TR International: Burdens and Remedies in Scope Case

Country of origin continues to be in the spotlight as Customs & Border Protection exercises its enforcement authority for Section 301 duties on products from China and also on products subject to antidumping and countervailing duties. A lot of the discussion has been around China and what needs to be done to a product to legally establish another country as the origin. This is useful to avoid the up to 25% duties imposed on these products. But, the same considerations apply in the antidumping and countervailing duty context except that the stakes can be much, MUCH greater. It is not uncommon to see deposit rates and assessments rates in excess of 100%. In one case, as much as 1300% (I'm look at you, mattresses). The recent Court of International Trade case TR International Trading Company v. United States, looked like a vehicle to address some of these cases but ended up focusing more on CIT practice than on origin.

The case involves citric acid imported from India, where it was made from inputs of unknown origin. CBP determined that the production process did not constitute a substantial transformation in India. That means the final product retained the origin of the inputs. Somehow (more on this later), CBP divined that the inputs originated in China, making the citric acid from India subject to the AD and CV duties applicable to citric acid from China.

Unfortunately, the decision does not resolve the origin of the merchandise. That is too bad because the CIT really needs to take another look at substantial transformation and how CBP interprets its reasoning. Otherwise, bad things will continue to happen.

The TR International decision is all about jurisdiction and process. Before we get into the legal weeds, we need to set the context. The case starts with some back and forth with a CF-28 Request for Information and CF-29 Notice of Action in which CBP informed the importer that it planned to liquidate the merchandise as subject to the ADD/CVD orders. Part of that debate was whether TRI had responded to a CF-28. Ultimately, TRI proved that it had made a timely response, which was helpful. Always respond to requests from CBP in a timely way and always create a record.

CBP's trade people (in this case meaning the Pharmaceuticals Center of Excellent and Expertise and the National Import Specialist) concluded that the production process in India did not constitute a substantial transformation. At about the same time, the CBP Laboratory also concluded that the inputs were not substantially transformed in India. Relying on that report, the PCEE concluded that the citric acid was not a product of India and advised that the entries should be liquidated as subject to the ADD/CVD orders.

Let's be clear about what happened here. CBP only determined that there was no substantial transformation in India. If we assume that is legally correct, how do they arrive at China as the country of origin? It is plainly stated in that origin of the inputs is unknown. Does CBP get to set the country with the highest rate of duty as the default origin unless the importer shows otherwise? Well, probably yes but maybe not. It depends on how the case is brought, which turns out to be the main issue here.

The Court of International Trade is a court of special and limited jurisdiction. This means that it can only resolve cases that have been assigned to by Congress and only within the terms of that assignment. This includes challenging a protest Customs has denied. 28 USC § 1581(a), certain Commerce Department decisions (including the scope of ADD/CVD orders), 28 UC § 1581(c), and other cases involving revenue from imports, tariffs, duties, and other fees and the enforcement and administration thereof. 28 USC § 1581(i).

Plaintiff brought this case to the Court of International Trade under 1581(i). The tricky thing about an (i) case is that the plaintiff needs to be able to prove that it could not have proceeded under one of the other more specific sections of the statute or that the relief available there was "manifestly inadequate." The United States moved to dismiss this action on the grounds that TRI could have filed a protests challenging the origin determination and then filed an (a) case if CBP denied the protest. TRI could also have asked Commerce to weigh in on the origin question through a scope ruling, which would then be subject to judicial review review under (c).

For its part, TRI argued that had it sought a Commerce Department ruling, it would not have been able to protest the result. That's true. Further, it stated that because TRI does not know the origin of the input materials, it could not submit a complete scope ruling request. Finally, TRI contended that a scope determination would only apply prospectively and would not have resolved the issue with respect to the subject entries. This is potentially true but only if Commerce determines that the orders are not clear on the issue. Furthermore, any scope ruling would apply to the suspended entries, which includes the entries in this case. 19 CFR § 351.225(l)(1).

With respect to the potential for a protest, the Court found that the factual determination by Customs when it liquidated the merchandise are protestable under 19 USC § 1514(a). In fact, if the scope of the order clearly excludes the merchandise, a scope determination by Commerce should not be necessary. Thus, TRI had a remedy under the denied protest review process of § 1581(a). That right there was probably fatal to this case moving forward.

TRI could also have asked Commerce to rule on whether the merchandise was within the scope of the order. It did not do that either. Had Commerce issued ruling holding the merchandise to be in scope, TRI could have proceeded in the Court of International Trade on the basis of § 1581(c). That alone, would also be fatal to this case.

As a result of the availability of other remedies, the Court held that TRI had improperly brought the case under § 1581(i), the Court's residual jurisdiction. Thus, the case was dismissed.

But, what else is going on here? Why did this get as far as it did in this posture? Let's be clear that everything that follows is my speculation. I was not involved. But, I have been around the trade litigation block more than once.

With respect to the protest, TRI claims to not know the origin of the raw materials. In a protest, the burden would be on TRI to prove the origin. It appears that the fundamental dispute was not about whether the processing resulted in a substantial transformation. If TRI could not prove the origin of the materials, it would lose the protest. It could then go to Court where Customs' determinations enjoys the presumption of correctness and TRI would have the burden of convincing the Court that the origin of the materials is something other than China. It apparently could not do that, so a protest is not going to work.

What about a Commerce Department ruling request? We again assume that TRI cannot prove the origin of the materials and that the processing in India is not a substantial transformation. What is Commerce going to do? Well, I honestly do not know. My guess is that it would ask some questions and then reject the request as incomplete. That would leave the decision with CBP. If Commerce did rule that the country of origin was China, the CIT would uphold that decision as long as it found substantial evidence in the record to support the conclusion. "Substantial" is not a high bar; it really means "something" as long as that something is not overcome by the the remaining evidence. That is a high bar for plaintiffs.

A case brought under 1581(i), on the other hand, is reviewed on the basis of the Administrative Procedure Act. 5 USC § 702. Under this standard, the Court will reject a conclusion that is arbitrary, capricious or an abuse of discretion.

What did Customs do in this case? First, it questioned the origin of citric acid that was indisputably made in India. Next, it held that the production process in India was not enough to establish origin if the key components did not originate in India. So far that is logical enough. Next, Customs decided that of the entire universe of chemical companies making the inputs to citric acid, the suppliers in this case must have been in China. How did it get to that conclusion? On what facts did it rely? Was that decision based solely on the existence of the ADD/CVD order and TRI's apparent inability to show that the inputs came from anywhere other than China? Without more, I could see making the argument that CBP was being arbitrary when it assigned the highest possible duty to the product without any proof that it actually originated in China. I suspect that TRI was hoping the judge would see it that way as well and send it back to the agency for a different result.

Had the case gone beyond the motion to dismiss, it is possible the Court might have reached that decision. The government would likely have raised questions about whether TRI was being forthright and that the lack of evidence is in itself evidence of something. That might have been the basis for a decision that meets the arbitrary and capricious test. But, alas, unless this decision is reversed we will never know.


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