Thursday, April 13, 2017

Surprise, Locking Pliers Are Not Wrenches

Tariff classification is based on the common and commercial meaning of the words used in the Harmonized Tariff Schedule of the United States. One of the words that has been in dispute of late is "pliers" as applied to locking pliers. To picture the product at issue, think about Vise-Grips®, which is a registered trademark of Irwin Tools, the plaintiff in this case.

An older Court of International Trade case under the prior Tariff Schedule of the United States ruled that locking pliers are classified as wrenches. The reason for this was that people use locking pliers to lock onto a nut or bolt head and to turn, or wrench it. Because people use the tool to apply torque to the nut or bolt, the CIT ruled it is, despite its name, a wrench.

In the Irwin case, the CIT made two important decisions. First, it held that the prior TSUS decision did not bind it to a given result in this case. Second, the Court rejected the notion that the way people use the tool is relevant to this classification. Instead, the Court held that "wrench" is an eo nomine description of the item that does not suggest a particular use.

From that basis, the question became, what is the common and commercial meaning of a wrench. The Court concluded that is a tool with a single handle and a working head that is either an open slot or socket that has is shaped to exactly or closely fit a bolt head, nut, or similar fastener.

The locking pliers have two handles and a grasping head that is not specifically shaped to fit a fastener. That means it is not a wrench.

So, what is it? We don't know yet. This decision was on the government's motion for summary judgment. Irwin had not moved for a decision. Consequently, the case was not yet ripe for a final decision. Irwin will need to file a motion for summary judgment, reach a settlement, or use some other mechanism to get to a final judgment.

Tuesday, April 04, 2017

Ruling of the Week: 2017.8: To Drawback, And Beyond!

ORIGINALLY POSTED MARCH 22, 2017.
UPDATED APRIL 4, 2017.


The customs implications of space travel have always interested me. NASA has confirmed, at least according to this article, that astronauts have to make customs declarations on returning to earth. It is not exactly clear to me whether that would be the case for an orbital flight that departs the U.S. and returns to the U.S. without an intervening stop at the International Space Station or elsewhere. In fact, the Apollo 11 customs entry seems to have been something of a joke, even if it was "official."

The future is certainly going to be filled with questions about this sort of thing. What will happen, from a customs-perspective, the first time someone starts a commercial asteroid mining operation? Will we need to expand the notion of "country of origin."

The obvious analogy is to ships at sea. Today, the law is clear with respect to fish caught in international waters. According to the Court of International Trade, in a case called Koru North America v. U.S.:

On the high seas, the country of origin of fish is determined by the flag of the catching vessel. Procter & Gamble Mfg. v. United States, 60 Treas. Dec. 356, T.D. 45099 (1931), aff'd, 19 CCPA 415, C.A. D. 3488, cert. denied, 287 U.S. 629, 53 S.Ct. 82, 77 L.Ed. 546 (1932). In international law, a ship on the high seas is considered foreign territory, functionally, "a floating island of the country to which [it] belongs." Thompson v. Lucas, 252 U.S. 358, 361, 40 S.Ct. 353, 64 L.Ed. 612 (1920). See also Robbins (Inc.) v. United States, 47 Treas. Dec. 261, T.D. 40728 (1925) (fish are characterized by their first taking).
That means an asteroid or portion thereof brought to the earth by a U.S.-registered space vessel will have a U.S. country of origin.

The folks who negotiated NAFTA thought this through. According to Article 415 of the Agreement, "goods taken from outer space, provided they are obtained by a Party or a person of a Party and not processed in a non Party" are considered to be "wholly obtained or produced" in North America. For you NAFTA nerds out there, that means they qualify as originating under Preference Criterion A.

What about going the other way? What if I import some fuel and send it out into orbit? Does that constitute exportation for purposes of drawback? That is the question presented in HQ H282698 (Feb. 24, 2017).

The law permits an importer receive drawback on duties, taxes, and fees paid on imported merchandise that it unused in the united stated and then exported or destroyed within five years of importation. There are lots of documentary requirements and procedures that need to be followed to secure drawback, so don't assume that I just explained all the ins and outs to you.

Merchandise is still unused if it has been repacked or subjected to other operations specified in the law. Again, don't try this at home without getting legal advice. In this case, about 66% of the fuel is loaded onto the satellite to power its thrusters in orbit. The remainder is exported from the U.S. According to CBP, transferring the unused propellant to a container for export is repacking and does not constitute use. It is, therefore, eligible for drawback.

The propellant loaded into the satellite is a different story. According to CBP, it is "used at the moment of its injection into a satellite thruster system." It is, therefore, not eligible of "unused merchandise" drawback.

Customs, however, provides a helpful alternative. It is also possible to secure drawback on imported materials used to manufacture goods in the U.S. CBP has previously applied that to parts of a satellite manufactured in the U.S. and exported to China for launch. That export to China was the relevant export for drawback purposes, not the launch into space. But, other rulings had determined that "merchandise assembled into a communications satellite sent into permanent orbit in outer space" is exported for drawback purposes. In this recent ruling, CBP reaffirmed that decision and held that launch to permanent orbit is an exportation for drawback purposes.


UPDATE:

Yesterday was the brokers exam. I had an opportunity to review the questions and I realized this post might be viewed by some as incomplete. So, let me say that I am aware that 19 U.S.C. § 1484a exempts certain items returned from space from entry requirements.

If you took the test, I am referring to Question 39 about whether goods brought into the customs territory of the United States by NASA from space or from a foreign country require an entry. As I read that provision, it applies to items previously launched into space from the customs territory of the United States and which remain in the control of United States persons on United States owned vessels. It does not exempt items obtained in space and brought into the customs territory of the United States nor does it apply to goods that were launched into space from a foreign country and then brought from space to the U.S. I think the question is a bit of a mess. If the goods were obtained in space or launched into space from a foreign country, I think a formal entry is required; probably a type 52 government entry (but I have not checked that). If the goods were launched from the U.S., and the other requirements of the statute are met, no entry would be required.

Saturday, April 01, 2017

Executive Order on Customs Enforcement

Apparently, the administration has pivoted to its trade agenda. Yesterday, we saw the draft letter to Congress outlining the modest goals for NAFTA renegotiations. I also tweeted the announcement that Kevin McAleenan would be nominated to Commissioner of Customs and Border Protection. The last recent action is the Executive Order issued yesterday "Establishing Enhanced Collection and Enforcement of Antidumping and Countervailing Duties and Violations of Trade and Customs Laws."

What's this about?

The Executive Order notes that as of May 2015, the United States has failed to collected $2.3 billion in antidumping and countervailing duties. Often, the liable importer is a foreign entity without assets in the U.S. or is insufficiently capitalized to pay the duties. Either way, the duties are uncollectable. To address this, Customs imposes bond requirements and, in certain cases, Commerce requires cash deposits of duties. As is, the bonding requirements can be onerous. In some cases, the surety requires cash collateral to issue the bond, meaning the surety is taking no risk and the importer may as well pay the duties up front (if it can). I have personally seen companies put out of business because they could not secure sufficient bonds. That, of course, is the nature of doing business in merchandise that is allegedly unfairly traded and, as they say, a risk of doing business.



What the Executive Order does is require that the Secretary of Homeland Security must develop a plan to require certain importers of merchandise subject to an antidumping or countervailing duty order and who pose a risk to the revenue of the United States to provide security through a bond or other legal measure. The plan must be developed within 90 days of the date of the order.

The new part of this might turn out to be the risk assessment for certain importers. The Order specifies that it applies to "covered importers." These are defined as new importers or importers for which Customs and Border Protection has a record of incomplete or late payment of antidumping or countervailing duties. One obvious concern this raises is that an honest importer who discovers a failure to deposit antidumping or countervailing duties might be penalized for making a disclosure and voluntary tender. The penalty would come in the form of increased bond requirements. The reasonable response to that might be that the importer benefitted from an artificially low bond during the time it was withholding the duties. For similar reasons, this will raise the stakes in post-entry audits where unpaid dumping and countervailing duties are discovered. Clearly, the biggest burden will fall on new importers who will likely see increased bonding requirements.

Also within 90 days, the Secretary must develop a plan "for combatting violations of United States trade and customs laws for goods and for enabling interdiction and disposal, including through methods other than seizure, of inadmissible merchandise . . . ." I am curious what interdiction and disposal methods the government might deploy other than seizure (and the forfeiture that generally follows). There is exclusion and re-exportation, but that does not lead to "disposal."

Regarding the protection of intellectual property rights at the border, the Executive Order requires that the government share, to the extent permitted by law, with rights holders information necessary to determine whether there has been an IPR rights infringement and information regarding merchandise that has been abandoned before seizure. Right now, that information is withheld because CBP treats it as commercial proprietary information. The impact of this might be to allow the rights holders to sue infringers in U.S. courts or to seek exclusion orders from the International Trade Commission.

Finally, the order tells the Attorney General to recommend prosecution practices and allocate appropriate resources to "ensure that Federal prosecutors accord a high priority to prosecuting significant offenses related to violations of the trade laws." This is interesting in that is appears to be focused on criminal violations. I say this because the trade enforcement lawyers who deal with penalty cases are not "prosecutors;" they are in the Civil Division at Justice. Even the Assistant U.S. Attorneys who handle seizures do so in civil matters. Does that mean we can expect more prosecutions of individuals for trade-related fraud and false statements? It seems so.

Keeping in mind that the collection of antidumping and countervailing duties has been a priority enforcement issue for years and that the United States has put significant resources toward the interdiction of products violating U.S. intellectual property rights, this Order seems to be telling CBP: "Keep at it." There is some specific instructions to apply risk assessments to importers of goods subject to antidumping and countervailing duty orders. I suspect, but can't prove, that people at CBP would tell you that the agency was already doing that.

Trump Administration NAFTA Strategy

It appears the U.S. will not be withdrawing from NAFTA. At least not immediately.

Yesterday, a draft letter from the Acting USTR Stephen Vaughn to Congress made its way to the public. The letter notifies Congress of President Trump's intention to initiate negotiations with Mexico and Canada to modify NAFTA. Obviously, this was a big campaign issue for candidate Trump, who declared NAFTA to be a complete disaster for the American people.

The interesting thing about the draft strategy is that it is directed at making manufacturing more profitable "within the trading bloc." The President believes that will lead to job creation in the United States and support rural communities and service providers. The letter partially makes the case for NAFTA by noting that in 2016, the bloc accounted for $1.07 trillion in trade in goods and $139 billion in services. This is a fairly traditional, pro-trade, pro-NAFTA endorsement of the proposition that trade is a net positive.

However, the letter does a quick pivot to focus on the U.S. trade deficits with Canada and Mexico. The letter then states that NAFTA is out of date. Post-NAFTA free trade agreements have addressed modern concerns including digital trade, labor and environmental standards. In the NAFTA, labor and employment were added as "side letters" after the agreement was fully negotiated. According to the letter:

Reviewing these relationships will also demonstrate new leadership by the United States on trade. The very highest standards, the broadest coverage, and the most effective oversight and execution of the agreement's obligations will make the United States, and North America, stronger, a more attractive place to do business and a model for the rest of the world in the 21st century. This will reinforce our shared interests, promote our common values, and reinforce cooperation beyond economic issues to shared bilateral and regional security concerns. We expect to obtain results that improve on previously negotiated outcomes. 

This sounds like a reasonable place from which to start updating an agreement that is more than two decades old. So, what does the administration have in mind? The letter covers a lot of ground, but not in much detail.

Regarding trade in goods, it seems the primary goal is to remove lingering non-tariff barriers to trade in North America. The letter suggests market access between each NAFTA country and the United States. It also suggests addressing permits, licenses, and "and other trade restrictive measures." Textiles and apparel are called out for attention, as is the leveling "the playing field on tax treatment."

With respect to NAFTA rules of origin, the letter states as a negotiating goal:

Seek rules of origin that ensure that the Agreement support production and jobs in the United States, procedures for applying these rules, and provisions to address circumvention that ensure that preferential duty rates under the agreement apply only to goods eligible to receive such treatment, without creating unnecessary obstacles to trade.

Coupled with this, that letter suggests that the NAFTA countries should work together to improve their implementation of the WTO trade facilitation commitments including the transparent, efficient, and predictable application of the customs laws. The fact that the Administration favorably referenced a WTO commitment should give the WTO some satisfaction.

The letter goes on to provide goals relating to trade in services, intellectual property protection, sanitary and phytosanitary measures, and to bring enforceable labor and employment measures within the body of the agreement itself.

While these goals seem to be reasonably consistent with modernizing the NAFTA along the lines of the subsequent U.S. free trade agreements, there are a few more controversial issues raised in the letter. For example, the letter states as a goal establishing a rule that permits government procurement to be conducted in a manner consistent with U.S. law and the Administration's policy on domestic preferences. That might be inconsistent with current NAFTA Chapter 10 and the WTO Government Procurement Agreement.

An area of much concern to many on both the left and the right of the political spectrum is the NAFTA investor-state dispute settlement mechanisms. These are the arbitration panels the NAFTA implemented to settle allegations by an investor from a NAFTA country that a NAFTA failed to provide fair treatment to the investor. "Fair" in this context means consistent with how the country would have treated a domestic investor or an investor from another non-NAFTA party. The standard is "no worse" treatment and "fair and equitable" treatment. Many have suggested that these arbitral panels are an affront to national sovereignty because they penalize sovereign nations for regulating to protect, for example, the environment. On the right, people argue that the investor-state dispute mechanism lets unelected, non-appointed private parties overturn lawful regulations and policy decisions. On the left, people have argued that the mechanism allows corporate interests to overturn reasonable environmental, health, and safety measures. This letter does not do much to quell the fears on either side. It generally seeks to improve procedures, reduce frivolous claims, and ensure that U.S. investors are treated fairly.

Lastly, the letter says the U.S. will seek to completely gut the NAFTA Chapter 19 mechanism for resolving dumping and subsidy disputes. For non-NAFTA parties, challenges to decisions of the Department of Commerce and International Trade Commission relating to antidumping and countervailing duty cases are heard by judges of the U.S. Court of International Trade, who are appointed by the president to lifetime positions. Chapter 19 moved those cases to private arbitration panels. No subsequent agreement has included this mechanism and there is no reason to believe that the U.S. CIT and presumably the Canadian International Trade Tribunal and Mexican courts are not proper venues for judicial review of these administrative decisions. The letter seeks to move them back to the courts.

Overall, this letter is more moderate than I expected from the campaign and post-campaign rhetoric. It's general goal of seeking to modernize NAFTA seems laudable and appropriate. Of course, this is nothing more than an opening notification to Congress. The devil will be in the minutia of details concerning, among other things, rules of origin and customs procedures. There has been talk about some of the complexities of the NAFTA including the limitations on drawback and the automotive tracing rules. The thing to keep in mind is that much of the NAFTA was written in close consultation with the impacted U.S. industries. We have tracing, for example, because the highly integrated North American automotive industry wanted tracing to make it more difficult for non-North American producers to take advantage of NAFTA without making significant investments in the region and in regional suppliers. It is not clear that the industry sees it any different today.

Thursday, March 30, 2017

DiCarlo Lecture at JMLS April 20, 2017

I am proud to be moderating the 15th Annual Dominick L. DiCarlo Court of International Trade Lecture at the John Marshall Law School in Chicago on April 20, 2017.

John Marshall's Center for International Law was kind enough to start hosting this program in memory of the important contributions Judge DiCarlo made to the practice of trade law and to the three John Marshall alumni who served him as law clerks. The program will include a conversation with the Honorable Jennifer Choe-Groves about her transition from government and private practice to a judge of the Court of International Trade. We will also talk about the nature of practice before the specialized court. Following the Judge, there will be two informative CLE panels covering developments in trade compliance. Once will focus on developments in supply-chain risks such as the growing use of False Claims Act cases and changes in U.S. sanctions policies. The second panel will focus on numerous aspects of intellectual property protection at the border by U.S. Customs and Border Protection including the scope of 337 exclusion orders and review by the CIT.


Scope: Aluminum Extrusions and Finished Goods Kits

Understanding the scope of antidumping and countervailing duty orders is critically important for customs compliance professionals. It does a company no good whatsoever to find a low-cost producer of some product somewhere outside the U.S. only to later discover after importation that the merchandise is subject to an antidumping or countervailing duty. Given that antidumping and countervailing duties are often in excess of 30% and have been as high as 300%, this is a potentially serious concern. If Customs and Border Protection discovers the error and the error resulted from negligence, it can collect the unpaid duties plus penalties covering a five-year period. In some cases, that can be enough to bankrupt a small importer.

Before we get into this case, let me dispel a common misunderstanding. CBP "flags" HTSUS classifications that are potentially subject to an ADD or CVD order. As a result, many brokers and importers manage AD and CVD compliance through tariff classification. If the classification is not flagged, then the assumption is that the product is outside the scope of the order. If it is flagged, ADD and CVD (or both) must be deposited. The worst decision is to assign a different tariff classification to the merchandise in an effort to avoid an ADD or CVD order. That might constitute fraud and probably won't work anyway.

The real question is whether the imported item falls within the description of the merchandise subject to the order in the order itself. Tariff classification numbers are provided as a courtesy, for reference. They do not control scope determination.

That brings us to Meridian Products, LLC v. United States, a recent decision of the U.S. Court of Appeals for the Federal Circuit. The case involves the order covering aluminum extrusions from China. This is a broad order that covers any product of the specified kinds of aluminum provided that the product is made by an extrusion process. It generally covers parts and semi-finished articles. The order specifically excludes some finished goods and finished good kits that contain aluminum extrusions. Relevant to this case, the exclusion for finished good kits states that the order:

excludes finished goods containing aluminum extrusions that are entered unassembled in a “finished goods kit.”  A finished goods kit is understood to mean a packaged combination of parts that contains, at the time of importation, all of the necessary parts to fully assemble a final finished good and requires no further finishing or fabrication, such as cutting or punching, and is assembled “as is” into a finished product.  An imported product will not be considered a “finished goods kit” and therefore excluded from the scope of the [Orders] merely by including fasteners such as screws, bolts, etc. in the packaging with an aluminum extrusion product.
Meridian imported "trim kits" consisting of a decorative frame that surrounds, but does not attach to, large appliances like refrigerators and freezers. The imported kit includes the trim pieces, which are aluminum extrusions, a hexagonal wrench, fasteners, and assembly instructions. I think the trim around the oven in this picture is what we are contemplating:

From MeridianProduct.com


Whether this combination of goods is subject to the orders went to the Court of International Trade not once but four times. The CIT ordered three remands to the  Commerce Department for reconsideration. The CIT interpreted the finished goods kit exclusion as meaning that finished goods are excluded even if those finished goods consist only of aluminum extrusions and fasteners. According to the Court, the overall context of the order indicates that the inclusion of fasteners in the packaging of an unassembled finished good does not void the exclusion. Commerce disagreed, but felt constrained to follow the Court, which is why the issue went to the Court of Appeals.

On appeal, the Federal Circuit disagreed with the Court of International Trade. The primary reason being that the order explicitly limits the finished goods kit exemption. The petitioner and Commerce included that language about fasteners to accomplish something, so the Court needed to apply it. In this case, the application of that language indicates that the finished item to be assembled with the fasteners is not excluded because it is nothing more than the aluminum extrusions and fasteners.

The Federal Circuit also said that ignoring the fastener language renders the order meaningless. Similarly, the Court said that the CIT created inconsistency by reading the order to apply to aluminum parts imported individually but not to the same parts when imported as a kit with fasteners.

Personally, I think the source of the disagreement between the CIT and Federal Circuit is how the order treats finished goods. Before talking about kits, the order says:

The scope also excludes finished merchandise containing aluminum extrusions as parts that are fully and permanently assembled and completed at the time of entry, such as finished windows with glass, doors with glass or vinyl, picture frames with glass pane and backing material, and solar panels. 

This means that aluminum extrusions will not be subject to the orders when entered fully assembled as part of something else, like a picture frame. I think, and this is based on nothing other than trying to reconcile the two opinions, that the CIT viewed this as an indication that finished goods are outside the order whether imported assembled or disassembled. Given the language above, would a disassembled picture frame fall within the scope of the order? Yes, because it is not "fully and permanently assembled." The CIT saw the finished goods kit exclusion as taking care of that issue by permitting the disassembled picture frame to enter as non-scope merchandise, just like the assembled picture frame. I don't think the Federal Circuit would disagree with that result.

The problem is how to treat products that are finished goods consisting of nothing but aluminum extrusions and fasteners. Note that the examples above are all more than just aluminum extrusions. They are windows with glass, doors with glass or vinyl, and picture frames with glass and backing. Based on that, it appears Commerce would find Meridian's trim pieces to be within the scope of the order even if imported assembled. Reading the finished goods kit to exclude the disassembled article that would be in the scope of the orders if imported assembled, creates an anomaly that the Federal Circuit has avoided.

This is an important decision for two reasons. First, if you have scope issues, this decision provides an excellent primer on the scope process and how to analyze orders. Second, if you have been importing finished goods kits, you should reconsider your position. To fall within the exception, there should be more than aluminum extrusions and fasteners necessary to complete the product and everything should be in the box. Note that because the tool and instructions and not part of the finished product, they don't count toward the analysis of the exception.


Friday, March 17, 2017

Post ICPA Thanks

Thanks to everyone at ICPA who stopped by to tell me that they read the blog. I don't always pay close attention to the site analytics and I don't have particularly good visibility of who is visiting. Seeing you all in real life is very encouraging. Keep reading. See you in San Diego.

Friday, March 03, 2017

This is a Test: The CPSC Webinar

Because this is the 21st Century, I figured I should try more than one media. Below is the recording of a webinar I conducted with my colleague Chuck Joern.


Consumer Products and Import Requirements from Barnes Global Trade on Vimeo.

Wednesday, March 01, 2017

Holiday Rituals

WWRD U.S. v. United States is exactly the kind of case that makes me love what I do. Much like our recent foray into sunflowers seeds, this case seems to have a simple answer that gets derailed by the law. It has to do with some potentially festive articles, which is also one of my favorite legal topics.

The question here is the classification of several examples of tableware that are decorated with Christmas or Thanksgiving motifs. The items have names like "Old Britain Castles - Pink Christmas" and "12 Days of Christmas crystal flutes." Customs and Border Protection classified the merchandise in various headings based on their composition. The plaintiff protested and asserted that the merchandise is specifically designed and intended for use in conjunction with Christmas or Thanksgiving dinners. According to plaintiff, that makes the correct classification HTSUS item 9817.95.01, which reads:

Articles classifiable in subheadings 3924.10, 3926.90, 6307.90, 6911.10, 6912.00, 7013.22, 7013.28, 7013.41, 7013.49, 9405.20, 9405.40 or 9405.50, the foregoing meeting the descriptions set forth below: 
Utilitarian articles of a kind used in the home in the performance of specific religious or cultural ritual celebrations for religious or cultural holidays, or religious festive occasions, such as Seder plates, blessing cups, menorahs or kinaras . . . .

The history of this provision is interesting. After a lot of litigation, in 2007 the HTSUS was amended to clarify when utilitarian articles are "festive articles" related to holiday celebrations. The amendment added Note 1(v) to Chapter 95, which excludes from Chapter 95 "Tableware, kitchenware, toilet articles, carpets and other textile floor coverings, apparel, bed linen, table linen, toilet linen, kitchen linen and similar articles having a utilitarian function (classified according to their constituent material)."

This change caused a related problem. Changes to the HTSUS are supposed to be revenue neutral. Removing these items from the duty-free provisions of Chapter 95 resulted in an increased rate of duty. To fix that, the ITC added 9817.95.01, which is also duty free and avoids the messy issues of classification as festive articles.

What all that means is that because of Note 1(v), these products cannot be classified in Chapter 95. If they are not classifiable in 9817.95.10, then CBP correctly classified them according to their constituent materials. So, what about 9817.95.10?

A lot of the legal analysis is about breaking down text to find its correct meaning. Doing that to 9817.95.01, we find that merchandise classifiable there must be:

  1. Classifiable in 3924.10, 3926.90, 6307.90, 6911.10, 6912.00, 7013.22, 7013.28, 7013.41, 7013.49, 9405.20, 9405.40 or 9405.50
  2. Utilitarian
  3. Of a kind used in the home
  4. In the performance of specific religious or cultural ritual celebrations for religious or cultural holidays, or religious festive occasions
There was no controversy surrounding the first three elements. The sole question before the Court was, therefore, whether these items are used in the performance of specific religious or cultural ritual celebrations for religious or cultural holidays, or religious festive occasions.

Ask yourself whether Thanksgiving dinner is a specific cultural ritual celebration? It is a specific cultural celebration. That seems to be clear. After all, we all know what that looks like, right?

Normal Rockwell's Freedom from Want
via a Quinta Arts Foundation
But, is the imported tableware part of a "ritual celebration?"

We all have family rituals for Thanksgiving dinner.  Do you have to hide the alcohol before Uncle Abe arrives and starts mixing overly sweet Old Fashioneds? Does Grandpa insist on carving the turkey his special circa 1975 electric carving knife? Does little Jenny come back from Berkeley to lecture everyone on the evils of industrial turkey farming while being the sole person willing to eat her tempeh loaf and non-gmo cranberries? How about when the entire assembled family simultaneously leans back from the table just enough to loosen their belts and newly-tight pants and then moves in for pie? 

I am less comfortable opining on Christmas rituals. I can, however, say with certainty that my personal Hanukkah ritual involves using a curved carrot peeler as an implement to clear candle stubs from the menorah each of the eight nights. Another widespread ritual is the discussion among knowledgeable Jews of exactly the best means of accomplishing that task.  Add to that the ritual second degree burns inflicted on the poor bubbe tasked with frying the latkes or, in fancy households, the sufiganyot. The latter should look familiar to Rustbelt residents who enjoyed paczki this week.

The legal problem is that while those may be rituals in a colloquial sense, they are not rituals in a tariff sense. According to the Court of International Trade, a ritual is "a customarily repeated often formal act or series of acts." That means it is something done the same way, using the same steps, every time. A ritual is essentially scripted and can be reduced to the instructions necessary to accomplish it. That is distinct from the raucous and chaotic family gathering around the Thanksgiving or Christmas table.

That understanding of "ritual" is consistent with exemplars in the tariff item. Seder plates, for example, are part of the ritual Passover Seder. "Seder" means "order" and the important ritual of every Seder is telling the story of the redemption from salvery in Egypt. The event is so ritualized that there is a manual given each participant. 



No matter what crazy things happen at any particular Seder, there is a defined ritual for telling the Passover story. It involves four cups of wine, four questions, and a plate full of symbolic foods. Often, the evening ends with a debate over whether Charlton Heston was better in The 10 Commandments or in The Omega Man, but that is not in the haggadah. 

Plaintiffs in this case lost because the Court of International Trade found that a family dinner is not a "ritual," even when it falls on Thanksgiving or Christmas. In other words, every celebration is not a ritual celebration. With no ritual involved, the dinnerware could not be classified in 9817. 

Note to the tableware industry, you might want to take a lesson from Maxwell House Coffee and start printing instruction books for Thanksgiving and Christmas dinner.


Tuesday, February 28, 2017

Ruling of the Week: 2017.7: Our Lady of Guadalupe in Wood

Customs law is an interesting practice because we get to see all of the interesting things that come into the country. Granted, a lot of it is pieces of machinery, chemicals, and goods for resale. Now and again, something strange or unexpected shows up. Couple that with my belief that the Harmonized Tariff Schedule of the United States provides the legal means of determining important philosophical questions such as whether something is art or is holy. These questions are, sort of, the issue in HQ H136955 (Aug. 6, 2014), which for some reason was only recently published.

The merchandise at issue is the 3/4 round depiction of Our Lady of Guadalupe with surrounding rays of light. The issue is whether this is a statuette or ornament of wood of HTSUS heading 4420, an original sculpture of Heading 9703, or an article for use by a religious institution of HTSUS item 9810.00.25.


The starting place for this analysis is that Note 1(r) to Chapter 44 excludes works of art of Chapter 97. That means the first philosophical question to be addressed is whether the above depiction of Mary is a work of "art" as opposed to a commercial craft. While artists, collectors, curators, and academics might argue that the definition of art is profoundly subjective, Customs does not work that way.

To be classifiable in Heading 9703, the item must be an "original" sculpture, ancient or modern. That excludes decorative items of conventional craftsmanship of a commercial nature. That means the random coconut carved into the head of a monkey is not likely to be "art" by this definition because the workmanship is conventional and commercial. Court cases have held that a statue is original if the artist exercised his or her own aesthetic imagination and artistic conception when creating the work.

It turns out that this image is basically a three-dimensional copy of images dating back to 1531. Stick with me here as I am way out of my comfort zone. In 1531 Mary appeared to Juan Diego. After the event, his cloak was miraculously imprinted with a version of the image depicted in the statue and also "countless" similar depictions. See, for example, this image of Juan Diego from Catholic.org:


And here is the "original:"


You can see that the imported statue does not show a lot of aesthetic imagination or artistic conception. Consequently, CBP declared it to not be "art." Also, there was no evidence presented establishing the identity of an artist who might have exercised some artistic imagination. That prevents classification in 9703.

What about 9810.00.25? This is an interesting question. The tariff item covers:
Articles imported for the use of an institution established solely for religious purposes:
Articles imported for the use of an institution organized and operated for religious purposes, including cemeteries, schools, hospitals, orphanages and similar nonprofit activities staffed and controlled by such institution:
Altars, pulpits, communion tables, baptismal fonts, shrines, mosaics, iconostases, or parts, appurtenances or adjuncts of any of the foregoing, whether to be physically joined thereto or not, and statuary (except granite or marble cemetery headstones, granite or marble grave markers and granite or marble feature memorials, and except casts of plaster of Paris, or of compositions of paper or papier-mâché)  

According to CBP, articles classifiable in this tariff item must be subject to a pre-importation sale to a religious institution. Here, it appears the item may have been sold to a church, but there is a failure of adequate proof. There is an inconsistency between the commercial invoice, which describes a 3/4 round statue, and the purchase order, which describes a fully round statue. Other documents do not list the church as party to the transaction. In addition, the entity listed as the importer is a re-seller of this type of merchandise and maintains an inventory of similar statues. IMports for re-sale would not fall within this tariff item.

As a result, Customs was not convinced that this particular statue was destined for use by a religious institution. Customs, therefore, rejected the possible classification in Heading 9810.

The statue of Our Lady of Guadalupe was, therefore, classified in tariff item 4420.10.00 with a 3.2% rate of duty.


Friday, February 24, 2017

Ruling of the Week 2017.6: Printers vs. Printing Machines

This one will be quick, for lots of reasons. Mostly, I don’t have much to add to the ruling other than a question. The ruling at issue is HQ H128416 (Feb. 9, 2017). It involves the tariff classification of digital wide-format ink-jet printer used to print and cut vinyl graphics for outdoor advertising and similar applications.

The printer is a combination of a printing machine and a cutting machine. As such, the competing tariff provisions are in Heading 8443 (Printing machinery) and 8477 (Machinery for working rubber or plastic). That is the sole question addressed in the ruling.


To resolve the classification, Customs and Border Protection applied Note 3 to Section XVI of the HTSUS, which states in relevant part:

Unless the context otherwise requires, composite machines consisting of two or more machines fitted together to form a whole and other machines designed for the purpose of performing two or more complementary or alternative functions are to be classified as if consisting only of that component or as being that machine which performs the principal function.

According to the importer, the principal function is printing, making the machine an article of 8433. Customs agreed, finding that the machine would not be used solely for cutting but that it might be used for printing without cutting. Customs examined the factors set out in United States v. Carborundum Co., 63 C.C.P.A 98, 536 F.2d 373 (1976), including physical characteristics, channels of trade, expectation of the ultimate purchaser, and recognition in the trade to ultimately agree that this machine is primarily a printer.

OK, so here’s my question: Why not consider this to be an 8471 unit of an automatic data processing machine? In other words, why is this ink-jet printer different than the ink-jet printer on my desk? The difference between 8471 printers and 8443 printing machines was discussed at length by the Court of International Trade in Xerox, which we reviewed here. The ruling states that these are “digital” printers. That means that they function in conjunction with a computer to translate digital data into signals to the printer. The only difference is that they print on large format plastic rather than on paper and they can cut the plastic. Once we determine that printing is the principal function, it seems to me that the cutting becomes irrelevant. What we know from Xerox is that large scale digital printing is still a data processing function. That would make these printers units of ADP machines of Heading 8471.


I am probably wrong for some factual reason not stated in the ruling. Heck, I may be wrong on the legal analysis. My analysis ends up with the potentially absurd result that all digital printers are ADP machines and 8443 printing machines would cover only Gutenberg-style presses and similar analog machines. It would be nice to know whether this was discussed and how it was decided that 8471 is not relevant.

Tuesday, February 21, 2017

Sunflower Seeds

I am falling behind on Rulings of the Week, but not for want of effort. I am keeping up with CIT decisions (more or less). The latest of which is Well Luck Co., Inc. v. United States. The case has to do with the classification of sunflower seeds that have been processed for human consumption. Some have been flavored with spices or other flavorings and dried. All are roasted and salted. The question is the tariff classification, which turns out to be trickier than you think.

The options are HTSUS item 1206.00.00, which covers "Sunflower seeds, whether or not broken." The applicable rate of duty is free and this is what the plaintiff claimed is correct. Customs and Border Protection liquidated the sunflower seeds in HTSUS item 2008.19.90 as "Fruits, nuts and other edible parts of plants, otherwise prepared or preserved . . . not elsewhere specified or included: Nuts, peanuts (ground-nuts) and other seeds . . . ." The applicable rate of duty is 17.9%, which is a significant deviation.



Think about everything you know about classification. In your heart, you already know the answer, don't you? Sunflower seeds are sunflower seeds. They are called out eo nomine in 1206.00.00 and that tariff item covers all forms of the sunflower seed. Easy. On top of that, as between the two, Heading 1206 is more specific in that is covers sunflower seeds. Heading 2008, on the other hand, covers other edible parts of plants not elsewhere specified or included, which is far less specific. Finally, since sunflower seeds are specified in 1206, they cannot be included in 2008.

All of that makes sense.

And yet, your conclusion (and mine) is wrong. Let's try to sort it out.

First off, do not jump to Relative Specificity under General Rule of Interpretation 3(a) until we fully explore the text as required by GRI 1.

Let's agree that if the processed sunflower seeds are classifiable in 1206, they are excluded from 2008. So that is the first question the Court of International Trade had to decide: are processed sunflower seeds "sunflower seeds" for purposes of Heading 1206? Getting the botany out of the way, there was no dispute that the imported product is the edible seed of Helianthus annuus, the common sunflower.

The problem for the plaintiff in this case is that the Explanatory Notes further define sunflower seeds of Heading 1206 as "minimally processed" and having general uses including for the extraction of oil and for sowing. These are not those seeds. They have been processed to add flavoring (even if just salt) and have been heated to an extent that they are no longer suitable for sowing. These are sunflower seeds with the specific use of being a food item. As a result, they are excluded from Heading 1206 and reamin classifiable in Heading 2008.

This conclusion is consistent with the Explanatory Notes. It is also consistent with the overall structure of the HTSUS, which moves from less processed to more highly processed materials. There is no doubt that the imported seeds are more highly processed than similar seeds for oil extraction or sowing. Thus, I don't have much of a problem with this result.

But, I think there is an analytical open question. A few Court of Appeals cases have held that the Explanatory Notes should not be used to impose a restriction on the language of the HTSUS that is not present in the text. See, e.g., Archer Daniels Midland v. U.S. Is that what happened here? Is there an answer to this issue that does not violate that principle?

There are no legal notes to Chapter 12 that exclude processed sunflower seeds. There are also no relevant Section Notes. Suddenly, this is a hard case.

The Court resolved this concern by noting that the meaning of the term "sunflower seed" is actually ambiguous. The lexicographical materials submitted to the Court indicate two distinct meanings. First, there are the raw and minimally processed seeds that remain suitable for oil extraction and for sowing. Those seeds may also be used for human consumption. Although not addressed by the Court, it is worth noting that Heading 1206 includes two statistical suffixes for sunflower seeds for "human use." The suffixes are not relevant to classification, but are indicative that some of the seeds of Heading 1206 are edible by humans.

The second meaning of sunflower seeds is in reference to the prepared snack food, which is no longer capable of general use. Having found two distinct meanings, the term is ambiguous and it makes sense and is legally correct to look to the Explanatory Notes to resolve the ambiguity.

That resulted in a substantial duty increase, which is why I suspect the Federal Circuit will let us know whether it agrees with this analysis. Given Archer Daniels Midland and the related cases, it is a close call on which reasonable judges might differ.

Wednesday, February 15, 2017

Who Moved My CAFTA-DR Cheese?

La Nica Products is an odd case. It involves a claim for preferential duty treatment under the US-Central America-Dominican Republic Free Trade Agreement, or CAFTA-DR. The merchandise is cheese from Nicaragua. On its face, one would think that an agricultural product like cheese would satisfy most rules of origin. But, that is not the issue in this case.

The problem here is the identity of the party making the claim. La Nica was listed as the importer of record and made the claim for duty-free treatment. After entry, La Nica, who had been listed as the importer of record, filed a Post-Entry Amendment ("PEA") attempting to change the importer of record to another party. Apparently, the other party purchased the cheese while it was en route. Customs and Border Protection asked La Nica for proof of the sale to the new alleged IOR and for a certificate of origin to support the CAFTA-DR claim. Plaintiff did not respond.

Customs denied the the PEA request and liquidated the entries as dutiable, thereby denying the CAFTA-DR claims as well. Plaintiff protested, and CBP denied the protests.

Under 19 CFR § 10.583(a), an importer may make a claim for preferential treatment under CAFTA-DR. The same regulation notes that a claim may be based on a certificate of origin from the importer, exporter, or producer. CAFTA-DR claims are, of course, subject to verification and can be denied if the Port Director determines that the importer has provided insufficient evidence to verify the origin of the merchandise.

What went wrong here? While the La Nica made the CAFTA-DR claim, it also told CBP that it was not the importer. Having sold the goods in transit, it appears that La Nica was no longer the owner of the goods at the time of entry and, therefore, was not the proper importer of record. Because the CAFTA-DR regulations require the the claim be made by the importer, La Nica is out of luck.

A couple things to remember about this. First, La Nica apparently never asserted that even though it sold the merchandise, it retained the right to make entry. If it retained a verifiable financial interest in the goods, it might have satisfied CBP's liberal interpretation of "owner" for purposes of making entry. That is not addressed in the decision.

The confounding issue here is that someone needs to be the IOR. Customs denied the PEA on the grounds that La Nica failed to prove the in-transit sale. That would seem to indicate a finding by CBP that La Nica still owned the merchandise and, therefore, was a proper importer. Alas, the CIT did not agree. Plaintiff has the burden of proof. In Court, La Nica continued to assert that it had made a successful sale of the cheese. Thus, the evidence before the Court indicated that La Nica was not the owner, which resulted in it being the wrong party to make the CAFTA-DR claim.

That is an example of free-trade whiplash.

Monday, February 13, 2017

Snuggies Are Blankets

[UPDATED TO ADD LINK TO THE DECISION]

Remember Snuggies? A few years back, they were part of the zeitgeist. Here is a reminder of exactly what is a Snuggie.



According to the commercial, Snuggies are wearable blankets with sleeves-like tubes. That raises an interesting classification question. Is it a blanket of HTSUS item 6301.40.00 (8.5%) or is it a garment classifiable in 6114.30.30 (14.9%)? Or, if it is neither, is it an "other made up article?" The Court of International Trade had to decide that question in Allstar Marketing Group v. U.S.

These are important questions in my world. I get that there is a lot going on in the larger world. Lately, I have been inspired and a little shamed watching lawyers who practice in areas affecting the actual lives and liberty of people, particularly refugees and others trying to entry the country. It made me proud to be a lawyer to see my colleagues set up shop at airports to provide assistance. Yesterday, I was at a meeting sponsored by HIAS Chicago at which an immigration lawyer offered pro bono assistance to arriving refugees. Occasionally, we get to undertake projects for individuals and worthwhile organizations, but that is uncommon in my practice. Here is an example of which I am still proud. Happily, I am currently working on a project that I think will serve the larger public, but it is still in the early stages and will not have the direct, personal impact that we have seen from the good work of immigration lawyers.

Now, back to the wearable blanket.

The evidence presented to the Court of International Trade shows that the importer referred to Snuggies as blankets in communications with the producer-supplier. The marketing materials show people using Snuggies in a variety of settings both in the home and outside, including on an airplane and at a sports stadium. Snuggies have sleeve-like tubes attached to allow users (or are they wearers?) to use their arms freely while still in the comparative warmth of the Snuggie.

The Court found that it had all the information necessary to resolve the matter and that there were no material questions of fact in dispute. That means, the only question is whether Snuggies fit within the common and commercial meaning of the tariff terms "garments" or "blankets." Under Note 2(a) to Chapter 63, if Snuggies are classifiable as garments, they cannot be classified as blankets or other textile items.

Tariff item 6114.30.30 covers "Other garments, knitted or crocheted: Of man-made fibers: other . . . ." There is no dispute that Snuggies are knitted of man-made fibers. The question is, are they "garments?" Looking at the structure of Section XI, the Court found that the items specified in Headings 6101 through 6114 are "garments," which is interchangeable with "apparel." Prior court decisions indicate that apparel is articles that "are ordinarily worn--dress in general." These are "clothes and covering for the human body warn for decency or comfort" as well as adornment. The government argued that because Snuggies are worn for comfort, they are apparel. The Plaintiff argued that because they are not worn for decency and adornment, they are not apparel.

The Court focused on the fact that apparel is "ordinarily worn." Specialized items covered by the apparel provisions include aprons, smocks, clerical vestments, scholastic (and presumably judicial) robes, and certain sports apparel. According to the Court, all of these are more akin to apparel than are Snuggies.

The Court then considered the use of the product. For why, see here. Physically, Snuggies are one-size-fits-all items and are open in the back. These characteristics do not resemble the kind of apparel that is "ordinarily worn." Furthermore, Snuggies were "inspired" by prior existing products called "Slankets" and "Freedom Blankets," both of which were marketed as blankets. Finally, the sales and marketing literature refers to the Snuggie as a blanket. According to the Plaintiff, that makes Snuggies improved blankets.

Blanket is defined as a warm covering used especially on a bed or a similar article used as a body covering for warmth. The Snuggie was designed and marketed as a covering for warmth. Since "blanket" is an eo nomine tariff description, it includes all forms of the article, including improved forms. From that, the Court was able to find Snuggies to be blankets (with sleeves). The addition of sleeves, according to the Court, did not so modify the nature of the article to make it something other than a blanket. The sleeves are incidental to the warming cover that is a Snuggie.

Thus, the plaintiff wins (this round) and Snuggies are classifiable as blankets of 6301.40.00.

Sunday, February 05, 2017

Ruling of the Week 2017.5: Copper Scrap

There are a number of Chapter 98 tariff items that permit partial duty exemptions for items of the United States that are sent abroad and returned to the United States. Given the current trade rhetoric, it might be worth explaining why that is the case. After all, why give a benefit to companies that send goods abroad for further processing? The short answer is that the duty exemption encourages the use of U.S. origin materials in manufacturing abroad. After all, if there is going to be manufacturing abroad, the U.S. should encourage that it take advantage of U.S.-origin components and materials. The alternative is to manufacture abroad entirely from foreign components.

The HTSUS item at issue in HQ H281950 (Jan. 26, 2017) 9802.00.60, which provides a partial duty exemption for:
Any article of metal (as defined in U.S. note 3(e) of this subchapter) manufactured in the United States or subjected to a process of manufacture in the United States, if exported for further processing, and if the exported article as processed outside the United States, or the article which results from the processing outside the United States, is returned to the United States for further processing . . . .
To qualify, the metal article must be manufactured in the United States. The question presented in this ruling is whether scrap metal collected from industrial production in the U.S. is "manufactured in the United States." The scrap metal at issue here is copper. The question is potentially complicated by the fact that some of the original copper was domestic in origin while some was originally foreign. Some of the scrap will be derived from production processes. Some will just be collected in the form of obsolete U.S-origin wire.

From exportindia.com


 The tariff does not define "manufactured" in this context. In prior rulings, CBP has held that metal is manufactured when it is subject to operations such as "splitting, annealing, milling, rolling, brushing, and leveling." Here, the industrial scap results from the application of those manufacturing processes to copper. As a result, Customs held that the scrap was also manufactured in the U.S.

Customs has also held that the process of making metal into U.S.-origin products is sufficient manufacturing to allow used, obsolete products to be considered manufactured in the U.S. [Note: I realize that seems self-evident, but that's the fact of the matter.]

Consequently, in this case, all of the goods, when re-entering the U.S. after further processing abroad, qualify for the partial duty exemption. There are, of course, documentation requirements. If you are going to try this, look at 19 C.F.R. 10.9.


IKEA Scope Rehearing Denied

Apparently there is some kind of festival of TV commercials starting in a few minutes. I understand it will be punctuated by grown men playing football for millions of dollars. Consequently, I will make this quick.

Consistent with my New Years Resolution to cover scope and other trade-related issues that closely impact customs compliance, here is a note on IKEA Supply AG v. United States. This is a request for a rehearing of a prior decision in which the Court of International Trade held that certain IKEA towel bars are within the scope of the antidumping and countervailing duty orders on aluminum extrusions from China. The bars are indisputably aluminum extrusions. In each box, there is mounting hardware that does not constitute aluminum extrusions, but which, according to Commerce, are fasteners. Finished goods are excluded from the scope of the orders. In a scope determination, Commerce held that because the finished towel bars are extrusions and that the only non-extrusion parts of the kits are fasteners, the bars fall within the order. In the first IKEA case, the Court of International Trade affirmed that decision.

This opinion involves an effort by IKEA to have the court reconsider its prior decision. Motions to reconsider are not easy to win. The moving party needs to show that there was an intervening change in the law, newly discovered evidence, clear error, or a need to prevent a manifest injustice.

The CIT did not see any of those reasons here. IKEA's first argument was that the Court failed to consider additional non-extruded components of the towel bar sets. The CIT basically said, "too late." These components were not discussed anywhere in the prior record or court proceedings. Thus, the Court would not consider them now. Moreover, there is no reason to believe that IKEA was not aware of these facts.

The second, and more interesting point, is that the CIT did not have the benefit of the CIT decision in Meridian Products LLC v. United States. In that case, another judge of the CIT held that Commerce needs to consider all of the non-extruded part of the kit, including those it considers to be fasteners. Under that test, there is a likelihood that IKEA might have won.

Sadly for IKEA, but legally correct, CIT judges are co-equal and the prior decision of any one CIT judge does not bind a subsequent judge. Technically, one judge does not even bind himself or herself in a later unrelated case. Thus, the intervening change in law raised by IKEA is really not a change in the law, until the Federal Circuit speaks on the issue. Then, it will be a change in the law.

Sunday, January 29, 2017

Ruling of the Week 2017.4: Midwakh from UAE

This is a good week to be talking about trade with the Middle East. I am talking about trade in goods, which is what I do. I don't talk about immigration issues. That's too bad because yesterday was a doozy of day in the history of immigration law in America. Congratulations to the ACLU and everyone who helped secure a stay of the President's order barring entry for people from seven majority-Muslim countries (including those already holding green cards and visas). That was a tremendous effort at ensuring the rule of law, not to mention humane treatment for people who had the bad luck of being on a plane at the moment he signed the order. There were many examples of lawyers showing up at airports around the country to help stranded travelers. Some of them were affiliated with the International Refugee Assistance Project. Both the ACLU and IRAP deserve your support.

That said, I will focus on something entirely superficial: the customs treatment of mewakh pipes.

From Medwakh.com
These are small wooden pipes that, in N257162 (Oct. 3, 2014), Customs and Border Protection described as being "of Arabian origin." That puts me in mind to watch Lawrence of Arabia and makes me wonder why they were not described as originating in the United Arab Emirates, which is what the facts state.

These are pipes traditionally used in the region to smoke dokha, which is a blend of tobacco, other leaves, bark and herbs. Dokha can also be flavored with fruit.

According to Customs and Border Protection, the pipes are classifiable in 9614.00.2500, not surprisingly, as "smoking pipes . . . of wood . . . ."

In the ruling, CBP made a couple useful observations. First, dokha of Iranian origin is probably subject to sanctions and not admissible into the United States. That seems to have been a complete aside as there is no indication that dokha was the subject of the ruling. But, I am not being sarcastic, that extra bit of information may have been useful to the ruling requester.

Second, CBP noted that the importer might want to look into whether the medwakh constitute drug paraphernalia, which would also not be admissible. Under 21 U.S.C. § 863, it is unlawful to sell or transport drug paraphernalia. But, under subsection 21 U.S.C. § 863(f)(2), the prohibition does not apply to “any item that, in the normal lawful course of business, is imported, exported, transported, or sold through the mail or by any other means, and traditionally intended for use with tobacco products, including any pipe, paper, or accessory.” That standard has come to mean that Customs looks to whether the imported item is primarily intended for use with illegal drugs, including a review of the labeling, instructions, marketing, display, etc. Under that standard, a mirror might be treated as drug paraphernalia if it is etched to depict razor blades, tiny spoons, and rolled dollar bills. [Note to my parents: The only reason I thought of those particular items is because I have seen Scar Face one too many times. Really.] For more on this, see HQ H150766 (Mar. 8, 2011)(holding that hookas area not drug paraphernalia).


Sunday, January 22, 2017

Ruling of the Week 2017.3: Indirect Materials

I do a lot of NAFTA-related work. At least I do this week. It remains to be seen whether that changes soon. Secretary of Commerce designee Wilbur Ross told the Senate committee considering his nomination that his top priority would be renegotiating NAFTA. So, this may all change. As we sometimes have to tell clients, the situation is fluid.

In the meantime, the NAFTA rules of origin continue in place. Often, for a product to qualify as originating, it must have a Regional Value Content of 50% when calculated with the net cost methodology or 60% when calculated with the transaction value methodology. There are exceptions, especially for automotive products. You need to check the rule applicable to your product in HTSUS General Note 12.

Sometimes, producers are close but cannot hit the required RVC. There are a few means provided in the regulation for adding to the RVC. One of the best is the designation of a self produced material as an intermediate material. HQ H273100 (Jan. 6, 2016) is a good example of how that works.

The producer was making starter motors for lawn tractors in Mexico. As part of that process, it also made the DC motor at the heart of the starter motor assembly. The starter motor is classified in 8511.40.00 and is subject to an RVC requirement because not all of the non-originating materials make a required tariff shift under the applicable rule.

The DC motor is classified in 8501.32. If the producer thinks just about the finished motor assembly, all of the non-originating materials in it make a qualifying change in tariff classification. That means the motor would, if certified separately, qualify as originating.

The useful thing to know here is that Part III, Section 6(4) of the NAFTA Rules of Origin Regulations provides (in relevant part):

Except as otherwise provided in section 9 and section 10(1)(d), for purposes of calculating the regional value content of a good under subsection (2) or (3), the value of non-originating materials used by a producer in the production of the good shall not include

the value of any non-originating materials used by the producer in the production of a self-produced material that is an originating material and is designated as an intermediate material.

As a result, and as Customs and Border Protection confirmed in this ruling, the value of non-originating materials used in the production of the motor are not counted toward the value of non-originating materials when doing the RVC calculation for the starter motor. It does go in the net cost. That means, the total value of the motor is treated as originating, despite containing non-originating materials.

This rule makes perfect sense. The motor sub-assembly could have been purchased from a third party. If that third party used exactly the same supply chain and production process, it would have been able to certify the motor as originating. The purchaser of the DC motor would not have been penalized for any non-originating material in the motor. The intermediate material rule recognizes that a vertically integrated manufacturer should not be at a disadvantage.

The wrinkle here is for automotive goods. The references in the regulation to section 9 and section 10(1)(d) cover that. For light-duty automotive goods, the net cost methodology is modified to require a higher RVC and "tracing." Tracing means that the value of non-originating materials includes the value of certain designated materials, even if they are in a sub-assembly. That non-originating value must be captured and brought forward for the RVC calculation. A similar limitation applies to heavy-duty automotive components, component-assemblies, and sub-components.

If you are having trouble getting to the required RVC, look for self-produced sub-assemblies in your bill of materials. There may be enough value there to get your product over the hump.

Sunday, January 15, 2017

Lock Washers: Scope and Suspension

Here, we continue our dive into the intersection of customs and trade law. The Court of International Trade decision in United Steels and Fasteners, Inc. v. United States, raises interesting issues about how scope decisions from the Department of Commerce impact customs entries awaiting liquidation. If you are a traditional customs compliance professional who does not often delve into trade questions, buckle up. This will be bumpy.

This case involves the antidumping duty order on Helical Spring Lock Washers from China. The scope of this particular order covers:

circular washers of carbon steel, of carbon alloy steel, or of stainless steel, heat-treated or non-heat-treated, plated or non-plated, with ends that are off-line. HSLWs are designed to: 1) function as a spring to compensate for developed looseness between the component parts of a fastened assembly; 2) distribute the load over a larger area for screw or bolts; and 3) provide a hardened bearing surface. The scope does not include internal or external tooth washers, nor does it include spring lock washers made of other metals, such as copper. The lock washers subject to this investigation are currently classifiable under subheading 7318.21.0000 of the Harmonized Tariff Schedule of the United States (HTSUS). Although the HTSUS subheadings are provided for convenience and customs purposes, our written description of the scope of this investigation is dispositive.
The order was first published in 1993.

In 2013, American Railway Engineering and Maintenance-of-Way Association ("AREMA") submitted a scope clarification request to Commerce concerning a specialized type of washer made to its own standards. These washers have modest helicality, a square or rectangular cross section, do not meet the ASME standards referenced in the ITC Report in this case, are specifically for railway use, and (among other things) are 50% to 130% thicker than typical helical spring lock washers. Shakeproof Assembly, the petitioner in the original dumping case and a defendant intervenor in the CIT, responded to the scope request arguing that the washers are within the scope of the order and, furthermore, requesting that Commerce instruct Customs to suspend liquidations and request cash deposits for all unliquidated entries back to the start of the administrative review.

Commerce ultimately held that the washers are within the scope of the order. Commerce also ordered Customs to retroactively suspend liquidations back to the date of the order.

This raises two obvious questions. First, is Commerce right about the scope? Second, should Customs have retroactively suspended liquidations?

The Scope Part

Petitioners and Commerce cannot always specify exactly what merchandise comes within the scope of an antidumping (or countervailing duty) order. Orders tend to specify some products and include general terms to catch similar products. When an interested party needs certainty about a product, it may apply to Commerce for a scope clarification under 19 CFR 351.225. In some cases, Commerce will decide the scope issue on the basis of the language of the order under 19 CFR 351.225(d) without commencing a formal inquiry. If that is not possible, Commerce can initiate a formal scope inquiry under 19 CFR 351.225(e).

If an interested party disagrees with the scope determination, it can challenge the decision in the Court of International Trade. The Court will uphold a scope determination that is supported by substantial evidence on the record. That is a highly deferential standard that means the Court may have to uphold a Commerce Department decision even if the judge disagrees with the result. Generally, these decisions can only be overturned where there is a lack of evidence in the administrative record to support them.

Commerce found that the AREMA washers are helical spring lock washers and that the distinguishing characteristics were not sufficient to remove them from the scope of the order. According to Commerce, the design and function of the AREMA washers minimalize helicality [Note: that is a phrase to consider] but did not strip them of their helical function. Commerce was helped in this regard by language in the petition noting that a "significant portion of the larger sizes [of helical spring lock washers] are used for installation of railroad tracks." That seems to be directly addressed at AREMA's product.

Plaintiff raised a number of arguments to show that Commerce's decision was not supported by substantial evidence. First, the fact that these washers are made to AREMA standards, rather than the more common ASME standard. This was not sufficient given that the administrative record shows no requirement that in-scope washers be made to any industry specification. Similarly, the fact that helical spring lock washers generally have a trapezoidal cross-section is not an exclusion of washers with other cross-sections. The Court also found that record evidence supports Commerce's finding that the unique thickness-to-diameter ratio of the AREMA washers did not remove them from the order. In the end, the Court rejected Plaintiff's arguments and found that Commerce's determination was based on substantial evidence in the record. So, the AREMA washers are in scope.

The Liquidation Part

To a degree, that is all background to the second question. To my mind, this is the more interesting part.

Having found the washers to be in scope, Commerce instructed Customs to suspend liquidation of unliquidated entries of AREMA washers as far back as 1993, when the order was first entered. As a practical matter, that means newish entries that have not liquidated and entries subject to an existing injunction. According to the Court, this means entries between October 1, 2011 and September 30, 2013. If this retroactive application of the scope determination is correct, this is the kind of unanticipated potential liability that keeps importers awake at night.

Under the Commerce regulations, specifically 19 CFR 351.225(l)(3), if products are found to be within the scope of the order, Commerce is to instruct Customs to suspend liquidation and to require a cash deposit of estimated duties, "for each unliquidated entry of the product entered, or withdrawn from warehouse, for consumption on or after the date of initiation of the scope of inquiry." In this instance, there was no formal scope inquiry initiated under § 351.225(3). Commerce decided the issue on its own under § 351.225(d). According to Commerce, that means the regulation does not address this exact fact pattern and Commerce can instruct Customs to suspend liquidation back to the date of the order.

The CIT disagreed. First, the history of the regulation makes it clear that suspension of liquidation is a serious step that can have significant consequences for importers and foreign exporters and producers. But, the domestic industry is entitled to the protection of the order for all in-scope merchandise. To balance these interests, Commerce set the date of potential suspension as the date of initiation of the scope inquiry. Thus, while not addressing this circumstance, it is clear that Commerce intended the potential period of subject entries to be limited. Looking to a prior CIT decision, the Court found that Commerce is limited in its authority to request the suspension of duties, regardless of the formality of the proceeding. The Court of Appeals similarly limited Commerce's authority in scope inquiries to after the date of initiation. Without these limits, Commerce would always be able to request suspension retroactive to the date of the order simply by choosing to forgo a formal scope inquiry under 351.225(e) in favor of an informal proceeding under 351.225(d).

Commerce made a good argument that its decision in this scope case was the equivalent of a finding that the AREMA lock washers were always within the scope of the order. By limiting the ability of Commerce to request suspension back to the date of the order, the Court is allowing in-scope merchandise to escape the lawful order. That is true. But, the Court noted, Customs had not identified these products as in-scope. The importer saw the question as uncertain and, therefore, took the correct step of seeking a scope clarification. Under these circumstances, the importer is entitled to rely on Customs' treatment and not have liquidations suspended and cash deposits collected until after the (admittedly informal) scope inquiry was commenced. The exact timing of which remains to be seen. The Court remanded to Commerce to issue new instructions consistent with this decision.

This is a good result for importers of merchandise that is found to be within the scope of an order after entry. The potential liability for antidumping and presumably countervailing duties is limited to unliquidated entries made on or after the date of the scope inquiry. But, do not read too much into that. This is not a Customs penalty case. In theory, Customs can still find that the importer's failure to deposit dumping duties was the result of negligence, gross negligence, or fraud and impose a penalty in addition to collecting duties. Given that customs penalty can be two times the amount of the duties owed for simple negligence, it is possible that a customs penalty will fair outstrip the unpaid duties to be owed as a result of a properly timed suspension of liquidation. On the other hand, if the importer exercised reasonable care (and can prove it), then liquidated entries are final and no penalty would be appropriate.


Saturday, January 14, 2017

What the Frak?

Spin up the FTL drive and meet me in the CIC, the Federal Circuit has issued its first 2017 decision in an appeal from the Court of International Trade.

Here is the sitrep: The case in question is Schlumberger Technology Corp. v. United States. The merchandise in question is bauxite proppants. These are the bits of granulated bauxite used in hydraulic fracturing operations to hold open cracks in the rock structures and, thereby, allow for the efficient extraction of oil and gas . In other words, these little bits of bauxite "prop" open the cracks. The proppants are produced from bauxite ore taken from the earth (or, in Hebrew, "Adama") and milled to a powder then granulated to produce larger particles. The particles are sorted by size, dried and kiln fired.

Customs classified the proppants in HTSUS Heading 6909 as "Ceramic wares for laboratory, chemical, or other technical uses; ceramic troughs, tubs, and similar receptacles of a kind used in agriculture; ceramic pots, jars and similar articles of a kind used for the conveyance or packaging of goods . . . ." Schlumberger countered that the correct classification is in  Heading 2606 as "Aluminum ores and concentrates . . . ." During litigation, the government proposed an alternative classification in 6914 as "Other ceramic articles."

Cutting to the chase, the government can only win this case if the bauxite proppants are ceramic wares or other ceramic articles. HTSUS Note 1 to Chapter 69 states that the Chapter covers "ceramic products which have been fired after shaping." Looking to a dictionary, the Federal Circuit held that shaping means "to give a particular or proper form to by or as if by molding or modeling from an undifferentiated mass" or "to give definite or finished shape to  . . . ." The Federal Circuit then noted evidence that the finished proppants vary in size by as much as 100%. This, according to the Court, does not equate to have a definite or particular shape. Thus, the merchandise would be excluded from Chapter 69.

Another important argument that supports the same conclusion is based on the legal principle of noscitur a sociis under which we determine the meaning of the word by looking at the words around it. So, what are the examples of ceramic items included in Chapter 69? We see troughs, tubs and similar receptacles; ceramic pots, jars and similar articles; mortars and pestles; beakers; letters, numbers, and sign-plates; and heating apparatus. All of which are products of a definite form and are quite unlike the bauxite proppants of varying size. This argument, therefore, is old-school felgercarb.

What about Heading 2606? The HTSUS does not define "aluminum ore." However, Note 2 states that "ore" refers to "minerals of mineralogical species actually used in the metallurgical industry for the extraction of" certain metals including aluminum." But, the note makes clear that material may still be an ore "even if [it is] intended for nonmetallurgical purposes." I wonder why that last point was necessary since aluminum ore is an eo nomine term, making its use almost irrelevant. Bauxite is the mineral from which aluminum is extracted. A significant amount of aluminum probably goes into making these.

The Note, however, excludes products that "have been submitted to processes not normal to the metallurgical industry." Normal processes include crushing, grinding, screening, agglomeration into grains, and drying. These describe the process of making proppants. The fact that the steps were not related to the extraction of aluminum does not matter to the outcome. Nothing in the note requires that the processes be for the purpose of extracting metal from the ore. Lastly, contrary to the government's argument, Heading 2602 is not, by its terms or any other authority, limited to ores in primary forms as opposed to ready to use finished products such as proppants.

How did the government react to this result? My guess is something like this:





Friday, January 13, 2017

Ruling of the Week 2017.2: Emergency War Material Covers Failed NAFTA Claim

I like this ruling. It is HQ H273101 (Nov. 4, 2016).

This is a case where the importer made a NAFTA claim. When asked by Customs and Border Protection, the importer either could not or just did not support the claim. It happens. Sometimes, subsequent review turns up a problem with the NAFTA documentation. Sometimes, the broker should not have made the claim to start with. Lots of things happen in the real world.

This particular product is a multi-sensor electro-optical surveillance and targeting turret from Canada. As you might imagine, a multi-sensor electro-optical surveillance and targeting turret is a piece of military equipment. When the NAFTA claim failed, the importer asserted that the merchandise is entitled to duty-free entry as war material certified as such by a military procuring agency under HTSUS item 9808.00.30. It submitted the necessary certificates.

Customs liquidated the entry at the applicable 4.5% rate of duty and the importer protested. Customs granted the protest. It noted that in the absence of willful negligence or fraudulent intent, the importer can, prior to liquidation, submit documents to support a claim for free or reduced duties. The regulation that supports this is 19 CFR 10.112. Note that the regulation allows for the documents to be submitted even after liquidation but before the liquidation is final. That is a narrow window of 90 days following liquidation. See 19 USC 1501.

Why do I like this rulings? It is not just because the importer won. It is also because the importer, or its counsel, took a step back from a problem, surveyed its options, and found a creative solution. I also like it because it reaffirms for importers and brokers that the filing of the entry is not necessarily the end of the process. If there is a better option or a way to reduce duties after the entry summary has been filed, go ahead and submit the appropriate documents. There is money to be saved, go save it.

Thursday, January 05, 2017

Ruling of the Week 2017.1: Geeks Will Eat Anything

It is a new year and a lot has changed in the world. People in my field are either excited about the possibilities of major changes in trade policy or are horrified by the possibilities of major changes in trade policy.

I have had several calls about whether the U.S. will withdraw from NAFTA, impose new duties on goods made in Mexico by U.S.-based companies, and raise tariffs on goods from China. My answer so far has been, "I wish I knew." The new President and the new Congress will have a lot of authority under domestic law. The bigger questions will relate to how our trading partners respond. The U.S. has agreed many times to hold or lower duties. Going back on those promises will mean violating WTO obligations and multiple free trade agreements. Some people may not care. The U.S. remains fully sovereign and can violate any international agreements it choses. As a former partner used to say, "The WTO has no army."

But, the WTO has the ability to authorize trade retaliation. That means our trading partners will likely raise tariffs on U.S. goods in retaliation for stiffer U.S. tariffs. That makes it harder for U.S. companies to export. Add to that the impact of U.S. tariffs making it harder to import. We could end up with a situation in which domestic producers face higher costs for imported raw materials and components and then can't export their finished goods. That is a bad scenario.

Despite those two paragraphs, I tend to be an optimistic person by nature. I don't really expect the professionals who will be running White House trade policy and Congress to brazenly flout trade agreements and obligations. I don't think anyone wants to start an old fashioned trade war. But, as I said, I can't see the future. It's possible.  We all need to be watching closely. No matter your business needs and policy desires, this is a good time to make sure you have your Senators and Representative on speed dial.

Happy New Year. 2017 will be interesting.

Which brings me to the ruling of the week, N126516 (Oct. 19, 2010), in which we learn that human beings will eat just about anything. In this case, we are talking about snacking on arthropods.

Item 1: Giant toasted leafcutter ants.

Via Wikipedia
Item 2: Oven-baked tarantula spiders.

Also Via Wikipedia
According to the importer, the ants are "grown specially for human consumption" and have a "nutty, bacon-like taste." The spiders, on the other hand are "crisp, crunchy, ready-to-eat snacks." The importer also requested a ruling on scorpions that have been farm raised, detoxified, and are uncooked. For whatever reason, CBP decided it was lacking the necessary information to rule on that tasty snack.

The actual classification of the ants and spiders did not seem to controversial. These are food items prepared and packaged for human consumption. There not being a more specific place these delicacies, CBP classified them as "other prepared or preserved meat, meat offal, or blood." When canned, the classification would be 1602.90.9080; un-canned it is 1602.90.9080.

The importer here is a company called Think Geek Inc. I believe this is its website. Let me just say that this is right in my wheelhouse. I would like one of these and this and this (XL) and even this. Take all my money. I might even trade tariff classifications for gift cards. What I don't want is to eat tarantulas. And, yes, I am fully aware that arthropods provide a valuable source of protein and calories. The fact of the matter is that I get too many calories as it is. Unlike Chicago-mix popcorn and frozen yogurt, I can pass up the spiders and ants.