No Small Matter: WTO Appellate Body Finds U.S. Bond Requirement Inconsistent with WTO Obligations - ABA YLD 101 Practice Series

By Seth A. Bayles

A decision by the Appellate Body of the World Trade Organization ("WTO") could make importing certain "special categories" of merchandise substantially more costly. On August 1, 2008, the WTO's Dispute Settlement Body adopted the panel and Appellate Body reports in a consolidated case concerning imports of certain frozen warm water shrimp. 1 The dispute focused on the U.S. Customs and Border Protection ("Customs") measure known as the "enhanced continuous bond requirement" ("EBR") and involved a February 1, 2005 U.S. Department of Commerce ("Commerce") Anti-Dumping Order on imports of certain frozen warm water shrimp from Thailand and India. Aimed at preventing companies from importing certain "special categories" of merchandise (thus far only certain warm water shrimp) before the final calculation of dumping duties (i.e. before dumping rates potentially increase), the new bond requirement makes importers of such merchandise post a continuous bond equal to Commerce's cash deposit rate for the previous year, plus any cash deposits equal to the amount of duties per entry. While the Appellate Body found that the EBR measure violated U.S. WTO obligations as applied to imports of certain warm water shrimp from Thailand and India, the Appellate Body did not rule that the measure was an as such (or facial) violation of U.S. WTO obligations. Consequently, the measure could be found legal when applied to other special categories of merchandise.

U.S. customs law requires all importers to file surety bonds to ensure compliance with a variety of Customs obligations relating to the imported goods, which are contracts whereby a guarantor (the surety) has an obligation to pay a second party (Customs) upon default by a third party (the importer of record/bond principal) in the performance that the third party owes to the second party. Generally, there are two types of bonds Customs accepts - a "single entry" bond covers one entry transaction, whereas a "continuous" bond (such as the EBR) covers entry transactions that take place over a one-year period. In 1991, Customs issued guidelines to importers using the EBR that they only had to post a bond equal to the greater of $50,000 or ten percent of the duties, taxes, or fees paid during the preceding year. Then, in 2004, Customs amended the EBR, adding new guidelines for certain "covered cases" within "special categories" of merchandise that makes importers of merchandise in these special categories post a continuous bond equal to Commerce's cash deposit rate for the previous year, plus any cash deposits equal to the amount of duties per entry. The rate under the amended EBR can potentially be much higher than the previous limit.

The manner by which Customs classifies merchandise as a "covered case" within a "special category" is essential to understanding the reach and impact of the EBR. Customs uses a combination of factors including previous collection problems, payment history, and indications that the liquidated duty rates may exceed existing security to determine whether certain merchandise should be classified as a "special category." To date, Customs has only designated "agriculture/aquaculture merchandise" as a special category and shrimp covered by Anti-dumping or countervailing duty orders is currently the only designed "covered case" within that category. There is no express limitation, however, on what Customs may deem a "special case" or "covered category."

Before the WTO Panel, India argued that the EBR was inconsistent "as such" and "as applied" with certain U.S. obligations under the WTO Antidumping Agreement ("ADA"), the WTO Subsidies and Countervailing Measures Agreement ("SCM"), and the General Agreement on Tariffs and Trade ("GATT"). The United States countered that the EBR, together with cash deposits, were aimed at ensuring collection of antidumping and countervailing duties by guarding against importers defaulting on payment of duties that increased from the time of the investigation until the calculation of the final duty during the administrative review. The Panel found for India on all these points. 2

Importantly for exporters of products in "special categories," the Appellate Body rejected India's "as such" challenges, meaning that the measure could potentially be successfully applied in subsequent cases. 3 The Appellate Body found that the reasonableness of the amount of security demanded depends on the magnitude of additional liability and the risk of default. And the Appellate Body agreed with the Panel that additional security could be taken "if a Member properly determined that the rates of dumping provided for in the anti-dumping order were likely to increase . . .;" The Appellate Body here concluded that the U.S. provided insufficient evidence that the EBR was reasonable to counter this risk. How this analysis will play out in subsequent cases, however, remains an open question.

Practically, the WTO's finding that the EBR as applied violates U.S. WTO obligations means that the United States should take action to comply with the ruling. While exact measures the United States will take to comply are as yet unknown, the Office of the U.S. Trade Representative ("USTR") will ask Customs to re-evaluate the bonding program implemented on shrimp imports from Thailand and India. 4 Although Congress was previously outspoken about the shrimp issues, 5 the response to the adverse WTO decision was more muted. Sen. David Vitter (R-LA) expressed disappointment, arguing that the amended EBR was an important step in addressing growing problems with U.S. trade laws. In the meantime and until the WTO decision is implemented, importers of certain frozen warm water shrimp from India and Thailand will still face the EBR.


1 Appellate Body Report, United States - Measures Relating to Shrimp from Thailand, WT/DS343/AB/R (Jul. 16, 2008); Appellate Body Report, United States - Customs Bond Directive for Merchandise Subject to Antidumping Countervailing Duties, WT/DS345/AB/R (Jul. 16, 2008) (collectively the "AB Report").
2 The Panel found the application of the EBR "constitute[d] a specific action against dumping," was not "in accordance" with the GATT as interpreted by the ADA, and therefore, was inconsistent with ADA Article 18.1. However, the Panel rejected India's "as such" claims because the Amended CBD was not mandatory, i.e. it allowed Customs to exercise discretion when discussing covered cases and special category merchandise. AB Report at paras. 196-201.
3 The Appellate Body rejected three specific claims: 1) that the EBR constituted an impermissible response to dumping; 2) that a security cannot be justified under the Ad Note independent of ADA Article 7; and 3) the reasonableness of the EBR as applied to imports of shrimp. With respect to the first claim, the Appellate Body stated that whether a security measure is permissible "should be evaluated in light of the nature and characteristics of the security and the particular circumstances in which it is applied." Rather, the Appellate Body explained that "Article VI of the GATT 1994 (including the Ad Note) and the Anti-Dumping Agreement represent an inseparable package of rights and disciplines."Id. at paras. 232-233. The Appellate Body also determined that the panel erred in determining that the cash deposits were not AD duties subject to ADA, and were in fact duties.
4 Sen. Vitter Criticizes WTO Ruling Against Continuous Bond Program, BNA Daily Report for Executives, Aug. 18. 2008, Issue No. 159 at A6

5 Senators Trent Lott (R-MS), Saxby Chambliss (R-GA), Mary Landrieu (D-LA), David Vitter (D-LA), and Johnny Isakson (R-GA) had previously urged Commerce to rigorously enforce U.S. antidumping laws with respect to warmwater shrimp. See Senators Urge Full Enforcement of U.S. Laws in Shrimp AD Cases, Newswire Today, May 30, 2007, available at http://www.newswiretoday.com/news/18904/

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About the Author

Seth A. Bayles is an Associate in the International Trade and Patent Litigation Groups at Weil, Gotshal & Manges LLP in Washington, D.C.

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