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Interest Not Due on Delayed Drawback Refund
05/02

Confirming once again that statutes are to be interpreted in accord with their terms, the Court of Appeals for the Federal Circuit confirmed a Court of International Trade decision finding that Hartog Foods International, Inc. was not entitled to a payment of interest simply because Customs failed to refund drawback eligible duties in a timely fashion. Both the lower court and the appellate court pointed out that drawback refunds are not the types of collections described in 19 U.S.C. 1505 and, therefore, since there is no provision in 1505 for the remittance of interest by the government in conjunction with drawback refunds, Hartog was not entitled to any interest payment. See Hartog Foods International, Inc. v. United States, Case No. 01-1220, decided May 17, 2002.

Government Changes Abound
04/02

While much has been said about merging the border inspectional agencies into Homeland Security and perhaps aligning them under the Dept. of Justice, other changes are also coming. For example, the Bureau of Export Administration (BXA) has been renamed the Bureau of Industry and Security (BIS). This agency grants licenses and enforces the laws over a wide variety of goods sold by American companies for export from the U.S.

The Federal Aviation Administration is also undergoing changes. Some of its literature renames it as part of the Transportation Security Administration.

Then there is C-TPAT. Customs has officially kicked off the Customs-Trade Partnership Against Terrorism with a press conference in Detroit. Of note is the charter member companies - BP America, Daimler Chrysler, Ford Motor Company, General Motors Corp., Motorola, Inc., Sara Lee Corp. and Target.

One of the requirements to participate is an importer must be considered low risk by Customs. In response to criticism that such a requirement was keeping many willing participants out of the program (not everyone has enjoyed a Customs audit!), Customs is looking at ways to qualify companies as low risk without requiring them to go through an audit. At the same time, Customs has approached about 200 importers already designated as low risk and invited them to join. The one meaningful carrot Customs is holding out to participants is expedited cargo release through the use of dedicated commercial lanes and reduced inspections. While there remains serious question as to whether such benefits can be extended to those who trade across the U.S.-Mexico border (at least in the near future), C-TPAT is further evidence that Customs continues to try to respond to the needs of the trade and the country with a variety of innovative programs. For more information about C-TPAT, check the Customs web site at www.customs.treas.gov.

Duty on Steel
04/02

In response to the confusion which exists regarding which increase amount is to be imposed of what steel product, Los Angeles Customs has issued Public Bulletin 02-010. It provides in question and answer format some clarity about this confusing situation. What it also includes is a summary from the materials the U.S. Trade Representative issued about the products which are included and those which are excluded.

Freight Charges Deduction Revisited
04/02

At one point, in exercising reasonable care, Customs instructed importers to use $2.00 as the figure to declare when the value of a shipment included international freight but the exact amount of the freight was not known. The purpose of the $2.00 figure was explained as a means to flag for Census (which gathers trade statistics) that freight was included in the value of a shipment but was not deducted. According to Customs, that request has been withdrawn by Census so importers are no longer allowed to make the $2.00 arbitrary deduction. Importers remain obligated, however, to insure the accuracy of their freight deductions and also to make sure they can properly support those deductions with appropriate records.

Fax Power of Attorney Approved
04/02

In a move hailed by customs brokers as recognition of how business is really being done, Customs issued 222743 back in 1991. Customs brokers have long been stymied by the conflicting problems of responding to the need to clear freight quickly while at the same time making sure the importer provides them with an original and properly completed and executed power of attorney so as to not run afoul of the Customs regulations.

In the ruling request, it was pointed out to Customs that 19 C.F.R. § 111.23(d) requires the original power of attorney to be retained. However, it also allows the copy to be retained. Based on the literal language of that regulation, Customs agreed that retention of a faxed power of attorney complied with the regulatory requirements. Customs also went on to point out that while the agency may accept a faxed copy as adequate, it rendered no opinion as to whether a court would do likewise. Therefore, importers should not be surprised if brokers continue to insist that the original power of attorney be immediately completed, executed and returned.

Steel, Steel Everywhere, But Was Enough Done to Make a Difference?
03/02

While an avowed free trader, on March 7th, President Bush announced safeguard measures intended to assist the U.S. steel industry to compete in the global marketplace. Imports from Canada, Mexico, Jordan and Israel were excluded. The text of the President’s announcement along with other details can be obtained at http://www.whitehouse.gov. Information is also available from the U.S. Trade Representative’s web site at http://www.ustr.gov.

The safeguards exclude certain sources of steel products, i.e., those from what are described as “developing countries” which are WTO members, provided the quantity of products imported from an individual developing country does not exceed three (3%) percent of imports, or the developing countries as a whole do not account for more than nine (9%) percent of all imports. Exempt from the safeguards are such countries as Argentina, Bulgaria, The Czech Republic, Hungary, India, Indonesia, Moldova, Poland, Romania, Slovakia, South Africa, Thailand and Turkey. Kazakhstan, Russia and the Ukraine are covered by the safeguards because they are not WTO members. Data is to be reviewed on a quarterly basis and the USTR is instructed to initiate consultations with countries whose quantities increase. If quantitative reductions do not follow, the USTR is authorized to modify the safeguards accordingly. Imports from GSP eligible countries are accorded similar treatment. Therefore, China is not exempt as it is not GSP eligible.

The safeguard measures apply to certain flat steel, hot-rolled bar, cold-finished bar, rebar, certain welded tubular products, carbon and alloy fittings, stainless steel bar, stainless steel rod, tin mill products, and stainless steel wire. While the higher rates of duty apply over a three (3) year period, the rates drop progressively each year. For example, any finished flat plates over the established quota amount will be subject to a 30% rate of duty in year one, 24% in year two and 18% in the final year. Other covered products are similarly affected. The Secretary of Commerce is also directed to create an import license procedure.

To date, the Commerce Department had received about 1,000 requests for exemptions from the higher tariffs, mainly from small manufacturing concerns who claim they are unable to obtain the specialized steel they need to make their products without importing it. So far, about 150 exemptions have been granted. USTR and Commerce have until July 3rd to act on all such requests.

Further complicating matters was a Federal Register announcement on March 20th deferring the payment of the higher duty rates until April 19, 2002. The stated reason for the deferral is to allow the U.S. more time to consult with its foreign trading partners. Not waiting for the U.S. to act, the EU has developed a list of products on which retaliatory duty rates may be imposed. Supposedly this list is intended to cause political harm to Mr. Bush and the Republicans in this year’s elections.

For more details about these steel safeguards, see this month’s Journal of Commerce column which will be posted to the JOC web site in the near future. If you would like an advance copy, please e-mail us your request.

WHAT IS REASONABLE CARE? U.S. v. Golden Ship Trade Co., et al,
02/02

Slip Op. 01-7 is the first case attempting to address the question of - what is reasonable care?

The importer was alleged to have negligently presented material false statements on both the entry documents and the t-shirts which misrepresented their origin. The t-shirts were imported from the Dominican Republic. Customs investigated and determined they were actually made in China. The only operation undertaken in the Dominican Republic was to attach the sleeves. As such, there was no change in origin and so the claim of Dominican Republic origin was materially false.

Customs then sought to impose a penalty for the misdeclaration and collect the ten (10%) percent marking penalty for the falsification of origin on the garments themselves. The importer did not challenge Customs' final determination of Chinese origin but rather defended on the grounds that reasonable care had been exercised. Citing the Pentax case, the Court of International Trade found Customs failed to meet the burden of asserting that "but for" the mismarking, actual Customs duties were unpaid.

Failing to meet that burden meant Customs could not now seek recovery of the ten (10%) percent marking penalty. As the importer did not challenge Customs' determination as to Chinese origin, the Government had met its burden of proof that a violation of 19 U.S.C. 1592 had occurred. Therefore, the defendant was left to explain what happened in order to minimize or avoid any penalty. The importer argued that it had been defrauded by the supplier and, therefore, was not negligent. In the end, the court found that simply taking the statements of the supplier at face value without any attempt at verification is not reasonable care. The importer did not inquire as to the origin of the fabric or the steps of production and where they were undertaken. Similarly, simply relying on the entry being prepared by the customs broker, who itself relied on the supplier's commercial documentation, also fails the reasonable care test. Well now we know what reasonable care is not - perhaps soon we will get a judicial framework to aid traders in identifying what is reasonable care!

CANADIAN SOFTWOOD LUMBER HIT WITH ADDITIONAL DUTIES
11/01

The U.S. Commerce Department has found softwood lumber from Canada is being dumped in the U.S. and so seeks to impose a 12.58% antidumping duty, a move which has infuriated industry. The 12.58% was set in Commerce's preliminary determination released on Oct. 31. That percentage gets added to the 19.3% countervailing duty imposed last August. In other words, the U.S. government has effectively imposed a 31.88% tax on lumber needed to build homes and other woodbased products. What makes the result particularly interesting is the question of how a handful of U.S. lumber companies were able to so effectively push the Bush administration for a new duty on Canadian softwood lumber at a time when the administration touts increased trade as one means to reinvigorate the moribund U.S. economy?

BORDER CROSSING DELAYS
11/01

For the latest information about heightened security steps and the attendant delays at the land borders, log on to the U.S. Customs website at www. customs.treas.gov.

Tariff Engineering - Is it Still Viable?
(Published in the Journal of Commerce on Sept. 25, 2001)
BY SUSAN KOHN ROSS

Dating back to a court case decided in 1881, Merrit v. Walsh, 104 U.S. 694, a long-held principal of classification for importers is the concept of tariff engineering. Merrit also stands for the proposition that goods are classified in their condition as imported. In its simplest terms, tariff engineering means an importer is allowed to make his product in such a way so that the lowest possible duty rate applies at time of importation. In light of a recent appellate court decision, it is not at all clear how viable an option tariff engineering remains. See Heartland ByProducts, Inc. v. United States, 001287, 001289, decided August 30, 2001.

In 1995, Heartland obtained a classification ruling from U.S. Customs for a sugar syrup product. The ruling request detailed Heartland's intended operations. Based on what was submitted, Customs found the syrup to be properly classified under 1702.90.40, HTSUS, i.e., outside any tariff rate quota provision. Heartland fashioned its U.S. operations in reliance on that ruling.

In January 1998, a domestic industry association filed a petition asking Customs to overturn Heartland's 1995 ruling. The request basically argued the intermediate sugar syrup Heartland imported should be classified under one of the tariff provisions which is subject to quota because Heartland was importing a product comparable to sugars subject to those quota restrictions. Customs' original ruling decision confirmed Heartland's sugar syrup contained more than 6% soluble nonsugar solids so it was exempt from the sugar quotas. However, domestic industry claimed the product actually fell below that mark and/or properly belonged under yet another tariff provision because it was more correctly described elsewhere.

In June 1999, Customs issued a notice of intent to revoke the original ruling and reclassify Heartland's syrup under one of the provisions which carried with it a tariff rate quota. [A tariff rate quota applies by allowing a set quantity of a good to be imported at one rate of duty and when the maximum quantity is reached, a substantially higher rate of duty applies to subsequent importations.] Specifically, as a basis for the revocation, Customs determined Heartland's imported intermediate syrup product had no separate commercial use or identity and so, as a matter of law, Customs held it could consider post-importation uses of the syrup in making a final classification decision. Heartland reached the 6% level by including molasses which was added to the mixture prior to importation. In reaching its conclusion, Customs found the molasses to be a "foreign substance" relative to the sugar and so held it was not to be considered when the 6% figure was calculated. What was shocking about Customs' position was that the sugar provisions under consideration were not "use" provisions. In other words, in the past, Customs only considered post-importation activities if tariff classification was based upon use. If no use provision was under consideration, classification was based on the terms of the specific tariff provision(s) which might apply. For example, the tariff provisions regarding computers are specific provisions, they classify computers. However, if a printer was imported, how it was used would be considered in determining whether or not it was intended for use with computers so as to fall in the Chapter 84 computer peripherals provisions vs. elsewhere as a "regular" printer.

Needless to say, the domestic sugar producers were delighted with Customs' decision. Their industry was to be further protected and competition reduced. The international trade associations were united in wholeheartedly criticizing Customs for once again trying to unilaterally change the rules. As sometimes happens, Customs was not moved by what the trade said and so in September 1999, it issued a final revocation of the earlier ruling. Heartland's sugar syrup was now to be classified under 1702.90.10/20, HTSUS. Underpinning its decision, Customs found the addition of the molasses was not a genuine manufacturing step but was instead intended to "disguise" what Heartland was doing for the sole purpose of escaping a higher rate of duty. According to Customs, because Heartland's activities constituted an "artifice," it was permitted to inquire into post-importation activities. The molasses was considered an illegitimate ingredient. Customs reasoned one does not mix molasses with raw sugar to obtain "sugar syrup." Therefore, the molasses could be ignored and the resulting syrup contained less than the requisite 6% of nonsugar solids and so was subject to quota.

Because that result was devastating to Heartland's U.S. operations, it filed suit at the Court of International Trade seeking a permanent injunction to prevent Customs from enforcing the revocation of its 1995 ruling. Customs lost on every point before the lower court. Rehearing was also denied.

Understandably unhappy with the result, the domestic industry association and Customs both appealed. In the meantime, the U.S. Supreme Court decided United States vs. Mead Corp., 121 S. 2164 (2001).

Mead held that classification rulings may merit some deference, i.e., the court might have to uphold what Customs decided rather than considering the matter from scratch. In other words, Customs' decision were entitled to Skidmore deference, named for Skidmore v. Swift & Co.; 323 U.S. 134 (1944). Not surprisingly, on appeal Heartland argued that Customs' actions were entitled to little deference because the agency's reasoning was flawed. Equally unremarkable, domestic industry argued great deference was due and focused on what Customs called the "artifice" or disguise" supposedly designed to avoid application of the quota. Domestic industry also argued that Customs was correct in looking at the commercial identity of the sugar syrup and determining it was not a legitimate commercial product. Further, domestic industry urged the court to give great deference to Customs' interpretation of how to calculate the sugar solids.

In the end, the Court of Appeals for the Federal Circuit upheld Customs' position. The court found the tariff was silent as to a definition of "foreign substances" in calculating sugar solids and, since Customs has unique expertise in interpreting the Harmonized Tariff, the ruling revocation was entitled to deference because of its "persuasiveness."

In Mead, the Supreme Court found that rulings issued by Customs are like interpretations of policy, agency manuals and enforcement guidelines. Therefore, whether a ruling is entitled to deference will depend on a variety of factors, e.g. the writer's thoroughness, logic and expertness, its fit with prior interpretations and other sources of weight. If these are present in some combination, the ruling decision may be found to be binding, i.e., persuasive.

In Heartland, the appellate court found the revocation decision was issued pursuant to notice and comment, so the public had an opportunity for input (and took it). The court also found that Customs considered the comments it received and responded with a thorough analysis addressing the main points raised in the comments. The only factor the court found weighing against deference was the fact that the ruling revocation would overturn a prior ruling. However, that fact alone was not enough. In the end, the court found because sufficient thoughtfulness was presented by Customs in justifying the revocation, combined with the opportunity for public comment and Customs' unique expertise to interpret the tariff, Skidmore deference warranted upholding Customs' decision. As a result, the lower court's ruling was overturned.

As the period in which an appeal to the U.S. Supreme Court has not yet expired, one cannot yet assume the decision is final. A close reading of the appellate court decision makes clear the court was persuaded as to the correctness of Customs' position, in part at least, because it viewed Heartland as having been less than forthright in its ruling request in terms of how it described its imported product. It is also likely that Customs took the actions it did because it was enforcing a tariff rate quota. While it is true the agency might have acted differently if no quota issue were present, the fact remains that whether or not Heartland is overturned by the Supreme Court, Customs has made clear its thinking if you are tariff engineering, you have yet one more factor to make sure is included in any ruling request commercial justification of the intermediate product.

Customs Update: A CASE OF SCHIZOPHRENIA 
8/01
Published in the Journal of Commerce on August 17, 2001
by Susan Kohn Ross

Click here for a printable version of this article

Talk about U.S. trade, and you're talking schizophrenia. Do we favor free trade or don't we? We just don't seem to be able to decide, and certainly cannot reach consensus. 

The U.S.Jordan Free Trade Agreement (USJFTA) was negotiated and signed. Now, as it goes through the approval process, Congress and the Bush Administration are unable to decide whether or not they really want it. 

Notable as the first trade agreement to include labor and environmental provisions (Nafta contained such provisions in side agreements), plus an additional one allowing for the imposition of sanctions in lieu of reliance on domestic laws for trade remedies, the USJFTA faces serious opposition. 

Elsewhere, the U.S.Singapore Free Trade Agreement is still in negotiation, while in July the draft text of the Free Trade Area of the Americas was released. 

The U.S. reached agreement with China over that country's accession to the World Trade Organization, but lost to the Europeans over Foreign Sales Corporations, a provision in U.S. law which allows tax benefits for certain income derived from foreign sales. The Europeans brought a WTO complaint which was sustained. The U.S. rewrote the law and, in a matter of days, the Europeans sought and later obtained approval from the WTO to impose sanctions on $4 billion worth of U.S. goods, sanctions which will be delayed until September so the U.S. may decide how it will respond.

While these steps suggest that Congress is at least somewhat receptive to free trade, we have an equal amount of backward movement. 

For example, the Byrd Amendment snuck into law at the last minute as part of an agriculture funding bill. It allows the redistribution of dumping and countervailing duty monies to the affected companies. Such a provision is thought to be a clear violation of the U.S.'s WTO obligations but was nonetheless approved! Similarly, a seeming violation of WTO obligations comes with the renewal of the merchandise processing fee to fund the Patients Bill of Rights. 

Meanwhile, further trade negotiations could be delayed by the Bush Administration's failure to obtain trade promotion authority because there are not enough Democrats who will support it without labor and environmental provisions, and the Administration appears adamant in excluding them. 

The Export Administration Act languishes again after what some have counted as a dozen attempts to rewrite it, due to a lack of consensus. Missing in this context is clear agreement as to what is freely available in the market place so as to not be subject to restriction. Although U.S. industry is clear about what its foreign
competitors are selling, the government seems unwilling to act on that information. 

We face a possible new round of WTO negotiations starting in Qatar in November on such important topics as competition policy, electronic commerce and dispute settlement but, again, there is no consensus in these areas.

We have also seen the proliferation of U.S. dumping cases from the predictable to the unusual. For example, in the category of the unusual is the case brought by California grape growers against China and Mexico. What makes this claim unique is the speed with which it was decided. The International Trade Commission dismissed it within a matter of weeks, calling it a naked attempt to avoid competition. 

The predictable example comes from an investigation that was recently opened regarding the steel industry, predictable in the sense that steel makers have long complained that foreign steel is being sold in the U.S. at prices well below the cost of manufacturing (a classic definition of dumping). 

In order for the steel case to succeed, the threshold step the International Trade Commission must take is to define the industry. Is it one industry or are there many? If many, which ones, if any, have been harmed? In terms of defining the industry, for example, should the making of steel be treated as a different market depending on its constituent materials or its intended end use? 

Whether the U.S. can find a cure for its trade schizophrenia is another question. 

Customs Update: WHAT IS CUSTOMS TO DO?
7/01
Published in the Journal of Commerce on July 6, 2001
by Susan Kohn Ross

Click here for a printable version of this article

In 1994, the ground rules between Customs and the trade community changed dramatically. With the advent of the Mod Act, it was no longer Customs' responsibility to figure out the correct classification, value and admissibility standard for a given shipment. That responsibility now fell to the importer. Customs clearly retained the right to confirm the accuracy of the importer's conclusions and impose enforcement action appropriate to the circumstances if there are errors, but the first decisions became the importer's to make and make correctly.

The most serious criticism leveled against Customs prior to enactment of the Mod Act came from the GAO which quite correctly pointed out that up to that time, Customs could not say with any degree of accuracy which importer or which industry was in compliance or its level of compliance. Acknowledging that shortcoming, Customs changes its outlook and approach. One major change was the creation of Compliance Assessment Audits, which Customs relies upon to determine a company's degree of compliance.

From the outset, Customs had trouble completing these audits because the methodology originally used was derived from then existing audit techniques. The first CAT audits were reported to take up to three years to complete and were tremendously cumbersome. Importers complained about the length of time they took. Importers also complained about the cost to respond to Customs varied requests for information and documentation.

Importers and Customs also vigorously disagreed whether a specific discrepancy was major or minor, resulting in even more delays and frustrations for all concerned. To Customs' credit, changes were made and continue to be made. Also to Customs' credit, the entire handbook used to conduct a CAT audit is available at http://www.customs.ustreas.gov/impoexpo/impoexpo.htm.

For those of us located on the West Coast, one of the more interesting features of the March 2001 CAT Kit is the section entitled "Common Importer Errors Identified During Compliance Assessments." The listing is of particular interest to us because we have had the benefit of a list of common "snafus" which were first disseminated in the mid1980s by the Regulatory Audit branch of the then Pacific Region.

That list of snafus reads:

1.      Failure to include assist costs in importer values;
2.      Additional payments to foreign manufacturers, in excess of prices on invoices, not included in product values;
3.      Transfer prices on imports between related parties fail to cover all cost and profit;
4.      Improper claims of foreign components as nondutiable American components on products imported under HTSUS 9802.00.80 (formerly 807);
5.      Lack of proof of origin on American components claimed as nondutiable for imports under HTSUS 9802.00.80;
6.      Lack of documentation to substantiate claimed nondutiable buying commissions;
7.      Failure to include dutiable quota costs in import values;
8.      Products imported duty free under GSP fail to meet 35% foreign cost criteria;
9.      Understatement of dutiable values on imports with CIF prices due to unsupported deductions for nondutiable international freight and insurance; and
10.    Failure to include dutiable royalty costs in import values.
11.    Understatement of dutiable values on imports with CIF prices due to unsupported deductions for nondutiable international freight and insurance; and
12.    Failure to include dutiable royalty costs in import values.

The West Coast auditors were quite frank in stating the way they found most of these violations was the result of conversations with employees of a company in departments other than import-export. In particular, the information associated with many of the costs listed above were maintained in engineering, accounting and sales, and were often not communicated to the import-export department. In many cases the information was requested but the request was ignored because the recipients did not think there was any consequence to not providing it. Under those circumstances, one can imagine a company's shock when presented with large demands for payment of additional duty.

Apparently, things have not changed much because the common problems listed in the latest CAT Kit read quite similarly:

1. Manufacturing assists;
2. Supplemental payments;
3. Nondutiable costs;
4. Merchandise classification;
5. HTSUSA Chapter 98XX;
6. Related-party transactions;
7. Buying commissions;
8. Record keeping.

Whether working from the old "snafu" list or the new "common problems" list, one thing is clear. Those importers who set up solid internal controls will have the fewest problems. In fact, when CAT audits started, importers could pass them without having written procedures, but no longer.

Customs now insists on a company not only having those written procedures but also proving they are actually the procedures being employed in the day-to-day transaction of business. It is amazing how many companies have written procedures but the procedures reduced to writing have nothing to do with how the company actually operates. Customs will not consider inaccurate written procedures to be satisfactory.

CAT Audits have also required importers to more closely monitor their inventory procedures. One issue which has been a thorn in the side of both importers and Customs is quantity discrepancies. In the real world, most companies consider a variance of 5% or less to be tolerable and of no consequence, because sometimes there are shortages and sometimes there are overages, but usually shortages. However, for Customs the requirement is 100% accuracy. If there are overages, they must be reported. If there are shortages, they, too, must be reported. The problem for both the trade and Customs is the format in which those changes are to be reported.

Customs Chief Counsel's office has interpreted the law to mean that any quantity discrepancy is a matter of admissibility and so cannot be reported through reconciliation. Customs is hoping the Post Entry Amendment process recently enacted will be adopted as the reporting mechanism of choice, but initial reports indicate few companies are using this mechanism. Instead, the very procedure Customs was trying to eliminate by adopting reconciliation has continued individual importers working with local Import Specialists and reporting these changes in an ad hoc manner.

When CAT audits first started, importers were generally placed in one of three risk categories, high, medium or low. Presumably the risk category (or "bucket" as it was sometimes referred to) dictated the frequency of exams. Importers have argued long and hard with Customs saying examination of goods has nothing to do with the adequacy of documentation, correctness of classification or completeness of value, and so the choice of enforcement tool is simply a waste of time for both sides. Hampered by the lack of truly effective enforcement tools in this context, Customs has clung to inspections as the option of choice simply because it drives up the importer's cost of doing business. However, the buckets have been refined to now include, low, standard, moderate and high. The differences between one risk bucket and another is not great and often only a matter of interpretation. However, one thing obviously sticks out. If a company lacks documented internal controls, it is placed in a higher risk category.

In other words, regardless of the accuracy of its operation, a company better get its import/export procedures reduced to writing.

One noticeable difference between the old "snafu" list and the new "common problems" list is the addition of record keeping, something also required by the Mod Act. While quite a bit has been said about record keeping in a variety of contexts, the summary criteria applied by the auditors is perhaps the best short explanation one can give. Are the records accurate? Are they easy to retrieve? Are they easy to understand? Do their entries correlate from one to the other? If a company cannot answer yes to all of these questions, it will have trouble with a Customs audit (and likely an audit by any other agency or entity as well).

The question asked most often is, "Why did my company get selected for an audit?" Customs previously announced that the top 1000 importers by value will be the subject of CAT audits. Similarly, the top 250 importers in each of the critical industries, e.g. advanced displays, agriculture, auto parts, autos, bearings, chemicals and petrochemicals, circuit boards, fasteners, footwear, production equipment, retailing, steel, telecom, textiles, and wearing apparel, will be similarly audited. Beyond those reasons, importers are most often targeted for audit by disgruntled ex-employees or ex-spouses; competitors; Customs employees who see violative goods in stores; search warrants; computer research/trend analysis; cargo examinations and samples; Customs officers' knowledge regarding commodities; importations from a new source or a new country; a large voluntary tender or prior disclosure (no specific dollar amount has been publicly identified); and a visit by Customs to one importer who identifies errors by others in his industry.

Additional audit triggers come in the form of what Customs considers red flags, such as invoice notations stating "For Customs Purposes Only" or "No Commercial Value;" invoices with information crossed out or whited out; goods made in one country but shipped from another; related transactions and those involving transfer pricing; lower or higher than usual prices; assists; and royalties. Customs also finds red flags with copyright, trademark or patent possibilities; quota restrictions and sanctioned goods or sanctioned countries.

Since most importers trigger at least one of these red flags, the question becomes where is Customs most likely to invest its time and energy to get a worthwhile return? Generally, its focus has been the large corporations. However, it is not unusual for companies of all sizes, especially small ones, to receive Requests for Information which lead to further enforcement activities by Customs, such as requests for samples and/or documentation, seizures, penalties and the like. The bottom line for all companies is to make sure their transactions are properly documented and properly declared from the outset. Being required to pay more duty long after the fact is the fastest way to lose money on a deal!

SUPREME COURT DECIDES MEAD
6/01

Click here for a printable version of this article

The trade community has been surprised at the number of import-export cases the U.S. Supreme Court decided to hear in the last year, a larger number of cases than it heard in the previous ten years. The latest case involves Mead Corp. and the classification of its day planners and was decided on June 18, 2001.

For many years, Customs classified these day planners so they were free of duty.  In 1993, Customs issued a ruling in which it changed its position and found them to fall under a different tariff provision so they became dutiable. Mead filed the appropriate protests which were denied and the case made its way to court.  The Court of International Trade found Customs' classification decision to be correct. The Court of Appeals for the Federal Circuit found in favor of Mead and so Customs appealed to the U.S. Supreme Court.  The basis for Customs' appeal was that its interpretation of the relevant tariff provision should have been binding on the court because it explained the agency's position in interpreting that tariff provision, sometimes referred to as Chevron deference. Not surprisingly, the importer vigorously disagreed. The question was framed for the Supreme Court as - to what degree of deference, if any, are Customs rulings entitled? Put another way, can the court hearing a classification dispute simply start from scratch in deciding a case or must it follow Customs' interpretation of a given tariff provision? In the end, the Court said - maybe!

The Supreme Court held that Customs rulings are not entitled to Chevron deference but may nonetheless be eligible for Skidmore deference.  In Haggar (decided while Mead was before the appellate court), the Supreme Court found that Chevron deference was due to actions by Customs where Congressional delegation allowed it to interpret statutory provisions, in that case HTS 9802.  The Court found that Chevron deference was also proper when Congress delegates authority to the agency to make rules carrying the force of law. Such deference is generally given when an agency promulgates regulations through notice to the public and an opportunity to comment, or adjudicates matters.

Clearly rulings do not go through a notice and comment process.  They also do not generally bind all importers. In fact, rulings can and often are reconsidered or later overturned. Through various means, Customs has warned importers not to rely on rulings unless they are the recipient.  As a result, the Supreme Court held that rulings are similar to "policy statements, agency manuals and enforcement guidelines." They are entitled to some weight but the amount of weight is to be decided by reference to the criteria enunciated in Skidmore.  Factors such as the specialized experience and broader investigation and information available to an agency must be considered, along with the writer's thoroughness, logic and expertness, the decision's fit with prior interpretations and any other sources of weight.  In the end, the Supreme Court left the importing community and the courts to decide how much "power to persuade" is contained in a given ruling by ordering the case back to the lower court for further hearings on the Skidmore deference question. In the broader scope of rulings generally, obviously New York (and most Port) rulings will not be entitled to any amount of deference as they generally contain only the final decision and little explanation. Rulings issued by Headquarters generally contain an explanation of the facts relied on, the law considered and sometimes even a clear explanation of why the decision was reached. However, just because the ruling is well thought out does not automatically mean an importer cannot challenge it. For example, if the ruling is based on material misstatements of fact or relies on the wrong law for its result, it may still be challenged. In the end, the U.S. Supreme Court left the playing field between Customs and the importing community relatively level when it comes to rulings, a good result for the trade given the enormously high cost of litigation.

DRAWBACK
08/01
Customs intends to reduce the drawback centers to four closing by San Francisco, Boston, New Orleans and Miami. If that change impacts you, let the NCBFAA know by submitting your views to survey@ncbfaa.org.

MPF EXTENSION PROPOSED FOR NONCUSTOMS FUNDING
6/01
When Senate Bill 872 was just introduced, it has been proposed that the merchandise processing fee be extended. It is currently set to expire on September 30, 2003. However, in order to fund the Patients Bill of Rights, the Democrats in Congress have proposed an eight year extension. The trade community had hoped the fee would simply expire but, if it didn't, the goal was to fashion renewal so that the monies raised would be earmarked for use by Customs (preferably to fund ACE) rather than going into Treasury's general fund.

Because the MPF is technically a user fee and not a tax, it is not subject to the jurisdiction of the two trade committees House Ways & Means and Senate Finance. Even if it were, rumor has it that Max Baucus, D-MT, who now heads Senate Finance, supports mpf renewal. When are those on the Hill going to understand that if Customs can't do its job, we run the risk of the economy crashing and contraband overrunning the country?

BONNER PROPOSED AS CUSTOMS COMMISSIONER 
6/01
Robert C. Bonner, former DEA head, federal judge and U.S. Attorney, has been nominated to head U.S. Customs. The trade community is hopeful that Mr. Bonner's last few years of representing corporate clients will make him more willing to understand and deal with the concerns of the trade community rather than fan the flames of drug and law enforcement. Again, elected representatives must come to appreciate that legitimate goods and people need to flow so that the economy continues to grow. Costs associated with importing and exporting are generally passed on to consumers. When do those costs (and attendant delays) become so great that products are no longer price competitive? What does that do for the American consumer? 

ITC OFFERS "INTERACTIVE" TARIFF ACCESS  
6/01
The U.S. International Trade Commission has launched an "interactive" tariff and trade data warehouse for use by the public and other government agencies on the Internet. Called DataWeb and available at http//dataweb.usitc.gov, the ITC has described the program as a "selfservice, interactive, Internet based system that provides access to extensive tariff and trade data." Data is available for years 1989 through 2001 and can be retrieved in a number of classifications systems, including the Harmonized Tariff Schedule (HTS), the Standard Industrial Classification (SIC), the Standard International Trade Classification (SITC), or the North American Industry Classification System (NAICS).

NAFTA Update: Unintended Consequences
4/01
Published in the Journal of Commerce on April 20, 2001

While opposition from the supporters of Ross Perot, most labor unionists and most environmentalists was to be expected when Nafta was being debated and voted upon, like many an agreement, Nafta has had some unintended consequences which are only now coming to light. They arise in the context of foreign investor rights.

Under the terms of Nafta, foreign investors are allowed to recover damages from government regulatory actions which negatively impact their investments. A case currently garnering lots of attention is the action filed by Vancouver based Methanex Corp. regarding actions by the State of California banning MTBE (a smog fighting gasoline additive).

California acted on the grounds MTBE causes contamination of water supplies. The damages being sought by Methanex totals nearly $1 billion! Many have railed against this case, questioning whether Nafta was ever intended to allow a private company the right to recover over the actions of a state government, or is relief from only federal government action what was intended? But the story does not stop there.

Mexico and Canada have both gone one step further. Metalclad (a U.S. based company) sued Mexico under Nafta 's Chapter 11 seeking compensation for what it claimed was expropriation of property. The arbitration panel heard the case in Canada, the agreed upon neutral site, and awarded approximately $17 million to Metalclad. Mexico appealed the panel's decision to the Canadian courts. Canada joined in that appeal.

The underlying facts involve a newly built plant. After the fact, the municipality apparently rejected the construction application claiming the site was an ecological reserve. The arbitration panel found the municipality failed to consider relevant facts such as environmental studies approving the project and Metalclad's compliance with relevant laws, permits and construction requirements. Even had the municipality not taken action, Mexican federal regulators could have closed the plant, but not without compensating Metalclad.

Like the rest of Nafta, Chapter 11 refers to a "Party" being allowed or not allowed to take certain actions, in this case the ban on expropriation of property. The argument being made by Canada and Mexico before the British Columbia court is that by the very terms of Nafta, only the actions of the federal governments of the three signatory countries are governed by the agreement. Since a municipality is not a "party" to Nafta, the arbitration panel overstepped its bounds. Mexico also argued that the panel's decision imposed on it an obligation to explain possible road blocks which Metalclad might encounter in the approval process and that duty was more than it was legally obligated to perform.

Canada is involved in another appeal, this one in a case where it lost to S.D. Myers for banning the export of PCB waste chemicals. The award involved approximately $20 million. Canada instituted a temporary ban on exports of PCBs which Myers wanted to dispose of at its Ohio facility. Myers had previously been exempted from U.S. law banning imports of PCBs.

Canada is said to have banned the export of PCBs in an attempt to protect development of Canadian based waste disposal facilities and to minimize cross border waste transportation. Canada countered by pointing to the Basel Convention which sets out international standards regarding the handling of hazardous waste. [Canada later lifted the ban but the U.S. imposed a blanket ban on imports of the wastes following a court order.]

In its appeal, Canada argued the issue was not one of foreign investment but rather one involving cross border trade and so outside the scope of Chapter 11.

At the same time, Canadian activists and labor leaders filed suit in March constitutionally challenging Nafta's Chapter 11. Their argument is that Nafta allows private firms to sue the government over alleged trade discrimination, a right which is not similarly extended to domestic companies. As with American activists opposed to Nafta, the Canadians argue their government's sovereign right to protect citizens' health, safety and wellbeing through their courts and regulatory systems is being undermined by Nafta.

What is said to have triggered their outrage is the alleged claim by UPS that Canada Post, the government postal service, was using its lucrative letter monopoly to unfairly subsidize its courier and express mail services.

UPS is reportedly demanding $156 million while at the same time admitting that similar anticompetitive practices exist in the U.S., although it has no similar remedy under U.S. law. On the other hand, UPS supposedly admitted that a Canadian courier service could make a similar claim against the U.S.

Also proceeding through the arbitration process in the U.S. is a claim by a Canadian funeral home chain seeking $750 million in damages for what it claims was unfair treatment by the Mississippi courts. Civic groups are responding with complaints that taxpayers should not be held responsible for jury awards in civil suits initiated by foreign investors. In response to the claim, the U.S. tried, but failed, to convince the arbitration panel that it lacked jurisdiction to hear the matter. Loewen Group's claim focuses on anti-Canadian, racial and class biases which it supposedly suffered at the hands of opposing counsel in the way the case was defended. The matter was settled between the parties but Loewen is arguing that because of Mississippi's state law regarding the size of the appellate bond it would have to post ($625 million), it was effectively coerced into settling for $175 million and should now be entitled to additional relief under Nafta 's Chapter 11. Critics fear that if Loewen's position is upheld, foreign investors will be able to bring unwinable civil suits, settle or lose and then seek additional damages from American taxpayers, an option not available to American investors in the U.S.

For some time, Canadians have consulted with their American and Mexican counterparts seeking clarifying language to Nafta's Chapter 11 without much luck. Neither the Americans nor the Mexicans have been willing to seriously engage on the issue. Given that the number of cases is multiplying and the amounts claimed are staggering, perhaps clarifying language will be agreed upon. At the same time, in the absence of such language, one wonders whether the U.S. will continue to argue that the principals in Nafta should serve as the boilerplate for all other multilateral trade agreements? Probably so but with modified language.

FABRIC IMPORTS TARGETED
4/01
Customs New York Strategic Trade Center has announced it is targeting the fabric industry for patterns of discrepancy and noncompliance involving classification and marking. Informed compliance warning letters have been issued to the top 500 fabric importers. 120 days later monitoring of entries will commence. In addition, water resistant wearing apparel is being separately targeted. Informed compliance letters on these products were sent to major importers and those previously found to be noncompliant. Again enforcement follows an opportunity for corrective action.

TAIWAN EXPORTERS DENIED ENTRY
4/01
For a period of two years commencing April 9, 2001, textiles and textile products from Hong Win Trading Company, City Art Printing, Hsu Chun Mei and Spring Information Industry Co., Ltd. will be denied entry. CITA directed Customs to act.

REASONABLE CARE
4/01
Looking for some new ideas about reasonable care? If so, take a look at our article published in the Journal of Commerce website on March 23, 2001 titled "Complying with 'Reasonable Care." You can find it on our web site as well as at www.joc.com.

CUSTOMS PUBLISHES NEW CAT KIT
4/01
As part of its ongoing effort to be responsive to the trade community, Customs has yet again revised its audit procedures. In support of those revisions, Customs has issued a new CAT Kit, a copy of which can be found at www.customs.gov/impexp1/comply/catkit.htm.

CUSTOMS INVESTIGATION CLOSES CHINESE COMPANY MAKING GOODS WITH PRISON LABOR
3/01
Allied International Manufacturing Stationery Co., Ltd. in China exported binder clips to Officemate International Corp. in New Jersey. The handles and bodies were made at the Nanjing factory but assembled at a nearby prison. The exporter pled guilty to transporting prison made goods to the U.S. and was fined $50,000. A principal of Officemate pled guilty to tax evasion and will be sentenced in the near future and faces back taxes, interest, penalties and criminal and civil fines. Officemate also paid Customs $500,000 to settle any potential civil charges. Customs learned of the scheme because a competitor filmed trucks leaving the Chinese factory with unassembled clips and returning from the nearby prison with assembled clips. That competitor presented his evidence before Congress. As a result, Customs opened an investigation which was successfully concluded.

Customs Update: Complying with "reasonable care".
3/01
Published in the Journal of Commerce on March 23, 2001

Click here for a printable version of this article

Every which way you turn these days, the U.S. federal inspection agencies are talking about reasonable care.

They may not all call it that, but whether it is the Bureau of Export Administration, Consumer Product Safety Commission, Federal Communications Commission, or any of the 60-odd agencies with jurisdiction over international trade transactions, they are all saying basically the same thing: Know your product, and how it is going to be used and sold by your buyer. How to comply, then, is a problem for companies large and small.

Regulatory compliance flows from the top down. If a company's management does not value compliance, its employees will simply ignore it.

Businesses typically start the process of regulatory compliance through the nuts and bolts of systems and staff training. The system approach often starts with the Board passing a resolution stating that one of the company's goals is to have the highest possible level of compliance - a critical cornerstone in this effort.

These resolutions become a permanent part of the company's history but are only a starting point. Each company needs to identify its own unique compliance issues. Professional advisors, the trade press, trade associations and agency outreach all help create awareness; and some even assist companies in creating their own compliance manuals (especially attorneys, consultants and customs brokers). Women in International Trade of Orange County has a very active Customs User Group, a major goal of which is to help its member companies' Customs professionals create, maintain and update their compliance manuals and procedures.

The system part of the puzzle continues with the company either establishing procedures or making sure that its existing procedures allow all interested individuals to exchange necessary information in a timely fashion, so that proper planning takes place. All too often, different people within a given business have responsibility for different parts of the import or export function (and the related finance and inventory/warehouse operations) and fail to regularly communicate. When that happens, trouble, or at least mass confusion, is sure to follow, as well as cost increases.

Despite these and other options, companies are still generally left to their own devices when it comes to training programs. Given the unique nature of international trade, helpful programs are hard to find. The Foreign Trade Association of Southern California offers one of the best-known courses designed to help individuals understand U.S. import requirements and prepare for the customs broker examination. The World Trade Institute in New York also offers a wide range of substantive courses, but most trade association programs are general in nature or at least not specifically designed to fit the needs of an individual company. So where do managers go for help when they want to train their staffs?

Customs Update: New turn for Mexican trucks?
2/01
Published in The Journal of Commerce February 22, 2001

Click here for a printable version of this article

A number of interesting legal decisions have been published in the past month, but the one garnering the most attention is, of course, the decision regarding trucking and the North American Free Trade Agreement (Nafta).

Prior to Nafta, Mexican-owned trucks had legal access only to what used to be called the ICC 50-mile zone, that is, they could transit anywhere within 50 miles north of the U.S.-Mexico international border. Under the terms of Nafta, operations were to be allowed so that Mexican trucks could legally operate anywhere in the U.S. southern border states (Arizona, California, New Mexico and Texas) starting in December, 1995 and anywhere within the country starting in January, 2000.

The issue of Nafta and Mexican trucks reemerged when the Clinton Administration decided to bar all Mexican trucks from entering the U.S. beyond the immediate 50-mile zone, for safety reasons. While agreeing that safety regulations were important, Mexico challenged the blanket ban before a Nafta arbitral panel. On February 6, 2001 that panel issued its decision.

What it said was the U.S. could not refuse to allow all Mexican trucks to enter the country. Some press coverage has included predictions of doom and gloom, going so far as to suggest American highways will be in carnage. In fact, what the arbitral panel said was the U.S. could not ban all Mexican trucks but it could apply its safety standards on a case-by-case basis. The U.S. based its position on what was described as the inadequacies of the Mexican regulatory system related to such issues as driver hours of operation, logs, and other factors.

The Nafta arbitral panel stated that it was not determining what, if any, safety standards should apply; nor did it disagree that safety of trucking services is a legitimate regulatory goal. The panel also said it was not advocating a quota or the approval of any or all Mexican applications. In fact, reading the Findings and Determinations carefully, one sees a statement saying that not all the Mexican truck companies currently operating in the U.S. border zone must be allowed to continue their operations.

The panel's holding also recognizes that different standards may be warranted depending on the citizenship of the applicant trucking company. However, if different standards are applied to truckers from Canada and Mexico, those differences must arise in good faith, be based on legitimate safety concerns and be Nafta-compliant. In other words, a blanket refusal is not allowed.

It should also be kept in mind that the safety issue, as legitimately important as it is, has been somewhat distorted. California and Texas are the two states where the most number of trucks cross from Mexico into the U.S. In both cases, the state departments of transportation have modern facilities available to conduct just the sort of safety inspections one would hope to see imposed. No one is foolish enough to believe that all trucks crossing the border will be inspected but the point is, the two states most seriously impacted by this truck traffic have publicly stated their readiness to conduct the necessary inspections.

Additionally, there is the out-of-compliance issue which underpins much of the discussion about safety concerns. The U.S. Department of Transportation released a survey which found 28 percent of U.S. trucks were out of compliance, while 35 percent of Mexican trucks were similarly situated. At first glance, that seven percent difference seems huge. Put into proportion, one must keep in mind that many of the Mexican trucks inspected were those which did nothing more than pull trailers across the international border. Many took cargo from Mexican long-haul drivers, hooked up to it, transited the international border and then handed the cargo off to American truckers shortly thereafter. As such, if given the opportunity to deliver Mexican cargo to U.S. consignees, one would not expect the trucks previously inspected to be the ones used. If they are, they should be inspected and turned back if out of compliance. However, Mexican truckers are not going to employ their newest equipment to sit in long waiting lines in order to transport cargo only a few miles. It makes no sense economically.

Strikingly missing from these discussions has been wide spread interest on the part of American truckers to deliver cargo in Mexico. Perhaps it has to do with the cost of American rigs and the condition of some Mexican roads. Perhaps it has to do with fears about personal or property safety. These are legitimate concerns. However, more progressive American truckers have begun partnerships with Mexican operators in order to maximize their opportunities.

The big question is, how will the Bush Administration respond? Early indications are it will comply with the panel's decision. The question of how remains open. It could be that the pending Mexican trucking applications will simply be reviewed relying on current standards. There could be an attempt to develop and apply new standards. Stay tuned as this contentious issue plays itself out to conclusion.

CANADA CUSTOMS COMPLIANCE PLAN
01/01

Canada Customs has posted to its web site information about its 2000-2001 Compliance Improvement Plan. Wondering how similar or different Canada is in its treatment of importers of goods into its country, check out the article at: www.ccra-adrc.gc.ca/customs/general/blue_print/compliance/plan-e.html

PROTOTYPE IMPORTS
01/01

The Trade Suspension and Tariff Act of 2000 contains a provision which allows the importation of prototypes. Until regulations are published, Customs has issued Administrative Message 00-1589 outlining the guidelines which apply for HTSUS 9817.85.01 and the importation of prototypes, including their definition and the procedure to convert a TIB entry to a prototype consumption entry.

INSTRUCTIONS ISSUED REGARDING NAFTA DRAWBACK 
01/01

U.S. Customs has issued a notice explaining the procedures to be followed in implementing the duty deferral portion of NAFTA effective January 1, 2001 as it relates to Mexico. While duty will become subject to drawback, antidumping and countervailing duties, plus agricultural and merchandise process fees are not subject to refund, waiver or reduction. Immediately affected are foreign trade zones, bonded warehouses and temporary importation entries. Inbond entries remain unchanged.

NAFTA COUNTRIES REVISE CUSTOMS OPERATIONS
1/01
Published by the Journal of Commerce on January 12, 2001

Much has been said in the American trade press about ways in which U.S. Customs has revised its operations in response to ever changing times and priorities. However, little has been said about changes in Canada and Mexico which are equally broad-based.

U.S. Customs has adopted the phrase "risk management" as the moniker to explain its revisions. The idea behind the effort is quite simple. Customs is being asked to deal with breath-taking expansions of trade with the same approximately 17,000 employees it has had for the last almost ten (10) years.

While the number of employees has remained stagnant, its responsibilities have risen dramatically (trade is expected to double between 1990 and 2010). In addition, Congress keeps giving the agency more responsibility often with no additional funding and always without providing more personnel. In order to operate "smartly" (as commissioner Kelly puts it), Customs has taken to identifying and implementing programs which allow it to focus its energies where the violations are likely to occur.

While this author has taken issue with some of Customs' efforts (such as in the pornography area which needs to be dealt with but is perhaps more appropriately handled by other agencies), the mainstay of Customs has been cargo and passenger processing. To that end, the agency has brought new technology and new methods of operation on line often times with great success. It has also revised the way in which it conducts its audits.

At the same time, Canada and Mexico have made similarly sweeping changes with little fanfare or notice in the U.S. In Canada, there have been changes in operations which also revolve around risk management. Canada's changes have been done for the benefit of the agency but also as part of the Canada/U.S. Partnership Initiative, a joint effort looking at what steps must be done at the border versus those which can take place elsewhere or at a later point in time. To that end, Canada created its Customs Action Plan which requires that where possible all compliance verification for contraband, and health and safety be conducted at the first point of arrival. Most other types of verifications are performed post-release. The Plan has three elements: border management, post-release verification and client service. Border management, as the name implies, seeks to determine the risk posed by people and goods prior to arrival at the border crossing port. To achieve this end, Revenue Canada hopes to enhance its use of intelligence and targeting practices. It wants to focus on higher risk and unknown risk situations although random examinations will continue. Risk categories associated with people, such as illegal migrants, people smugglers and terrorists continue to be a high priority. Risks associated with goods, such as contraband, trade, and health and safety, will be dealt with through priorities set according to commodity and mode of transportation but flexible enough to change depending on geographic location and types of traffic.

Post-release verification priorities for 2000-2001 are steel, textiles and apparel, footwear and tariff rate quotas. Again random selection based on sectors, importers and programs will continue.

Client services have been structured to seek consistency and uniformity. The focus for 2000-2001 will be to expand client education and outreach, such as visits and information sessions including through electronic delivery. The long-term goal is stated to be to increase the role of electronic technology in providing services and to improve efficiency, convenience and accessibility while at the same time reducing the reporting burden and the costs of compliance. Like the U.S., Canada is seeking greater acceptance of electronic filing of its export declaration, plus expansion of CANPASS (an expedited crossing program) and the like.

The following sectors were identified for initial focus: chemicals and chemical products; agricultural machinery and equipment; pulp and paper; petroleum and natural gas; aircraft and aircraft parts; and metal and metal products.

To further implement its plans, Revenue Canada has posted to its Web site information about the Commercial Driver Registration Program. This program seeks to pre-register Canadian drivers, thereby expediting their Customs and immigration border crossings. Once registered, a driver will be allowed to make his or her declarations (but cannot import any controlled, restricted or prohibited animals, plants or goods) on a travelers form and will be billed any duties to a credit card account on file with the agency.

To be eligible, the driver cannot have had goods seized by Customs in the past five (5) years, cannot have a criminal record or otherwise have been found to be in violation of any Customs or immigration laws. Much like Line Release in the U.S., the driver has to be pre-registered to get the benefits.Revenue Canada has also created the Customs Self-Assessment Program.

Similar to monthly reporting as envisioned by the U.S. trade community, the purpose of this Program is to provide approved importers the benefit of streamlined accounting and payment processes. Companies will be allowed to use their own business systems to self-assess and meet their Customs' obligations. Likewise, if the importer uses a pre-approved carrier and registered driver, his goods will be subject to streamlined clearance processes.

Importers are eligible if they are active importers without contraband or major commercial infractions; are prepared to invest in business systems; will have senior management involvement in the establishment and maintenance of the program and will sign an agreement.

Carriers are eligible if they are bonded or post-audit; have a history of transporting international goods without contraband or major commercial infractions; will properly control bonded shipments until delivery; will have senior management involvement and adequate business processes including an audit trail. Again they must be willing to sign an agreement.

The goal of the program is to eliminate transactional transmissions of data elements; end artificial customs systems; increase the certainty of expedited processing; ease the means to meet legal obligations; and streamline legitimate trade; all goals also sought by many American importers. For more details about the changes made by Revenue Canada, see their web site at www.ccra-drc.gc.ca/customs/business/importing.

While the American and Canadian Customs agencies operate using similar procedures, Aduanas (Mexican Customs) operates in a somewhat different environment. For example, the U.S. and Canada place the ultimate responsibility on the importer for his entries, require him to post a bond and seek recourse against the surety if the importer defaults. (Canada, of course, has the added benefit of being able to stop a company from importing.)

In Mexico, entry is made by the customs broker who by law has absolute liability for the accuracy of the data submitted. While some Mexican brokers have expanded their procedures to allow importers, especially large American companies, to indemnity them in exchange for expedited procedures (such as not inventorying the goods at time of entry or export), that benefit has not been extended by the brokerage community to all importers (or exporters). Nonetheless, Aduanas has attempted a number of laudable changes. Its goals remain protecting its people (national security, health and environment) and the revenue, while at the same time facilitating trade to promote economic growth (sounds very similar to the goals of its U.S. and Canadian counterparts). Like Canada and the U.S., Mexico (even under the new Fox Administration) seeks to employ expanded means of communication and technology to reach those goals while at the same time facing budget constraints, insufficient infrastructure (especially railroads), increasing pressure from the trade community and on-going integrity concerns.

Mexico has 270 check points. Its main concerns are trade fraud in the form of illegal transhipments and undervaluation, and to facilitate compliant importers and exporters. Mexico is fully committed to total automation. As of November 2000, it had an enhanced system in place. It also wants a Uniform Electronic Entry System with its NAFTA partners, something similar to what American importers want - all three countries should require the same minimal basic data, a goal being worked on extensively by the International Chamber of Commerce and the G7 governments as well.Risk management by Aduanas is being implemented relying on a Scientific Compliance Measurement System which is updated in real time with feed back from the field. It is compatible with U.S. Customs' Automatic Commercial System. Aduanas is also strengthening its Audit and Investigative divisions. It has also participated in task forces and joint audits with U.S. Customs.

To address on-going concerns regarding integrity, Mexican Customs applies a zero tolerance policy. It has devised new training programs; established an ethics code; investigations are now conducted by internal affairs; it is institutionalizing its personnel into a civil service system; implemented mandatory procedures; and has a program which involves second inspections by private companies. Like the U.S. and Canada, Mexico is achieving its goals through improved infrastructure such as equipment, facilities, and laboratories. In addition, like Canada and the U.S., Mexico is implementing expedited procedures for large frequent but compliant importers.Mexican Customs is also building partnerships with the trade community. It has programs with 46 industry sectors, a Facilitation Committee at each port and, of course, second inspections are provided by private companies.

If one wonders why the changes in all three countries seem so similar, one need only remember that NAFTA included the establishment of a Customs Working Group. The heads of the three Customs Services continue to meet on a regular basis long after the implementation of NAFTA has been finalized. The NAFTA Customs Subgroup meets four times a year to iron out issues between the three countries, such as hours of service, direct communication lines, bilingual signs and flyers and differences in the interpretation of NAFTA's provisions. It is through the NAFTA Customs Subgroup, for example, that the three agencies agree about rules of origin, market access and Customs procedures and regulations. It is through this working group that audit rules are also being harmonized.

It is, however, at the Heads of Customs level at which statistics are exchanged, documents used in trade are harmonized and data elements are standardized. The objectives for the Heads of Customs Conference are enforcement, compliance, trade facilitation, industry partnerships and international cooperation. For example, a serious concern for American law enforcement is stolen vehicles being smuggled into Mexico. Mexican and U.S. Customs have established programs, relying in part on the American private sector, which allow both American and Mexican authorities to access a common database in Arizona to determine the legal ownership of American vehicles exported from that state. As well, the procedures applying to the return of stolen vehicles have been streamlined so as to result in quicker returns.

If three such disparate countries are able to work out their differences, one can only hope that the efforts in Brussels to generate transparent Customs procedures worldwide under the aegis of the Word Trade Organization will meet with similar success.

NAFTA DRAWBACK CHANGES IN MEXICO
12/00
Published by the Journal of Commerce on December 11, 2000

December 1 was a big day for Mexico as it inaugurated President Vicente Fox, but international traders should focus on January 1, 2001 because that is the date on which the duty-free status of most items imported into Mexico ceases.

As close observers will recall, part of the Nafta agreement provided that duty-deferral programs goods traded among Canada, Mexico and the U.S. would end.

When Nafta was enacted, drawback between Canada and the U.S. was on the verge of expiring under the then-existing U.S.-Canada Free Trade Agreement. Although extended, it did expire on January 1, 1996. On January 1, 2001 that same portion of the law takes effect for trade between Mexico and the U.S. Canadian trade with Mexico is similarly affected.

In anticipation of the imposition of duties on goods which had previously been duty-free, the Zedillo Administration was concerned that change might make Mexican products too costly. Discussions between representatives of the government and the private sector took place which led to key raw materials and components being identified, called Sectoral Promotion Programs. The Mexican government then reduced the duty rates on goods for those Sectoral Promotion Programs to between zero 5% , with limited items still subject to higher rates of duty.

The changes were originally scheduled to take effect 60 days ahead of time, i.e. on November 1, 2000 (see below for a further explanation of the timing). It took until November 20th for the rules to be in place.

The new sectors were identified as chemical; plastic and rubber manufactures; iron and steel; medical equipment, medicines and pharmaceutical products; transportation, except automotive; paper and carton; wood; leather and furs; automotive and auto parts; and textile and apparel. These sectors were added to the ones previously named: electrical; electronic; furniture; toys, games and sporting goods; footwear; mining and metallurgy; capital goods; photographic; agricultural machinery; and a miscellaneous or basket category. The October 30, 2000 rules augmented those previously published on May 9 and October 13, 2000.

The goods impacted are set out by tariff number and the importer must be a producer of goods. These rules create a new category identified as an "indirect producer," a company which produces merchandise but is itself not identified in a particular Sectoral Promotion Program, but supplies that merchandise to a producer whose goods are identified in such a Program.

The degree of manufacturing required by an indirect producer is open to question. To take advantage of the new rules, indirect producers will have to be registered by the direct producer or another indirect producer.

Registration is accomplished with the office of the General Director of Services to Foreign Trade or before the Delegation or Sub-Delegation office corresponding to the address of the plant where the production process will be carried out. Maquiladora and PITEX programs could seek certification as early as October 23, 2000. Others could register as of December 1, 2000.

The Mexican economic development agency, SECOFI, has agreed to process the applications promptly, promising responses within 20 working days, and granting extensions to existing programs within 15 working days.

Some of the rules are left for later promulgation by Hacienda, the Mexican taxing authority, while others will require Congressional action to change the Customs laws. The new rules clarify that materials imported prior to November 20th will not be subject to import duties regardless of the date of exportation of the goods they are used to produce. Materials imported as of November 20th will also not be subject to import duties provided they are exported before January 1, 2001. Materials imported as of November 20th are subject to import duties if the goods they are used to produce are exported on or after January 1, 2001.

The new regulations also establish minimum export levels for both maquilas and PITEX companies plus the law creates some limitations on service maquilas in terms of the entities to which they may render their services and still remain qualified.

Generally, the result of these changes is that temporary imports under maquila or PITEX status become subject to import duty, including maquila to maquila transfers. Machinery and equipment imported temporarily under either status are subject to the payment of duties at time of importation, while duties are not due on materials until the goods they are used to produce are exported from Mexico. The duty rates applicable under the Sectoral Promotion Programs apply provided the licensee has the proper authorization.

Since all temporary importations are becoming subject to duty, it would appear fuels, lubricants and other consumables also are subject to duty payment. Trailers, containers and boxes are specifically exempted from duty. The regulations also provide certain additional exemptions: Nafta-origin materials; non-Nafta origin materials provided they are exported to a country other than the U.S. or Canada; non-Nafta fabrics and other items for the textile and apparel industry imported under limited conditions; merchandise returned or exported to the U.S. or Canada in the same condition as it was imported into Mexico; repairs and alterations as described in Nafta Article 307.

Lest anyone be confused, these changes have nothing to do with the change in Mexican administrations or the handing over of power from one Mexican political party to another. They are simply Mexico implementing its obligations under Nafta. With Nafta, the rules change so that each item (raw material, component or good) is dutiable each time it is imported into one of the Nafta countries. Obviously this circumstance leads to the possibility that an item could have duty paid on it three times. In order to minimize that potential, the Nafta parties agreed to a process called "drawback" [an unfortunate choice of words because all three countries already have a program called drawback which has nothing to do with Nafta claims].

The basic idea behind Nafta drawback is that the total amount of duty paid on any one item will not exceed the amount of duty generated by whichever country has the highest rate of duty for that particular item.

For purposes of illustration, suppose a raw material is imported into Mexico where duty of $1 is due. The resulting component is then imported into the U.S. for further processing, where duty of $2 is due. Nafta drawback provides that the lower amount of duties is paid or owed to either the original importing Nafta country or the subsequent importing Nafta country.

In the example just given, duty would be due in the U.S. generally within 10 days of release of the goods [it is five days in Canada].

However, in Mexico it is possible the duty would not be due for 60 days. Therefore, the Mexican importer could use his proof of U.S. duty payment to legitimately avoid the payment of any duty in Mexico.

Conversely, if the duty into the U.S. were zero, duty would have only been paid once (in Mexico) so there would be no basis for a drawback claim.

On the other hand, if the duty on the finished good exported into Canada was $1 (resulting from the component being further processed in the U.S.), the Canadian importer could also make a legitimate claim for duty avoidance and/or a refund of duty.

One of the most controversial aspects of Nafta drawback is the extensive record-keeping which is required. In the U.S. there is particular concern about the mandate to provide a copy of the Mexican or Canadian entry in order to obtain the refund. Often such documentation is not available for purely commercial reasons, e.g. the buyer and seller are not related and the seller has no means to convince his buyer to provide the documentation, especially with one time transactions. A similar circumstance arises where the goods are sold ex-factory at the U.S. site. The buyer hires the American freight forwarder and the Canadian customs broker, neither of which owes any duty to the seller so neither is willing to provide the entry copy.

In the U.S., goods imported into a foreign trade zone or bonded warehouse will similarly become subject to duty if exported to Canada or Mexico. This issue has become quite a headache relative to U.S. exports to Canada because importers hope to use entry into a foreign trade zone or bonded warehouse to avoid payment of anti-dumping or countervailing duties, and have been unnerved to learn it does not work with goods exported to Canada regardless of whether Nafta is claimed. The same result will apply at the beginning of the year for exports to Mexico.

Under the traditional American definition of drawback, only same condition direct identification drawback survives between the U.S. and Canada or Mexico. There are, however, exceptions to the new Nafta drawback transportation and exportation entries and non-conforming goods, such as rejected merchandise. There are also special exceptions for certain sugar and citrus products.

Manufacturing drawback with originating components is allowed as well as goods delivered for joint undertakings and limited non-Nafta textile and apparel transactions.

To make his claim, the importer will have to provide certain documentation to his home country Customs service: a receipt evidencing payment of Customs duties on a particular entry; a copy of the entry document showing its receipt by the Customs administration of the other country; a copy of the final Customs duty determination; and other evidence of payment as needed. It is left to the governments of the three countries to work out the duty debits and credits between themselves.

However, in addition to anti-dumping and countervailing duties, quota charges and/or tariff preference payments and Section 22 Agriculture fees are not subject to refund (with rare exceptions).

In the hopes of minimizing the impact of Nafta drawback, Mexico sought to have its Sectoral Promotion Program in place by November 1, 2000, 60 days before January 1, 2001. The idea was that by lowering the applicable duty rates in advance of Nafta drawback, such a step would greatly ease the impact of these changes on doing business in Mexico.

Remarkably, the Mexicans have come up with a practical solution - lower the duty rates - well in advance of implementation and despite a historic change in government.

The author wishes to thank Carlos Angulo Parra of the Baker McKenzie office in Juarez, Mexico for his assistance in the preparation of this article.

STEPPED UP ENFORCEMENT
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Arising from allegations of forced child labor , Customs has issued a detention for all imports of apparel made by Dong Fang Guo Ji of Mongolia. Most of the company's exports are under its own brand name, although some sub-contracting work is performed.

INTERNET TRANSACTIONS
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Anticipating problems for individuals with goods bought over the Internet, Customs has posted to its web site a publication titled Internet Transactions reminding importers of the pitfalls which can arise when ordering for importation over the web; for details:

http://www.customs.ustreas.gov/impoexpo/inetrade.htm.

CUSTOMS REISSUES BOND AMOUNT REMINDER
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The Port of Blaine has issued a reminder to the trade that entries involving FDA, EPA, FCC and TSC ALL require bonds set at three (3) times the entered value. Bonds for BATF goods of alcoholic beverages and distilled spirits, CPSC shipments of toys and fireworks, and AMS shipments of goods subject to marketing orders also require bonds set at three (3) times the entered value.

COTTON BOARD REVISES ITS FEES
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In order to avoid imposition of the cotton user fee on U.S. produced cotton which is exported and then reimported as textile or apparel products, USDA has amended its regulations to exemption tariff numbers in headings 9819 and 9820 from imposition of the cotton user fee.

CUSTOMS CAN'T STAY OUT OF COURT
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(Published in the Journal of Commerce, November 7, 2000)

Given his background, when Raymond Kelly became Commissioner of Customs, the understandable concern of the trade community was how much more of a law enforcement agency would Customs become? Well, we have certainly seen a tightening of the enforcement noose, something not altogether unexpected in that the Mod Act has been in existence since 1994. Perhaps the more interesting indication of Mr. Kelly's stewardship is the apparently non-traditional issues with which the agency has come to concern itself.

By way of example, on October 25, 2000 the United States Court of Appeals, Ninth Circuit, issued its decision in U.S.A. v. Hay, No. 99-30101, D.C. No. CR-98-00340-BJR. The case involved a conviction for possession and distribution of child pornography by means of a computer. Customs was involved in the case from the outset. The original tip arose because the Canadians arrested an individual who was known to actively trade and exchange child pornography. The evidence the Canadians developed showed the transmission of nineteen (19) graphic files to a specific File Transfer Protocol in the United States. That information was given by Canadian law enforcement to the U.S. Customs Service Attache in Canada. He turned it over to the Customs' field office in Washington State which tracked down the FTP address. Customs found it belonged to Hay, who, in a ruse telephone conversation, admitted to being the only user of the computer to which the address was attached. Hay's receipt of graphic files did not come through e-mail or SPAM mail but rather by direct transfer to his personal FTP address.

Relying on the information it developed, Customs obtained a search warrant which allowed the search of Hay's apartment and seizure of his computer hardware, software, records, instructions, documentation and depictions of child pornography. On one of the seized hard drives, hundreds of computer graphic files were found which contained sexually explicit conduct involving minors.

Following trial, the jury convicted Hay. He appealed arguing the search of his entire computer system was unreasonable. He appealed on other grounds which were unrelated to Customs' actions. The appellate court upheld the conviction rejecting all of Hay's objections and finding the search warrant was drawn with reasonable particularity plus the actions of Customs were proper under the circumstances. Mr. Hay is not the first defendant convicted for engaging in child pornography as the result of Customs' action. The agency is to be applauded for its efforts. At the same time, however, one has to wonder - why did Customs proceed with the case? Why not turn it over to the F.B.I. or some other domestic law enforcement entity?

For an agency with limited resources, a static work force of about 17,000 employees, and trade growing exponentially, one has to wonder why Customs is going so far afield from trade related matters? No one is suggesting child pornography is not a serious crime or that those engaging in it should not be pursed and severely punished. The question is should Customs be the agency doing the pursing? Like a lot of things the agency does, we in the trade community look at it with mixed feelings. Should the agency pursue criminals outside the trade arena? Since it has, we all should be proud of Customs as it sets the standard in the Internet environment for other law enforcement agencies.

Even when operating in the traditional trade arena, Customs cannot stay out of court. Only a couple of days after announcing the Hay decision, the Ninth Circuit announced its decision in Nippon Miniature Bearing Corp. vs. George J. Weise, et al., No. 97-55930, D.C. No. CV-96-08837-RSWL, which involved the importation of miniature steel ball bearings. In the mid-1980s, Customs began an investigation of Nippon's importation practices. The investigation concluded that Nippon was misdescribing its ball bearings in such a way that they were materially misrepresented and, as such, were illegal to import. In 1989 Customs seized nineteen (19) shipments at Los Angeles, California. Nippon sought early release. Customs agreed but demanded a deposit of over $1 million which equaled the dutiable value of the seized ball bearings. Nippon took advantage of the petition process but later paid the fine imposed.

During the course of its investigation, Customs determined that many more than the nineteen (19) shipments seized had been similarly misrepresented and so issued a penalty case relying on 19 U.S.C. § 1592 (a statute which allows the agency to impose a penalty when goods are materially misrepresented or a material omission had occurred). Again Nippon petitioned. Again Customs refused to mitigate. Nippon then filed a supplemental petition and shortly thereafter filed suit in federal court in Los Angeles.

In its lawsuit, Nippon argued that Customs had violated its due process and free speech rights by subjecting its goods to forfeiture and initiating administrative penalty proceedings. In other words, Nippon claimed its constitutional rights had been violated. Nippon, in fact, did what many importers dream about doing - it took Customs to court. While the dream is an appealing one, the result was a rude awakening to Nippon.

The trial court found it did not have the power (jurisdiction) to hear the case because, it said, federal law grants exclusive jurisdiction over import issues to the Court of International Trade. The appellate court agreed in part but also disagreed in part.

While it is always tempting to want to sue Customs and exact a pound of flesh for the way in which the importer perceives himself to have been treated, there are limits to what can be done. Unlike state court actions where just about anyone can be sued for just about anything, one gets into the federal court against the government only when the government agrees to be sued (and the government agrees to do so based on laws which Congress enacts). The problem for Nippon was that Congress granted exclusive jurisdiction to the Court of International Trade to decide penalty actions. However, Nippon claimed that both the penalty and the forfeiture actions were improper. As a result, the appellate court remanded the case back to the federal district (trial) court for further proceedings to answer the question - did the government act properly in seizing Nippon's goods?

Even though Nippon seems to have won the battle, it will quite possibly lose the war! The problem Nippon is going to have to overcome is the claim of the government that it waived its right to protest the government's actions. As stated earlier, in order to obtain its goods, Nippon paid the fine demanded. When it first submitted its check, the accompanying cover letter stated it was being paid under protest. Customs refused to accept the payment in that fashion. Nippon then submitted the payment removing the protest language from the cover letter. Nippon contends it never agreed to waive its remedy of going to court. Customs says it did.

There is a lot of money at stake. Nonetheless, the Nippon case serves as an expensive lesson for importers whose goods get seized. If you want your goods, you end up giving up your right to challenge Customs' action because, as a condition of obtaining release, Customs now requires all importers to waive their right to court action. Therefore, if an importer believes Customs acted outrageously and really wants to take the agency to court, he has to be willing to risk the loss of his goods. In a forfeiture action, the basic decision the court makes is whether or not the goods violate the law. If so, the importer loses. Therefore, an importer has to be very careful about proceeding in court. To do so, he has to reject administrative disposition of the case and, instead, seek to defend himself in court. The danger, however, is that if the law has been clearly violated, the importer loses his goods, spends a considerable amount of money for attorneys' fees and costs plus a large chunk of his time, and ends up with nothing positive to show for it. Customs does not often end up in court on forfeiture actions because they are seldom dead wrong, an unfortunate fact because often the way in which the case has been processed by Customs leaves a great deal to be desired!
http://www.joc.com/lede/20001107/sections/spec3/w15151.shtml

TRADE AND DEVELOPMENT ACT OF 2000 - Update -
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On October 5, 2000, Customs published interim regulations implementing both parts of the Trade and Development Act of 2000 (the Act) - the U.S.-Caribbean Basin Trade Partnership Act (CBTPA) and the African Growth and Opportunity Act (AGOA). Of particular interest to importers and their suppliers is the record keeping aspects of these new regulations. A new Certificate of Origin form has been created and must be in the importer's possession before a claim can legally be made. Additionally, importers are now required to keep all the relevant records in the U.S. In the event of a Customs verification, an importer can expect a request for production records, information relating to the place of production, the number and identification of the types of machinery used in production and the number of workers employed in production. These types of documents (along with others) are now routinely requested when Customs wants proof no transhipment occurred. Importers will also need to be able to produce purchase orders, invoices, bills of lading, shipping documents and import and clearance documents. In addition, importers are expected to be able to document how they came to the conclusion their product qualifies for benefits under the Act, potentially a particularly challenging task if part of the claim is based on the U.S. origin of certain inputs which the supplier sources.  In the case of CBTPA, proof of growth or manufacture is needed which includes a cost and value breakdown.

As with NAFTA, a Certificate of Origin from a supplier is considered adequate documentation for CBTPA. In the case of AGOA, a GSP Declaration would be acceptable. However, importers cannot ignore red-flags or self-blind. Even the existence of the Certificate of Origin or GSP Declaration may not be enough if other circumstances suggest the goods in question do not qualify. Importers need to be sure the form is properly filled and out and signed by someone with knowledge about the supplier's operations (an officer or manager, but not a clerk).  Even having done all of that, if the contents of the Certificate or Declaration do not support the granting of benefits, an importer cannot ignore that fact and make his claim anyway.  Having done all of that, if so requested, importers will also have to show Customs the adequacy of their internal controls.
Importers should also keep in mind that although the regulations and the Act took effect on October 1, 2000, benefits will not be available to certain countries until the U.S. Trade Representative makes the necessary findings to make a country eligible. These findings will be published in the Federal Register and come into force on the date of publication. For a guide to the AGOA, the U.S. Trade Rep. has posted an implementation guide written in non-legalese terms, see http://www.ustr.gov/regions.

CUSTOMS ANNOUNCES TEST OF POST-ENTRY AMENDMENT
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A test of the Post-Entry Amendment (PEA) process has finally been published and takes effect no earlier than December 28, 2000. It lasts for about a year, unless extended. In order to create a more manageable means than Supplemental Information Letters and allow importers to report post-entry pre-liquidation changes, and because importers have an obligation to exercise reasonable care and a self-serving interest to avoid penalties and increased monetary obligations, Customs developed PEA. It allows importers to report both revenue and non-revenue changes.  

While recognizing the omission or misstatement leading to the filing of a PEA may still trigger a penalty, Customs has determined that changes involving less than $20.00 per entry (refund or increase) will generally be disregarded, with exceptions related to other agency requirements.

To file a claim, the importer must explain the error and provide corrected information on a per entry basis. Individual amendments are required where the over payment or under payment involves $20.00 or more, or when any amount of dumping or counterveiling duty is involved. Quota and textile goods, as well as those subject to a Voluntary Restraint Agreement, will require per entry corrections for errors related to country of origin, net quantity, visa number and classification. Individual amendments are required for non-revenue errors related to Census Bureau statistical changes, generally where a line item is revised by $10,000 or more. Quarterly reports may be used in all other circumstances and are due on the 15th day following the close of the calendar quarter. If the types of corrections are mixed, an individual amendment must be filed.

Customs is developing a cover sheet to be used. The importer must explain the error and provide corrected information along with any relevant supporting documents for each affected entry whether filing quarterly or individually. Customs is also developing a database report which importers will be able to use.  Importers are cautioned to regularly check the liquidation status of affected entries to make sure their claims