandated that Customs start collecting data on the use of first sale valuation and report that data to the International Trade Commission for appropriate number crunching. Unfortunately, the initial reporting will fall on importers. As Paul points out, it is not entirely clear how that information will be transmitted to CBP for collection. One assumes it will happen through something simple like a Special Program Indicator.

But here's the thing: This does not exactly say "No, don't do that." Rather, it provides a "sense of Congress." That is kind of like a parent saying "I'd rather you didn't eat peanut butter from the jar." My own experience on both sides of that weak command is: that's not a "No" and "Not a no" can be as good as a yes (unless it involves romance, in which case anything resembling a no is a no).

I seriously doubt that CBP will take any action contrary to the sense of Congress. That would simply invite more direct legislative action. Also, this time out gives CBP some time to lobby Congress on the merits of its position. So, I suspect nothing will happen before 2011. After that, all bets are off.

Which leads to the last question: What are importers supposed to do now? If you currently use first sale valuation, go ahead knowing that you might lose the benefit in a couple years. If you have been thinking starting to use first sale, you should figure out what you stand to save in the next couple years and decide whether that savings is worthwhile. If you would not make back your investment in administering the program for five years, it might not be a good investment now.

Have a good weekend.

Wednesday, May 21, 2008

A Holiday Just for Us

Yesterday was the anniversary of the passage of the Tariff Act of 1828, commonly known as the Tariff of Abominations.

I suggest that May 19 be declared a minor holiday for customs lawyers in America.

The Tariff of Abominations resulted from one of those great legislative follies in which a bill is put before Congress on the theory that no one will support it and then political hay can be made by blaming the defeat of the bill on political opponents. In this case, the southern states put together a tariff bill that raised rates on raw materials needed by northern industrial states as well as finished goods imported by southerners. It was assumed that the New England members of Congress would object to the bill and it would die. Turns out that it passed, causing tariff rates to rise on consumer goods and creating a political storm in the south.

This led to what is known as the Nullification Crisis, in which South Carolina moved to declare the tariff unconstitutional and unenforceable in that state. What follows is great. President Jackson sent a bill to Congress seeking authorization to use force to enforce the customs laws. The custsomhouses were to be relocated to ships in the harbor, cash payments (rather than bonds) demanded, and federal arrests for anyone refusing to pay duties whom the state did not arrest. In the end, a compromise tariff was enacted along with the Force Bill. The immediate crisis was, thereby, defused.

This created an environment in which South Carolina, the first state to eventually secede from the Union, rallied around the issue of states rights and the sovereign nature of the states. Thus, it is not too much of a stretch to say that the Tariff Act of 1828 -- the Tariff of Abominations -- was a contributing factor leading to the Civil War.

Next time I argue with Customs and Border Protection for a change in classification or duty-free treatment under some trade agreement, I am going to have to work in the larger implications. After all, what if the decision on widgets from Mexico leads to the next Civil War?

You may be wondering why I said May 19 should be a minor holiday. It's because I'm saving June 17 for the major holiday.

Friday, May 16, 2008

Deal or No Deal: GSP Edition

Before I get into this, I need to make an important point (that I have made before): I like and respect most of the the folks at Customs and those at the Department of Justice who represent the agency. Over the three years I have been blogging, I have reviewed cases that I think Customs and Border Protection should have won and I have given a virtual high-five to Customs for the good and important work it does. There have been times when I have been called out for being unfair and on at least one such occasion, I changed my position. I just write about what strikes me as interesting and, sometimes, I feel it is appropriate to criticise certain actions. OK? Are we all still friends?

That said, I have a new problem . . . GSP.

Customs and Border Protection recently published this document providing compliance information for importers making claims under the Generalized System of Preferences. It is great that CBP does this and is consistent with the notions of shared responsibility and informed compliance.

Back in the day (as the kids like to say), an importer would ask the exporter for a Form A to substantiate a claim for duty-free entry under the GSP. This created a document trail for Regulatory Audit. By completing a Form A, the exporter was certifying that the merchandise met the 35% value-added and direct shipment rules. When a claim turned out to be false, the Form A pointed the finger of wrongdoing squarely at the exporter. Several years ago, I can't quite remember when, Customs eliminated the Form A.

In this new document, CBP continues its apparent push to make the importer primarily responsible for false statements by the exporter. Think about it: Who knows the origin of the materials used in production? Who knows the value of the labor and overhead involved in production? How many vendors want to tell their customers where they get materials and how much they cost? None. They want to just provide a basic statement that the goods qualify; something like a Form A. When backup is needed, many would rather give it directly to CBP than to their customer.

Despite all that, this document states (and this is not new policy) that documentation supporting the GSP claim must be readily available to Customs upon request to the exporter, importer, or both. As a practical matter, CBP is going to start with a request to the importer. Among the information Customs may request are:

if processing operations are performed on articles;
(a) description of processing operations and country of processing, and
(b) direct costs of processing operations,
if materials are produced in a beneficiary developing country or members of the same association then;
(a) description of material, production process, and country of production, and
(b) cost or value of materials.

This again raises the question of what importer is going to be able to get the direct cost of processing and the value of materials from a supplier, assuming the supplier is unrelated? This is a very high burden that may put importers at serious risk. Now that this requirement has been published, is CBP going to take the position that failing to have access to these documents is a recordkeeping violation or that making an entry without reviewing the backup is an absence of reasonable care? Customs has show good faith by saying that it will exercise flexibility and good judgment is accepting alternative documents to support the claim. Give the agency credit for that.

Customs has also provided some guidance on compliance. This is useful. But, keep the context in mind. Customs begins by saying: "The importer should establish internal controls that identify and gather records to support GSP claims." Clearly, the onus is on the importer and it is not enough to simply accept the representations of the supplier. This is made clear again when CBP says:

Documentation and records supporting the GSP claims must be verifiable by linkage to inventory and accounting records, including summary records such as monthly production reports and accounts payable records. Again, this list is not considered absolute and Regulatory Auditors are charged with making a reasonable attempt to solicit and identify other alternative recordkeeping sources. However, the responsibility to substantiate the GSP claim ultimately resides with the claimant.
What to do? Here are more thoughts:
  • Document your supplier's representations as to GSP qualification.
  • Request reports showing the supplier's analysis. You may need to negotiate the level of specificity of information involved. An alternative is to designate a third party reviewer such as broker or law firm.
  • Conduct announced and unannounced plant visits to confirm: point of production, receipt and origin of materials, production process, etc. This will likely require a contract clause permitting inspections. Inspections may be by a third party.
  • Put a clause in your contract requiring that the supplier indemnify you for any losses resulting from the GSP claim being unprovable. This should include duties, penalties, and legal fees. Then, hope that the clause is enforceable wherever your supplier happens to be.

The bottom line on this seems to be that GSP is of increasingly questionable utility. Ask yourself whether you can prove your current claims. Now calculate the duty saving and the potential penalties (including legal fees and administrative expenses) associated with your claims. Does GSP still look like such a great deal?

Now, flip it around. If you were Customs, what would you do? Your only real point of contact is with the importer. Also, it is the importer who pays the duties. The importer is required to be reasonably careful about making claims. So, this position makes some sense. For the immediate future, we probably need to live with it.

In the bigger picture, though, it seems like the burden falls on the wrong party. A process modeled on NAFTA verification makes much more sense. CBP should be conducting verifications of the exporter who asserts that the goods qualify. Rather than put the burden on American business, Congress and the President should be looking at some means of international facilitation for GSP verifications of the exporter. An obvious point of leverage is continued participation in the program. If a country wants to continue to receive GSP benefits, it should be required to permit U.S. Customs and Border Protection personnel to conduct GSP verifications on their soil. If that is unpalatable, perhaps the local authorities could be required to gather certain specified information and provide it to CBP. If it turns out that the claim is invalid, the U.S. importer will still have to pay up but there would be no penalties assessed unless it was apparent that a reasonable importer would have known that the claim was false.

It seems to me that either approach is a fairer allocation of resources and a better deal for U.S. business.

Customs News of the Weird

It's Beetlemania in Pennsylvania!

Customs and Border Protection sting nabs illegal beetle imports. Read about it here.

Actually, there was no sting involved; I just could not resist the pun.

Tuesday, May 13, 2008

In Rem Action: U.S. v. Flash Drives

In law, there are two kinds of civil actions. The usual case is brought "in personam," meaning it is against a person. This is the usual So-and-So v. So-and-So kind of case in which the plaintiff claims the defendant did something wrong. Other actions are "in rem," meaning against the thing. In these cases, the very existence of the thing is the problem and it doesn't matter all that much who is at fault or who owns them (although the owner can show up and put on a defense for the stuff). In law school, the most famous in rem cases have to do with the seizure of pornographic films. They (the cases, not the films) have titles like "U.S. v. 250 Reels of Motion Picture Film."

This is relevant here because of the recent filing of U.S. v. 3,000 Microsoft Flash Drives in the U.S. District Court in Alaska. This was reported in Information Week, although the story appears to have been taken down (the link is to the Google cache). The flash drives include an unauthorized Microsoft Windows logo and were seized by U.S. Customs and Border Protection. CBP appears to be focusing on high-tech counterfeiting as there was also a recent case on counterfeit keyboards.

The Information Week article makes the interesting point about the diminishing value of the merchandise, which was seized in July of 2007. Because of the rapid advances in chip production technology, the seized flash drives are worth less every day. That, of course, raises the question of whether it is worthwhile to fight this case at all? It seems that the issue of infringement should be pretty clear unless the importer has some heretofore unproduced license to import products bearing Microsoft trademarks. It seems that if such a document existed, it would have been produced by now.

So, what is left? Is there an argument that the Windows logo is necessary to communicate compatibility with the OS? Not likely as the words "Microsoft Windows" with a prominent trademark disclaimer would have accomplished that. Further, a quick look at the six flash drives in my desk draw reveals that not one is decorated with a Windows logo.

Another alternative is proving that the merchandise was legally produced and is permitted entry to the U.S. as gray-market merchandise. We've discussed that before. That is also a tough, though not impossible, row to hoe.

I suspect, the U.S. Attorney's Office in Alaska is about to have a life-time supply of flash drives.

Thursday, May 01, 2008

Fiji on First Sale

A quick update on Customs and Border Protection's effort to eliminate "first sale," sometimes called middleman," valuation:

Earlier in the week, 17 U.S. Senators sent a letter to Homeland Security Secretary Chertoff expressing "serious concern" over the move.

If this happens, the countries that feel it most will likely be developing economies with active textile sectors. Today, the Government of Fiji has acted. Fiji is concerned that changing the valuation methodology might make Fiji products more expensive in the U.S. I'm not sure whether other governments have similarly commented but one must assume that if Fiji is worried, others are as well.

We're All Grown Ups Here, Right?

I like to hang out at the intersection of trade and intellectual property. I find the issues raised there to be particularly interesting.

One long-simmering issue is the question of protecting geographically descriptive designations for products. Champagne, the French argue, must come from Champagne (France); not Italy or California and not even Champaign, Illinois. Similarly, Scotch should come from Scotland and Tequila from the Tequila region of Mexico. Cheddar is a town in England and Gouda is in the Netherlands.

This issue has been the subject of negotiations at the WTO level and is part of U.S. law. It remains confusing to consumers who may buy a product like Hawaiian Punch, with a geographic indication in the name but no real connection to the locale. Arizona Iced Tea is another example. This is because some product names, even though they are geographically misdescriptive, are so well known that they have "secondary meaning" as a source identifier.

It now appears that natives of the Greek Island Lesvos (commonly spelled Lesbos) have taken up the cause of fighting to control the use of the name of their home. This comes from the AP via Assuming this is not a joke, residents of the island have sued a Greek gay and lesbian organization that has no connection to the island to prevent it from using the word "lesbian" in its name. According to the plaintiffs, the use of "lesbian" in this context insults the identity of the island.

As ridiculous as it seems, this raises interesting questions. From a U.S. perspective, it seems that the term has, over the course of the 2600 years since Sappho wrote poems, moved from a specific to a generic meaning. This is what happened to former trademarks like aspirin and cellophane. Becoming generic is a step beyond having secondary meaning, so it would appear that there is no legal issue in the U.S.

But, what about the tougher question of public policy? Lesvos is a real, live place filled with real, live people. Some of those people seem to be offended by the use of "lesbian" to designate gay women. Contrast that to, for example, the Illini band of Native Americans (actually a confederation of six or more tribes). The Illini confederation is now extinct; although part of the Peoria Tribe is now found in Oklahoma. Despite the lack of Illini to complain, Native Americans and others sympathetic to the issue have fought the University of Illinois long and hard over its use of Fighting Illini as a team name and, more specifically, Chief Illiniwek as a dancing mascot at sporting events. As it stands now, the Chief has been retired but the team name continues.

Here's my question, do the living people of Lesvos have a greater claim to control the use of their name than do the representatives of the Illini? Moreover, did the members of the GLBT community stake out a position in the Illiniwek controversy? It seems like living, breathing, suing people--who can pull out a drivers license and show a connection to the region--have a pretty good case in the court of non-hypocritical public opinion. And, since I have long supported the elimination of The Chief at Illini games, I believe I now need to find a new word for lesbian.

What about the movement to rename places with the word "squaw" in them? Maybe the people of Lesvos can offer support on that front.