A Brief Summary Of Customs And Trade Issues For Corporate Counsel - Part II

Trade Remedy Proceedings

Just as FTA preferential duty regimes and GSP can reduce duties on imported inputs in trade remedy proceedings - antidumping, countervailing duty and safeguard proceedings - can significantly increase duties and administrative and legal costs and are issues a company should consider when evaluating whether to source in a particular country. In some cases, such as the U.S. and EU safeguard measures against Chinese textiles, companies will have a fair bit of warning prior to the initiation of an action, and can participate in the public proceedings which will determine whether an action goes forward. Monitoring potential issues and proactively submitting comments to government representatives can make the difference between whether a company's products are adversely impacted by a trade remedy proceeding or are not. For example, a proactive company may be able to ensure that its particular product is considered outside the scope of an antidumping action that otherwise impacts the class of products in which it trades.

Antidumping actions are the most prolific of trade remedy actions. Government authorities may protect domestic industries from international price discrimination or "dumping" by imposing antidumping duties, an additional tariff, based on the size of the price discrimination or "dumping margin," on imported products. These authorities must first investigate and find that the foreign exporters have exported a given product at a price (the "export price") which is less than its "normal value." The authorities must also determine that the imports in question are causing, or are threatening to cause, material injury to the domestic industry (the "injury inquiry").

Dumping and injury inquiries require a fairly substantial factual investigation, both of the foreign industry and of the domestic industry and importers, respectively. The fact gathering process is potentially fraught with danger for the foreign producers/exporters as uninformed responses to inquiries or a failure to respond can result in a more adverse determination. In fact, unsavvy foreign producers may find themselves totally excluded from the market by substantial dumping margins until such time as they can revise their pricing structures to reduce or eliminate the margin through a subsequent review of the antidumping duty order. Of course, quite apart from any antidumping duties eventually imposed, the investigation itself generates substantial market turmoil for a company attempting to plan its sourcing and distribution operations.

Countervailing duty actions likewise require WTO Member authorities to conduct an investigation, and the imported goods in question must cause, or threaten to cause, material injury to the domestic industry producing the "like product" in the country of importation (the "injury inquiry" referenced above). Finally, they likewise result in tariff-like duties being imposed on imported goods.

Unlike antidumping actions, however, no price discrimination need be found. Instead, the countervailing duty authorities must find a countervailable subsidy. A "subsidy" is defined as a "financial contribution" (or any form of income or price support) by a government or any public body that confers a "benefit" to parties in its territory. For a subsidy to be "countervailable" it must also be "specific." As a result of the similarities between antidumping and countervailing duty actions, countervailing duty complaints are frequently filed together with antidumping complaints, particularly for goods coming from countries which have been held to provide countervailable subsidies in the past.

Safeguard actions are rare, compared with antidumping and countervailing duty investigations. However, there are variations of safeguard actions - in particular, the safeguard actions that can be filed against textiles from China based on a "market disruption" standard which is less onerous than the usual "serious injury" standard discussed below. Since the end of the textile quotas on January 1, 2005, these safeguard actions have increased very substantially and promise to be a staple until their existence expires on December 31, 2008. Thus, particularly in the textile area, companies should not ignore the risks of a potential safeguard action.

A WTO member may apply a safeguard measure to a product if it determines that the product is being imported into its territory in such increased quantities (absolute or relative to domestic production) and under such conditions as to cause or threaten serious injury to the domestic industry that manufactures similar products. "Serious injury" is defined as a "significant overall impairment in the position of a domestic industry." Unlike antidumping and countervailing duty investigations, safeguard investigations do not require that there be unfair trade practices, such as dumping or subsidies. Further, safeguard measures may only be in place for such period as is "necessary to prevent or remedy serious injury and to facilitate adjustment," and not more than four years unless extended. Finally, safeguard measures can take many forms, including tariffs, quotas, and tariff-rate quotas, and are typically applied to all products irrespective of source, with the exception of certain free trade partners or developing country WTO members.

Assessing the risk of a trade remedy proceeding requires a company to first determine whether there is a domestic producer of the goods the company wishes to import located in the importing company's home country. Absent a domestic producer, the risk is very low indeed, since antidumping actions require injury to a domestic industry.

If a domestic industry does exist, the next step is to assess the likelihood of an antidumping action taking place in that industry and country. Some countries, such as the United States, India, Canada, Mexico, Australia, and the EU, are known heavy users of antidumping laws. Others, such as Brazil, Thailand, and most recently, the People's Republic of China, are becoming more active.

Likewise, certain industries are more risky. Steel is risky in most places, chemicals can also be problematic, electronic goods can be risky in the EU and textiles are risky virtually everywhere (but particularly from China). In fact, all capital intensive industries that must operate at full capacity utilization (e.g., steel, certain chemicals and plastics), where worldwide over-capacity can result in drastic price reductions rather than reduced production, should be on the watch for antidumping cases. Likewise, all industries that have cyclical pricing cycles (e.g., semiconductors, electronics) where prices decline sharply after new products are introduced, should be on the lookout as well.

U.S. And Other Export Controls

Companies seeking to shift assembly abroad need to be very careful to ensure that their transfers of technology and machinery do not require an export control license or other approval, either from the U.S. Department of Commerce, Bureau of Industry and Security ("BIS"), or, for defense articles and services, from the U.S. Department of State, Directorate of Defense Trade Controls ("DDTC"). One of the prime candidates for production outsourcing - China - is also a country subject to a U.S. arms embargo (under the International Traffic in Arms Regulations administered by DDTC) and to some fairly strict dual-use export restrictions contained in the Export Administration Regulations (administered by BIS). A careful review of the machinery, software and technology to be outsourced is essential to determining whether a license is required. Moreover, companies outsourcing to other companies, or establishing joint ventures with foreign companies abroad, would be well-advised to subject those suppliers to a careful review to ensure that they are not on, or affiliated with companies on, any of the prohibited party lists maintained by BIS, the Department of Treasury's Office of Foreign Assets Control (OFAC), or the Department of State.

Many companies are not aware that their goods may be on the list of controlled items, and therefore allow their freight forwarder or customs broker to identify their goods as EAR99 on the Shippers Export Declaration (SED). They discover their error only after years of exports, and often have to pay significant penalties simply as a result of their failure to classify their products properly.

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Although the general trend today is towards reduction and elimination of tariffs and other barriers to trade, unfamiliarity with the numerous rules governing the importation of goods in the United States and its trading partners can result in increased duty costs, as well as penalties, that can impact the company's bottom line. The primary burden of compliance has been shifted squarely from the customs authorities to the importer, and ironically, potential penalties are often higher in the case of duty-free merchandise than for dutiable merchandise. Moreover, many of the U.S.'s trading partners view trade remedy and customs duties as an important source of revenue, creating a potential impediment to the smooth operation of a company's supply chain and compliance initiatives. However, a well-planned strategy will enable companies to avoid potential pitfalls while taking advantage of transaction structures resulting in production and duty cost savings.

Published July 1, 2005.