Part I of this interview appeared in the December 2005 issue of The Metropolitan Corporate Counsel and can be accessed online at www.metrocorpcounsel.com by putting "Schroth" in the site's search box.
Editor: Please tell our readers about the new Bilateral Quota Agreement between the U.S. and Chinese governments.
Schroth: The agreement is complex; however, it is basically a version of the former quota regime whereby an electronic visa system will be used to monitor pre-approved growth rates by category for three years (e.g. in 2006 there is a 10 percent growth rate allowed in apparel categories and a 12.5 percent growth rate in textile categories).
The agreement expires in 2008. Certain quota categories not covered by the agreement will still be covered by safeguard actions which will continue the disruption and uncertainty in the export of these products.
Editor: How will the new Bilateral Quota Agreement affect trade actions against Chinese textile and apparel products?
Schroth: Notwithstanding the Bilateral Quota Agreement, we continue to believe that Chinese textile and apparel products will be targeted by antidumping actions by competing U.S. industries. First, antidumping actions are highly disruptive and effective barriers to foreign trade, particularly against China. Second, other U.S. industries that produce agricultural goods (shrimp, garlic, honey, apple juice), consumer goods (candles, wooden bedroom furniture, tissue paper) and steel product (steel wire rope, steel plate, etc.) have very effectively used these cases to stifle Chinese imports. Third, the advent of the Byrd Amendment, whereby U.S. producers can receive back a pro-rata share of the dumping duties assessed against U.S. importers has lead to huge windfalls by petitioners filing these cases. Fourth, the U.S. textile and apparel industry is heavily invested in Latin America and the Caribbean, and they will want to protect these investments from increasing Chinese exports even under the new quota regime. Fifth, the threat of a dumping action creates widespread uncertainty as U.S. importers hedge their sourcing decisions and move towards domestic sources, or non-Chinese sources, to cover their requirements and reduce duty risks.
Editor: What practical tips do you have for Chinese textile and apparel producers to avoid the potential of an antidumping action against their products?
Schroth: We have advised Chinese textile and apparel producers and their affiliated or unaffiliated U.S. importers or customers to implement price monitoring programs and "strategic sourcing and production plans." The latter involves a variety of restructuring and resourcing efforts to reduce exposure to dumping duties. These can include setting up offshore processing activities (OPA) whereby certain processes can be performed outside of China with finishing or more labor intensive processes undertaken inside China. If done properly, this will shift the origin away from China (e.g. sewing garment panels in country A and linking and looping the panels in China).
We have also helped companies rationalize their production or sourcing operations by identifying textile and apparel products that are highly vulnerable to an antidumping action and shifting production or sourcing to countries outside of China. Again, certain labor intensive processes can still be performed in China without losing the non-Chinese origin of the product.
Editor: What are some examples how a "pre-investigation audit" can help minimize or eliminate the risk of an antidumping action or punitive duties being assessed against a Chinese company?
Schroth: The gamut of pre-investigation audit factors can include multiple sourcing (to spread the risk of cataclysmic antidumping duties) or exclusive sourcing (creating an exclusive relationship with a supplier that has prepared for and can survive an antidumping case, often effected by creating an affiliation between the companies or contractually binding the supplier with the U.S. importer) as well as restructuring of the import transaction (e.g., creating a non-resident importer of record where the Chinese supplier, not the U.S. importer, is responsible for all entry duties and other fees/assessments upon importation).
We also look at possible affiliations between the U.S. importer or distributor and the Chinese supplier in order to minimize or eliminate potential dumping duties. These affiliations can reduce the dumping exposure (again measured as the difference between the net U.S. resale price and the net "constructed" Chinese price) by increasing the net U.S. price to that charged at the resale level rather than at the import level.
Finally, we analyze a Chinese manufacturer's supply chain for material inputs and determine whether there are any "market economy" inputs (e.g., cotton, thread, beading, etc.) that can be used. This avoids the DOC's use of extremely high "surrogate values" to cost out the material input if sourced only from Chinese suppliers.
Almost every aspect of a company's manufacturing and distribution activities in China has an impact on the ultimate dumping duty assessed. It is critical to analyze each component of a company's operations in order to reduce or eliminate dumping duty exposure.
Editor: What other measures can U.S. companies take to enhance their competitiveness when sourcing from China?
Schroth: In addition to our trade practice, our firm specializes in U.S. Customs law and administrative law of other U.S. agencies such as the FDA, FTC, USDA, etc. Our Customs attorneys have had great success in increasing the competitiveness of our Chinese clients by setting up OPA programs (discussed above), "agency programs" (i.e., separating manufacturing operations from non-dutiable buying agency services and reducing dutiable value), "first sale" programs (i.e., using middleman trading concepts to create a dutiable value based on the first sale between manufacturer and middle man), duty preference programs (duty relief programs under multilateral treaties such as NAFTA, AGOA, CBI and other bilateral agreements with Asian trading partners) and duty savings, deferral and refund programs (such as duty drawback, use of foreign trade zones to "reverse engineer" duty rates, use of bonded warehouses to defer duty payments, etc.). In addition, our firm offers a full range of tariff classification and product valuation advice to assist Chinese companies and their U.S. importers in reducing tariff rates and assessments of regular and antidumping duties.
Editor: Are there other U.S. laws or government actions that U.S. companies need to be concerned with when dealing with China?
Schroth: As U.S. trade agencies step up enforcement activities against Chinese producers and exporters, U.S. companies should be vigilant of trade retaliation measures by the USTR such as Special 201 and 301 trade actions. These are usually initiated in response to a petition requesting retaliatory relief for violations of intellectual property rights in China or other violations of GATT-sanctioned trade protections. These actions can result in the levy of special retaliatory duties on a variety of products, usually selected on the basis of the amount of economic harm such sanctions will bring to Chinese industry (and thus the degree of pressure on the Chinese authorities that are responsible for providing these protections.) We have defended entire Chinese industries as well as individual companies and U.S. resellers in these cases, arguing that inclusion of certain products on the sanction list would create short supplies in the U.S. market, harm nascent U.S. industries, deprive upstream or downstream producers of critical inputs, lead to inflationary pricing, or damage defense or national security interests of the U.S.
Editor: What steps can companies take to isolate problems and mitigate any civil or criminal liability when importing goods from China?
Schroth: With respect to imported goods from China, U.S. importers must also be aware of certain enforcement actions by U.S. Customs and the DOC regarding origin fraud, transshipment of merchandise, circumvention of antidumping (or retaliatory) duties, mismarking, mislabeling or other violations of U.S. trade and customs statutes. To this end, we can assist companies (Chinese or American) in setting up internal self-assessment programs, informed compliance and reasonable care programs and prior disclosure programs to isolate problems and mitigate any civil or criminal liability that may result. For publicly traded U.S. companies or U.S. companies with Joint Venture partners in China (or companies looking for partners in China), the very strict regulations of the Foreign Corrupt Practices Act or the Sarbanes Oxley Act need to be fully explained and explored. In addition, new and very strict money laundering statutes implemented in Hong Kong and China have led to much greater scrutiny of offshore financial activities with punitive fines and penalties levied against any domestic or foreign company operating in China which runs afoul of these regulations. We advise on all of these types of compliance issues as part of a "due diligence review," which is a regular part of our counseling.
Editor: What are the advantages to companies that take pre-emptive steps to avoid antidumping actions or punitive duties?
Schroth: In the current political and economic environment, U.S. companies must be increasingly aware of U.S. trade retaliation measures against China and take the necessary pre-emptive steps to avoid or mitigate exposure to these measures. If an antidumping case is threatened (or currently in administrative reviews), companies can minimize their risks by undergoing pre-investigation or pre-review audits. Those companies that prepare early and reorganize their corporate structure, sourcing channels and pricing and costing systems typically obtain the best results and increase their U.S. market share exponentially.
Published January 1, 2006.