Wednesday, February 29, 2012

Enforcement Center Comes to Life

Yesterday, the President signed an Executive Order creating the Interagency Trade Enforcement Center that he promised to us in the State of the Union address. The Center is to be headed up by a full time senior USTR employee and will be housed at USTR. The second in command will be a full time senior person from Commerce.

In section 3 of the EO, the President defines the Center's mission as follows:

(a) serve as the primary forum within the Federal Government for USTR and other agencies to coordinate enforcement of U.S. trade rights under international trade agreements and enforcement of domestic trade laws;

(b) coordinate among USTR, other agencies with trade related responsibilities, and the U.S. Intelligence Community the exchange of information related to potential violations of international trade agreements by our foreign trade partners; and

(c) conduct outreach to U.S. workers, businesses, and other interested persons to foster greater participation in the identification and reduction or elimination of foreign trade barriers and unfair foreign trade practices.
On interesting aspect of this is that the President ordered that the Center have a Liaison to the Intelligence Community designated by the Director of National Intelligence.

Tuesday, February 28, 2012

More on Debarment

The State Department's Directorate of Defense Trade Controls has taken a solid swing at the freight forwarders discussed in the previous post. Here is a link to the notice. The upshot of this is that these forwarders will be able to work through existing authorizations. Pending requests for new authorizations will be returned without action unless they contain a transaction exception request. They can be resubmitted. New requests involving these forwarders must contain a transaction exception request or they will be returned.

It's hard to see how these requests for exceptions will be treated except to deny them, but that is not a forgone conclusion. Maybe this is a shot over the bow of the forwarding community and requests will be granted until the debarments end. Or, DDTC could play hardball, which will make life very difficult for the forwarders involved and defense companies that use them.

Friday, February 24, 2012

ITAR Brokering and Freight Forwarders

UPDATE: Take a careful look at Jim Dickeson's thoughtful comment on this item. He correctly points out that there is an exception to the requirement that freight forwarders register and seek licenses. And, that exception makes perfect sense in an environment in which the shipper is the exporter and subject to the licensing requirement. Nevertheless, the brokering regulation does list freight forwarders as parties subject to regulation. The distinction appears to be whether their role is limited to forwarding or whether they take the next step and act as an importer. Read what follows with that in mind. And, thanks to Jim for the input.
_________________________________________

I don't typically cover exports here, although it is part of my practice. I am making an exception because this issue has now come up from a number of sources. So, I want to do what I can to clear the air. But, I do not have a conclusion for all involved.

The fact is that six prominent freight forwarders have been debarred from government contracting by the Air Force. This action follows guilty pleas by the companies in a federal criminal price fixing case. The companies involved are:

  • EGL Inc.
  • Kühne + Nagel International AG
  • Geologistics International Management (Bermuda) Limited
  • Panalpina World Transport (Holding) Ltd
  • Schenker AG,
  • BAX Global Inc.
Here is a link to the Justice Department press release concerning the pleas.

The question for us is whether this has any impact on the trade. It appears that it might, but should not.

The potential problem is that freight forwarding is defined as "brokering" in the International Traffic in Arms Regulations. See 22 C.F.R. 129.2(b), which says, in part: "Brokering activities means acting as a broker as defined in § 129.2(a), and includes the financing, transportation, freight forwarding, or taking of any other action that facilitates the manufacture, export, or import or a defense article or defense service, irrespective of its origin."

As ITAR brokers, freight forwarders are subject to registration requirements and, in many cases, must seek a license or approval from the Department of States, Directorate of Defense Trade Controls. That is where the potential problem lies. 

The ITAR provide that only a select class of individual are entitled to licenses or other approvals. According to 22 CFR 120.1(c): 
Foreign persons (as defined in § 120.16) other than governments are not eligible. U.S. persons who have been convicted of violating the criminal statutes enumerated in § 120.27, who have been debarred pursuant to part 127 or 128 of this subchapter, who are the subject of an indictment involving the criminal statutes enumerated in § 120.27, who are ineligible to contract with, or to receive a license or other form of authorization to import defense articles or defense services from any agency of the U.S. Government, who are ineligible to receive export licenses (or other forms of authorization to export) from any agency of the U.S. Government, who are subject to Department of State Suspension/Revocation under § 126.7(a)(1) through (a)(7) of this subchapter, or who are ineligible under § 127.7(c) of this subchapter are generally ineligible.
The question that is causing concern is whether this prohibition on the granting of licenses and approvals to U.S. persons who have been debarred from contracting with an agency are automatically or potentially prohibited from receiving license or approval under the ITAR.

The answer to that is unclear. One important factor is that the Air Force debarment code "A" applied to this situation is specific to antitrust violations. The "treatment" associated with an "A" debarment is somewhat limited in scope. Specifically, it provides that:
Contractors are excluded from receiving contracts and from directly or indirectly receiving benefits under Federal nonprocurement programs, and agencies shall not solicit offers from, award contract to renew or otherwise extend the duration of current contracts, or consent to subcontracts with these contractors, unless the acquiring agency's head or a designee determines that there is a compelling reason for such action. Government prime contractors, when required by the terms of their contract, shall not enter into any subcontract equal to or in excess of $30,000 with a contractor that is debarred, suspended, or proposed for debarment, unless there is a compelling reason to do so. Debarments are for a specified term as determined by the debarring agency and as indicated in the listing.
That is distinct from treatment code UU which states:
Listed persons are prohibited from participating directly or indirectly in the export of defense articles or United States origin related technical data or in the furnishing of defense services for which a Department of State license or approval is required.

Code UU seems much more specific and the fact that it was not applied in this case might indicate an intention to avoid disrupting the defense forwarding business. On the other hand, the language of treatment code A relating to federal nonprocurement programs might be sufficiently broad to include this situation. Furthermore, a UU debarment is appropriate under 22 CFR 126.7(a)(5), which also references the inability to contract with a federal government agency.

Another point to keep in mind is that this exclusion from license only applies to U.S. parties. Foreign parties could not be granted licenses or approval. A foreign person is defined, in part, as "any foreign corporation, business association, partnership, trust, society or any other entity or group that is not incorporated or organized to do business in the United States . . . ." 22 CFR 120.16. It is not clear that any of this would impact the operations of the wholly foreign entities listed separate from possibly U.S. related parties.

All of which creates some ambiguity and a lack of clear guidance for ITAR product exporters who rely on these forwarders. Businesses would be wise to check with these forwarders to determine whether the contract debarment is affecting their business. Further guidance may be available from the Response Team at DDTC.

Thursday, February 23, 2012

Proposed Changes to In-Bond Process

I'm just going to throw this out there for my broker and importer friends. Yesterday, Customs and Border Protection published a proposed rule to modify the in-bond process.  Here is a link to the notice.

Here is the summary in full:


Under the U.S. Customs and Border Protection (CBP) regulations, imported merchandise may be transported in-bond. This process allows imported merchandise to be entered at one U.S. port of entry without appraisement or payment of duties and transported by a bonded carrier to another U.S. port of entry provided all statutory and regulatory conditions are met. At the destination port, the merchandise is officially entered into the commerce of the United States and duties paid, or, the merchandise is exported. CBP is proposing various changes to the in-bond regulations to enhance CBP's ability to regulate and track in-bond merchandise and to ensure that the in-bond merchandise is properly entered and duties are paid or that the in-bond merchandise is exported. Among other things, the proposed changes would: eliminate the paper in-bond application (CBP Form 7512) and require carriers or their agents to electronically file the in-bond application; require additional information on the in-bond application including the six-digit Harmonized Tariff Schedule number, if available, and information relevant to the safety and security of the in-bond merchandise; establish a 30-day maximum time to transport in-bond merchandise between United States ports, for all modes of transportation except pipeline; require carriers to electronically request permission from CBP before diverting the in-bond merchandise from its intended destination port to another port; and require carriers to report the arrival and location of the in-bond merchandise within 24 hours of arrival at the port of destination or port of export. CBP also proposes various other changes, including the restructuring of the in-bond regulations, so that they are more logical and better track the in-bond process. At this time, CBP is not proposing to change the in-bond procedures found in the air commerce regulations, except to change certain times periods to conform to the proposed changes in this document.

Comments are due April 23, 2012.

Harmonization or New World Order?

I am a big proponent of the harmonization of international standards. This is mainly because I am cheap and believe in efficient, practical solutions to problems. I have always thought that the U.S., Canada, and the EU, for example, could merge their drug approval processes making for a one-stop shop. Once approved by this international body, the drug would be approved for sale in all three jurisdictions. I realize that is far easier said than done. The problem is that every country wants to be able to protect the health and safety of its citizens. And, at a very detailed level, the different organizations may have different approaches. Those details can become stumbling blocks and eventually stymie the whole thing. But, it can be done.

Another objection to this is that the U.S. will be giving up sovereignty and allowing "foreign bureaucrats" to make decisions about the medicines (or foods, or whatever) Americans can use. This, to me, is a red herring. As long as the United States retains a way out of the pact and there is adequate opportunity for judicial or other independent review, I don't think there is much of a sovereignty issue. Even if there is, we trade sovereignty for other benefits all the time. If the decision is reversible and we get a benefit, that is OK with me.

I am thinking about this because of this news item that the U.S. and EU have agreed to accept each other's certifications that products are "organic." This opens the way for companies on either side of the Atlantic to market their products as organic without having to go through re-certification and labeling on the opposite side. According to the report:

“This agreement comes with a double added value. On the one hand, organic farmers and food producers will benefit from easier access, with less bureaucracy and less costs, to both the U.S. and the EU markets, strengthening the competitiveness of this sector. In addition, it improves transparency on organic standards, and enhances consumers' confidence and recognition of our organic food and products,” stated the EU Commissioner responsible for agriculture and rural development, Dacian Cioloş. "This partnership marks an important step, taking EU-U.S. agricultural trade relations to a new level of cooperation"


Of course, this is not the merging of two independent programs. Rather, it is just mutual recognition. Still, it strikes me as a good example of a long term strategy to harmonize standards.

Wednesday, February 22, 2012

Is It Soup Yet?

The Court of Appeals for the Federal Circuit has affirmed the decision in Aromont USA, Inc. v. United States in which the Court of International Trade held that commercial food flavoring was classifiable as food preparations not elsewhere specified or included (2106.90.99) rather than as "soups and broths and preparations therefor" in 2104.10.00. We discussed the Court of International Trade Decision here. This is an issue of principal use and the Federal Circuit had some interesting things to say.

As you probably know, some tariff classifications are based upon the use of the product. Additional U.S. Rule of Interpretation 1(a) provides that:

[A] tariff classification controlled by use (other than actual use) is to be determined in accordance with the use in the United States at, or immediately prior to, the date of importation, of goods of that class or kind to  which the imported goods belong, and the controlling use is the principal use
"Principal use" is the single use that exceeds any other single use. Traditionally, the Courts have not been too concerned with the use of the particular imported goods, but rather with the principal use of the class or kind of goods involved. This differentiates between a general "use provision" and a classification based upon "actual use." The Federal Circuit has refined that "class or kind" decision to "call for a determination as to the group of goods that are commercially fungible with the imported goods." The Court uses numerous factors from a case called United States v. Carborundum to determine what goods are commercially fungible with the imported goods.

First among the Carborundum factors is the actual use of the imported merchandise. This appears to have been a sticking point in this case. The United States argued that because this is not an actual use provision and the classification is to be based on the principal use of fungible goods, the actual use of these goods is irrelevant. The Court rejected this seemingly logical argument because, in effect, it went one step too far. The Federal Circuit noted that it had recognized the use of the goods as a relevant consideration in Carborundum. Further, the Court held that there is no harm in looking at whether the actual use of the imported goods is consistent with the proposed classification. The distinction, however, is that this inquiry is only one factor to be considered in the overall context of all the Carborundum factors. In contrast, in an actual use case, it would be the only factor.

Applying this factor, after some related evidence questions, the Court found that the imported merchandise was used primarily as a flavoring agent rather than as soup base. According to the Court, "this factor weighs heavily against classifying the flavorings as preparations for soups and broths."

From actual use, the Court moved on to the other Carborundum factors, which I will run through here just to be complete. Regarding physical characteristics, the Court found the fact that the imported product is in one of the many forms in which soup base is made to be insignificant. The Court next found that the relatively high cost of the imported merchandise weighed against Customs and Border Protection's classification as soup base. Looking at the remaining factors of expectations of the ultimate purchasers, channels of tradeenvironment of the sale, and recognition in the trade, the Court found nothing to distinguish the imported merchandise as soup base because both food preparations (i.e., the soup and flavoring agents) move in much the same trade and have overlapping characteristics. Given the actual use and high cost of the product, the Federal Circuit affirmed the classification as an other food preparation in heading 2106.

I think the focus on actual use is interesting and a good reminder. It is is an easy overstatement to tell an importer that actual use is irrelevant in principal use cases. Rather, as this case points out, it is relevant and should be considered along with all the Carborundum factors. That is important because the actual use or its own principal use is often the only evidence of use the importer has. An importer of methylethyleslimystuff ("MESS") knows and can prove that it makes rocket fuel from the stuff but might be completely oblivious to the fact that the company down the road makes breakfast cereal from the same MESS. Customs and Border Protection went too far when it argued that actual use was irrelevant and importers should keep that in mind, particularly when seeking binding rulings on products classified in use provisions.

Wednesday, February 15, 2012

Where Administrative Law Meets Pleading

The Court of International Trade has also dismissed a case in which U.S. Customs and Border Protection attempted to impose a penalty on a customs broker. The underlying issue had to do with the failure of the broker to properly deposit antidumping duties and to properly identify the producer of freshwater crawfish from China.

This is another in the now long series of decisions from the Court of International Trade that turn on pleading rather than the merits. There is nothing wrong with that. Obviously, plaintiffs need to properly plead their cases to proceed. But, these cases are usually not as interesting as a decision on the merits.

This case is somewhat interesting because it seems to plug the holes left by two earlier cases. The first is based on United States v. UPS Customhouse Brokerage. In UPS, the Court of Appeals for the Federal Circuit held that Customs and Border Protection had not properly pursued a penalty against a broker because it failed to consider all 10 factors listed in the relevant regulation. In this case, Customs apparently failed to specify what regulations the broker allegedly violated. Based on this, the defendant asserted that Customs failed to properly exhaust the administrative process. As all student of administrative law know, exhaustion is usually an important step in getting into Court.

In this case, however, the Court of International Trade thoroughly reviewed the statutory requirements for imposing a broker penalty under 19 U.S.C. 1641 and collecting it under 28 U.S.C. 1582. The Court found there to be no statutory requirement for exhaustion for the subject matter jurisdiction of the court to attach. Thus, according to the Court, it has the discretion to decide whether exhaustion is a jurisdictional requirement. This resolves any lingering doubt about whether UPS was a jurisdictional decision. According to the CIT, it was not and exhaustion is not required under these circumstances.

The second hole to be filled comes from United States v. Optrex America in which the Court of International Trade held that the United States cannot amend a complaint to assert gross negligence or fraud that was not asserted at the administrative level. Again, the Court of International Trade held that Optrex is not a jurisdictional decision. Rather, it can reasonably be read an dismissing the government's enhanced claims on the basis that it failed to satisfy the required administrative procedures in much the same way that Customs failed to consider the 10 factors in UPS.

So, the Court found that it does indeed have subject matter jurisdiction over the claim against the defendant customs broker. But, the United States failed to provide the required notice to the defendant during the administrative process. As a result, it cannot state a claim against the defendant. Case dismissed.

CIT Dismisses HTS Gender Case

The long running effort by some importers to show that differing rates of duty for men's, women's, and children's gloves, footwear, and apparel are unconstitutionally discriminatory has hit another bump. Specifically, the Court of International Trade has dismissed Rack Room Shoes v. United States.

Just by way of example, consider leather gloves. Men's gloves of 4203.29.30 are subject to a duty rate of 14%. Other gloves, meaning gloves for women and children, are classified in 4202.29.40 and are subject to a duty of 12.6%. That means that every time I buy imported gloves for my manly hands, someone in the supply chain paid an extra 1.4% in costs added on by the United States government as a direct result of my Y-chromosome. We can assume that the rational economic actors in the supply chain have passed that extra cost along to me. When a woman buys gloves for her dainty lady hands, there is no such burden on her supply chain.

On its face, this seem wrong and, frankly, un-American (in my liberal, politically correct world view). Why should the United States be imposing an additional tax burden on me and my hands that is not imposed equally on a woman or child? If you asked the average American on the street whether that would be legal, I suspect the answer would be a resounding "No." But, we are not asking the man or woman on the street. Instead, this issue is in Court and the law requires more than the general notion that the law should treat men and women the same and not unfairly discriminate against children without some good reason.

In a previous case, the Court of Appeal for the Federal Circuit held that this difference in the tariff rates is not "facially discriminatory." That is because the distinction is based on the product, not the gender of the purchaser. This makes some sense because there is not an obvious and necessary connection between the importer of the gloves, shoes, or clothing  (i.e., the taxed party) and the ultimate purchaser. It is just as likely that the importer is a gender-less corporation. Even in Mitt Romney's world where corporations are people too my friend, corporations do not have gender-based rights. Another reason this is not facially discriminatory is that a man might be the importer of women's gloves. Remember, the statute does not create a higher rate of duty for "gloves imported by men."

Once the Court reached the conclusion that the tariff is not facially discriminatory, the burden on the plaintiff is much higher. Simply showing that the discrimination has a disparate impact will not be enough. Instead, the plaintiff needs to assert facts showing a governmental intent to discriminate. And that, as you might guess, is a problem.

The first fact alleged to show discriminatory intent is that the United States government could have selected any other criteria on which to impose this duty difference. Since it chose gender and age, it must have intended to discriminate. I read that to mean that if the government wanted to burden bigger manly gloves more than dainty lady gloves, it could simply have differentiated between gloves based on size or weight. Since it did not do so, the government must have intended to put the burden on men.

The second argument was based on a governmental report from 1960 indicating that gender based tariff rates were of questionable economic justification. The Court of International Trade rejected that argument as well, holding that the report was not evidence of any Congressional intent behind the current tariff schedule.

Based on this analysis, the Court found that the plaintiffs had failed to assert facts that, if true, would plausibly give rise to an entitlement to relief. That is the standard the Supreme Court has said must be met for a case to move on in federal court. All of which seem logical and incredibly lawyerly.

But, it is very unsatisfying. The U.S. is under no obligation to explain the difference between these duty rates to me or to anyone else. But, in the real world, that would be an appropriate step. The Court made general reference to tariff rates being the result of trade negotiations and concessions and to possibly depending on country of origin, the nature of the product, and the state of the domestic industry. I am not sure I agree. Most trade negotiations set maximum rates and duty reduction schedules, rather than impose specific rates for specific products. And, with the exception of trade preferences and the very few countries not entitled to Normal Trade Relations status, the country of origin does not affect rates of duty. It is possible that the domestic industry making men's gloves, shoes, and apparel is in need of more protection than the women's and children's industries, but the government did not argue that.

It strikes me that while the Court of International Trade might be right in this case, Congress should recognize that legal distinctions based on gender are always going to be suspect. Absent some affirmative showing of the need for these distinctions, as a matter of policy, it seems like it is time to equalize these rates.

Wednesday, February 08, 2012

Don't Say I Did Not Warn You

According to the preface of the February 3 edition of the Harmonized Tariff Schedule of the United States:

[T]his edition of the HTS does not contain updated rules of origin for all U.S. free trade agreements; such updates must be proclaimed by the President. The rules of origin for the North American Free Trade Agreement, the U.S.-Australia Free Trade Agreement, the U.S.-Chile Free Trade Agreement, the U.S.-Singapore Free Trade Agreement, and the U.S.-Bahrain Free Trade Agreement have been updated to reflect amendments made by the WCO to the international Harmonized System in 2007 and proclaimed by the President in Proclamation 8097, effective February 3, 2007; no similar updates have been proclaimed for any other free trade agreements. No rules of origin for any existing free trade agreement have been updated to reflect the amendments made by the WCO to the international Harmonized System, effective January 1, 2012, and proclaimed by the President in Proclamation 8771, effective February 3, 2012.
Press reports, meaning International Trade Today, state that Customs and Border Protection expects to be issuing rulings on how the changes impact entries. You have to decide whether you can wait for a ruling. Remember that you can show reasonable care by seeking advice from competent internal resources and outside experts such as counsel experienced with customs and trade issues. Of course, reasonable care is only half the battle, until the rules are up to date, there is always the risk that the you might end up owing duties. Think about whether you can use your purchase orders to try and shift some of that risk.

Sunday, February 05, 2012

Super Catch Up Edition

Here's the thing about blogging: It takes time that I do not always have. But, I do enjoy doing it and I know that many people read the blog and, to some extent, rely on it for current and useful info. So, I am going to spend some time between entertaining commercials and a potentially boring football game to catch up. That means that this won't be the most detailed post.

CIT Orders Appraisal in Penalty Case

In United States v. Callanish, the Court of International Trade seems to be trying very hard to dispose of a penalty case, but is frustrated by procedural issues. Specifically, the case involves an effort to secure a default judgment against an importer. However, the Court pointed out previously that it needs to know the domestic value of merchandise to assess the penalty. As a result, it ordered the United States to move to amend its complaint with well-pleaded facts establishing value.

In its amended complaint (and I am skipping over an issue about how that amendment was accomplished), the United States asserted that the domestic value of the merchandise was calculated as twice the invoice price. The government relied on 19 CFR 162.43(a) for support. The Court, however, noted that domestic value must be based on the price at which such or similar merchandise is freely offered for sale in the ordinary course of trade. According to the CIT, Customs and Border Protection's appraisal worksheets only provide a conclusion as to the alleged appraisal and fail to provide any facts on which the Court can find that conclusion to be true. As a result, the Court remanded the case for further proceedings consisting of a new appraisal.

In reality, it seems that what the Court wants is an explanation of the appraisal, although Customs can certainly come back with a different number based on a new appraisal.

No Support, No CDSOA Money

I usually give short shrift to trade cases here, when I cover them at all. This is no exception. In Ashley Furniture Indus. Inc. v. United States, a three-judge panel of the Court of International Trade held that a domestic producer of wooden bedroom furniture who opposed the antidumping petition on merchandise imported from China is not entitled to share in the distribution of funds under the Byrd Amendment (A/K/A the Continuous Dumping and Subsidy Offset Act). Once it was determined that the plaintiff had opposed the petition, it was in a hole from which it could not escape (at least according to the CIT). An interesting aspect of the decision is the discourse on whether the Supreme Court's decision in Citizen United, means that the CDSOA improperly burdens political speech my a corporation. It is a good argument, but does not gain traction with the CIT.

Similar issues were discussed in Ethan Allen Global, Inc. v. United States.

Epoch Designs

Epoch Designs LLC v. United States is about the amount of antidumping duty to be assessed on a single entry of wooden bedroom furniture from China. Because there was no dispute about whether the merchandise was subject to the case or the calculation of the margin, this was all about how Customs and Border Protection assessed the duty at the time of liquidation. The underlying problem was that Commerce failed to initially list the separate (and lower) rate for the relevant exporter. Although corrected liquidation instructions were issued, Customs and Border Protection liquidated the entry at the 198% China-wide rate.

While cases involving antidumping and countervailing duties are typically brought to the Court on review of an International Trade Commission or Commerce Department determination, this is a relatively simple customs case. The plaintiff filed a protest challenging Customs' liquidation of the entry at the higher rate in contravention of the amended instructions. In most cases, that would be likely result in an approved protest and refund. However, there were issues here.

First, at the time of this entry, a protest had to be filed within 90 days of the liquidation. Today, the relevant period is 180 days. Epoch filed its protest about six months after liquidation, and outside the required period. The reason for this is likely that even though this was a 2004 entry, liquidation did not occur until 2008, four years after the change to the 180-day protest period. Unfortunately, the applicable limitations period is based on the entry date. On top of that, it appears that at the time the summons was filed, Epoch had not paid all the liquidated duties, charges, or exactions" applicable to the entry. This is also a jurisdictional requirement. See 28 USC 2637(a), if you want to check. That created a second independent reason for the Court of International Trade to dismiss the case.

Lastly, since the protest was an available and not manifestly inadequate avenue for relief, the plaintiff could not rely on the Court's residual jursdiction (28 USC 1581(i)) to get into Court.

5 Minutes to Kick Off

Surprisingly, I finished this up before kick off. Enjoy the game, the commercials, and Madonna.