Friday, August 15, 2008

Open Thread: Uniform Rules of Origin

I know my open thread experiments never work. Nevertheless, I will soldier on once again.

I have been having a lot of discussions about Customs and Border Protection's proposal to implement tariff-shift based rules of origin and do away with the old substantial transformation approach. For background, see here.

Here is what I want to know? Do we think this is legal?

One argument goes that CBP has the authority to implement the marking requirements through regulations and that agencies have the ability to change their policies by changing regulations. They just need to go through the proper notice and comment steps and explain the change rationally. So this is routine and permissible.

Another argument goes that agencies can only regulate when given express authority or to fill gaps in ambiguous statutes. When the Supreme Court decided that an origin determination is made by finding the last substantial transformation, it removed the ambiguity in the statute leaving the agency without authority to regulate a different test. A contrary approach leads to the absurd result that Court decisions are meaningless except with respect to the individual case that was decided because agencies can regulate their way around any judicial interpretation.

Are there more arguments out there?

I know that there are lots of customs lawyers reading this. I also know people are often hesitant to talk about live issues that might end up in court. But come on, throw the trade community a bone. What do you think?

By the way, note that I affirmatively did not say what I think. Unlike the rest of you, I am not anonymous.


Ken Bamberger said...

Very interesting post, Larry.
The Supreme Court dealt with this set of questions in the 2005 "Brand X" case (Nat'l Cable Telecom Assn v. Brand X, 545 U.S. 967).
In light of that decision, the question whether Customs can change its interpretation through regulation will depend in large part on whether prior judicial constructions constituted the *only * reasonable way to read the marking statute, or simply the way the court thought was best at the time. If the latter, then an agency can likely adopt a new interpretation -- at least if they do so in a formal manner deserving of Chevron deference.

Anonymous said...


Whether CBP can legally do this is one thing, but I disagree with anyone that says it is simpler. Importers don't have this information, and if they did, it would cost them a lot to process it. Think about, you buy something from a foreign supplier, do you think they are going to give you their confidential bill of materials to make this determination?! Alternatively, do they have the resources to conduct the classification? This is absurd, as is the entire WTO effort to harmonize rules of origin. Substantial transformation is the only sane approach.

Larry said...

These are good points. I don't recall saying that the tariff shift approach would be simpler. In fact, I'm not sure why Customs seems to think that substantial transformation needs to be retired. I think the test is easily understood and easy to apply up to the standard of reasonable care. Yes, there will be cases where reasonable minds will differ. That, however, does not mean the test needs to be abandoned in its entirety. Perhaps someone needs to propose a refinement to the blunt instrument that is "a change in name, character, or use."

It seems to me that the tariff shift approach is harder for CBP to manage and audit. I also don't know that it necessarily produces better results. So I don't understand CBP's desire to make the change. It is difficult enough for CBP to manage all the changes to the FTA rules of origin. Adding another set seems like it is taking on a lot of work for little or no benefit. Similarly, audits are going to be more complicated and CBP will have less discretion in its decision making.

On the importer side, it is true that importers will need to implement compliance systems to ensure that origin is properly determined. The question for importers is how difficult has it been to manage this in the NAFTA and textile contexts? We are 14 years into using these rules for North American trade. Despite the complexity of the rules, the determination is very often (but certainly not always) fairly evident because the analysis is not based on value and often involves an obvious shift.

I think the real questions here are these:

1. Can CBP make a case that this change benefits the administration of the customs laws and facilitates trade? I don't think CBP has really made a case that there was anything wrong with substantial transformation as a test. Absent a showing of significant benefits expected from the proposed change, I'd say CBP is not making a good use of public and private resources.

2. Assuming the change is made, what will CBP's enforcement expectations be. This is the real sticking point for me. If Customs is going to approach this through the Golden Ship Trading lens and put all the burden on the importer to independently prove origin, then this may be unworkable. If, on the other hand, Customs takes the NAFTA approach and permits importers to engage in reasonable reliance on the representations of the exporter, then it will be workable.