The tariff shift tests in Part 102 are generally more predictable and easier to meet than the substantial transformation test. If implemented, the new rules could give products further manufactured in Canada or Mexico an advantage over products further manufactured in other countries due to the increased certainty in determining the COO—and they could even give Mexican and Canadian products a greater chance of avoiding Section 301 tariffs. This is because Chinese components, used to make a product subject to Section 301 tariffs if the COO is China, must be “substantially transformed” in a third country before importation into the U.S. to avoid the tariffs. But if the new rules are implemented, some Chinese components further manufactured in Canada or Mexico could be considered products of those countries even with less substantial further manufacturing compared to other countries.
Unlike NAFTA, the USMCA does not contain any marking rules. Many speculated that the Part 102 special marking rules for goods from Canada and Mexico would be void when the USMCA replaced NAFTA and that the marking rules applicable to goods from all other countries would apply instead. But pursuant to the proposed new rules, goods from Canada and Mexico—regardless of whether they qualify for duty-free treatment under the USMCA—would continue to be marked according to Part 102. The proposed new rules do not impact the COO for purposes of applying antidumping and countervailing duty orders to such goods.
The USMCA contains a first-of-its-kind labor provisions enforcement mechanism called the Rapid Response Labor Mechanism (RRLM). On May 12, 2021, the Office of the U.S. Trade Representative (USTR) issued the first request for review under the RRLM. The request was prompted by events surrounding a vote by workers at General Motors de México’s Silao facility regarding their collective bargaining agreement.
On July 8, 2021, the United States and Mexico agreed to a course of remediation, including a new vote. The vote was held on August 17 and 18, 2021. Federal inspectors from Mexico’s Secretariat of Labor and Social Welfare oversaw the vote, with the International Labor Organization and Mexico’s National Electoral Institute serving as vote observers, and the workers voted to reject the existing collective bargaining agreement.
Less than a month later, the USTR filed its second request under the RRLM, alleging that a Tridonex facility in Matamoros was denying workers free association and collective bargaining rights. USTR announced that an agreement with Mexico had been reached on August 10, 2021, providing severance, backpay, and a commitment to neutrality in future union elections.
USMCA Article 23.6 states that Canada, Mexico, and the United States must “prohibit the importation of goods” that are “produced in whole or in part by forced or compulsory labor.” Canada seized its first shipment of goods—women’s and children’s clothing—suspected of being made using forced labor in 2021. Canada Border Services Agency (CBSA), which works with the Labour Program of Employment and Social Development Canada to identify goods suspected of being made using forced labor, made the seizure. Later, in November 2021, Supermax Healthcare Canada was asked to stop all imports into Canada, until it could prove that no forced labor was used in making its nitrile gloves. These are some of the most significant USMCA-related developments forin 2021. Next year will no doubt bring further evolutions to this still new—and very important—free trade agreement.
III. Customs Modernization Act of 2021
In 2021, proposed legislation was introduced in Congress that would significantly enhance the ability of CBP to secure national and economic security, enhance data integrity, confront international adversaries, and better facilitate trade by utilizing emerging technologies. As discussed below, the objectives of the Customs Modernization Act of 2021 (CMA) are to resolve existing data collection constraints, expand the legal use of trade data, increase supply chain visibility and accountability, improve enforcement effectiveness, and direct federal agencies to share trade data.
The CMA would improve CBP’s ability to collect and use information. Significantly, CBP would be authorized to collect additional information from additional parties, including information related to the sale, purchase, transportation, importation, or warehousing of a product through a commercial or marketing platform. CBP would be permitted to utilize such information for any lawful purpose, including commercial enforcement, and CBP would have the power to impose penalties of $5,000 for the first violation and $10,000 for subsequent violations.
CBP also would be authorized to require electronic filing of all data related to an entry and to require a single entry filing of all data, although CBP would retain the ability to waive the electronic filing requirement and allow for paper- based filing in limited circumstances at CBP’s discretion. Only the importer of record (IOR) or its agent (e.g., customs broker) would be permitted to make the electronic filings, and the IOR or its agent would be required to certify electronically-filed entry data or to sign the entry if the data is not electronically filed. Importantly, with respect to documentation or information submitted in advance of entry (Advance Data), the IOR or its agent would be permitted to convert such Advance Data into an entry, and CBP would be authorized to use Advance Data for any lawful purpose, including commercial enforcement.
The CMA also would expand recordkeeping requirements to additional parties that facilitate cross-border transactions, including those that submit, transmit, or otherwise make available or visible to CBP documentation or information under U.S. customs and trade laws or that own or operate a commercial or marketing platform or marketplace through which imported goods are offered for sale or purchase. Significantly, the CMA provides that, if a person fails to comply with a demand for records, CBP may use an inference adverse to that person’s interests in (1) ascertaining the correctness of any entry; (2) determining the person’s liability for fines, penalties, duties, fees, and taxes; and (3) promoting compliance with U.S. laws.
CBP’s powers with respect to enforcement of intellectual property rights (IPR) also would be enhanced if the CMA was implemented in its current form. To begin with, CBP would be able to share information on IPR-related import violations provided or shared by online marketplaces, e-commerce platforms, express consignments operators, freight forwarders, and other entities that facilitate imports or the sale of imports to verify the legitimacy of those shipments. The CMA also would require counterfeit imports or exports to be seized and, in the absence of the written consent of the owner of the mark or copyright being infringed, to be summarily forfeited. In addition, the CMA would clarify that persons who are in any way concerned with infringing or counterfeit activities are subject to civil penalties. In a rare instance where CBP’s powers would be curtailed, however, the CMA would require that challenges to Section 337 exclusion order enforcement be filed with the U.S. International Trade Commission.
Importantly, the CMA would make some significant changes to how CBP handles penalty matters. For example, the CMA would remove the standard and maximum penalties for gross negligence, and it would require that CBP redefine the standards for negligence and fraud and align the definition of fraud with standards in other civil fraud statutes. The CMA also would establish standards for issuing penalty determinations, which would include an exception to requiring pre-penalty notices if the claim is $500,000 or higher per regulation, and it would permit enforcement of fraudulent violations at the U.S. Court of International Trade without CBP having to issue a penalty notice. In addition, the CMA would expand liability to any person in any way concerned with unlawful acts, and it would increase civil penalties for violations of arrival, reporting, entry, or clearance requirements (up to the value of the subject goods in some instances). Moreover, the CMA would allow CBP to summarily forfeit items found to violate the Food, Drug, and Cosmetic Act and other counterfeit goods.
The CMA also would provide additional powers to CBP with respect to entities that have been suspended or debarred by the federal government. To begin with, the CMA would permit CBP to prevent suspended or debarred persons from participating in the IOR program. The CMA also would grant CBP the power to deny administrative exemptions for imports involving suspended or debarred persons. In addition, the CMA would authorize CBP to issue special rules for entry and declaration of goods whose importation is caused or facilitated by suspended or debarred persons.
As the discussion above indicates, if enacted in its current form, the CMA would augment CBP’s powers in numerous ways that could have significant implications for importers and exporters. Importantly, the Congressional sponsors of the CMA have expressed a willingness to engage in discussions with interested parties and potentially to make changes to the text of the CMA, and given this fact, it may be beneficial for companies, organizations, and practitioners to seek to enter into such dialogue with the Congressional sponsors.
IV. Section 232 Tariffs on Imported Steel and Aluminum Products
In March 2018, President Trump issued Proclamations 9704 and 9705 announcing concurrence with the Secretary of Commerce’s determination that aluminum and steel articles were being imported into the United States in quantities and under circumstances that threaten to impair the national security of the United States. Under authority of Section 232 of the Trade Expansion Act of 1962, the President authorized additional tariffs of 25 percent on steel articles and 10 percent on aluminum articles imported from most countries, effective March 23, 2018. Legal challenges arguing that these tariffs were the result of unconstitutional delegation of authority to the president that allowed too much discretion were unsuccessful. The tariffs remain in place at the time of this article’s submission.
Presidential authority was again challenged following issuance of Proclamation 9772 on August 10, 2018, when the Section 232 tariffs on steel articles imported from Turkey were raised from 25 percent to 50 percent effective August 13, 2018. Transpacific Steel LLC (Transpacific), an importer of Turkish steel, filed a lawsuit at the Court of International Trade (CIT), claiming that the imposition of the tariff increase was unlawful because Proclamation 9772 was issued outside the mandatory statutory deadlines for the President to take such action. The CIT sided with Transpacific and found that the President’s actions were untimely and violated the Equal Protection Clause of the Fifth Amendment as lacking a rational means of addressing the national security concerns underlying imposition of these Section 232 tariffs. This ruling constituted the first successful challenge to the tariffs; however, on July 13, 2021, the U.S. Court of Appeals for the Federal Circuit (CAFC) issued its opinion on appeal reversing the CIT. The CAFC found that the President has broad authority to act under Section 232 based on national security concerns and that there was a rational basis for the increase in tariffs on Turkish imports. The case was remanded to the CIT.
On April 5, 2021, the CIT once again found the President’s imposition of Section 232 tariffs was unlawful because the statutory deadline to take such action was exceeded. The ruling applies only to a specific subset of imports—steel and aluminum derivatives such as nails, tacks, staples, wires, and cables. The decision is subject to appeal but signals the unwillingness of the courts to allow the President unfettered authority to impose import tariffs based on national security concerns.
On October 31, 2021, the United States and the European Union (EU) announced an interim agreement to relax Section 232 tariffs on European steel and aluminum articles and derivatives and EU retaliatory tariffs on various U.S. goods exported to Europe. As part of the deal, the United States agreed to remove tariffs on EU steel and aluminum exports, effective January 1, 2022, and impose a tariff-rate quota (TRQ) system. Under the TRQ, historically based volumes of EU steel and aluminum exports will enter the United States tariff free. Items entered after the quota quantity is exceeded will be subject to Section 232 tariffs. Items granted exclusions from the tariffs will not be subject to the TRQ limits. The EU agreed to end retaliatory tariffs on imports of U.S. whiskey, orange juice, motorcycles, and jeans effective on a yet to be-announced date set by European Commission regulation. The United States is also in discussion with Japan and the United Kingdom on the negotiation of similar agreements.
The Department of Commerce continues to administer a Section 232 tariff exclusion process. Exclusions from the tariffs have been granted for items that are not available from U.S. sources. Exclusions are granted for a twelve-month period and may be renewed. Exclusions granted in the past fiscal year will be automatically extended through the end of 2023 without the need to submit a renewal request. On December 14, 2020, the Department of Commerce published an Interim Final Rule revising the process for requesting exclusions. The new rules create a more efficient approval process for approving exclusions where no objections have been filed, allow for more volume of excluded imports than designated through past usage, and modify the time standard for exclusion objectors to provide the same steel or aluminum article available from a foreign supplier. The goal is to ensure the appropriateness of factors considered and the efficiency and transparency of the process employed in rendering decisions on exclusion requests.
V. 2021 Update on CBP’s Force Labor Prevention Efforts
Section 1307 of the Tariff Act of 1930 prohibits the importation of goods that are mined, produced, or manufactured wholly or in part in any foreign country by convict labor, forced labor, or indentured labor (forced labor). CBP implements § 1307 through the issuance of Withhold Release Orders (WRO). CBP issues a WRO when there is information presented that reasonably indicates that the merchandise being imported, or belonging to a class thereof, was produced in whole or in part using forced labor. CBP detains shipments of goods suspected of being imported in violation of this statute.
For goods that are detained by CBP under a WRO, an importer may choose to export or abandon the goods, or it may submit evidence that the goods in question were not produced “wholly or in part” by forced labor. CBP has three months from the date that the goods were imported to determine whether the proof furnished is sufficient to establish the admissibility of the merchandise. If proof of admissibility has not been timely submitted, or if the proof furnished does not establish the admissibility of the merchandise, the port director will notify the importer that the merchandise is excluded from entry. The importer then has sixty days to export the merchandise or challenge the exclusion by filing a protest. If the protest is denied, the importer may challenge the denial before the Court of International Trade. If the importer takes no action the merchandise will be deemed to have been abandoned and will be destroyed.
In 2020, fifteen WROs were issued by CBP, nine of which involved cotton products originating from China, mostly products from the Xinjiang region. Three WROs involved disposable gloves and palm oil from producers in Malaysia. The remaining three WROs involved seafood from Taiwanese-affiliated fishing vessels. In FY 2021, CBP expanded its efforts to prevent the entry of foreign goods produced by forced labor by issuing eight new WROs, including silica-based products made by Hoshine Silicon Industry Co. (Hoshine) and its subsidiaries. The order covers materials as well as final goods, derived from or produced using Hoshine’s silica-based products, regardless of where the materials and final goods were produced. “Silica is a basic raw material [used] in the manufacturing of a wide variety of electronic goods, including semiconductors, printed circuit boards, batteries, solar panels, and virtually all consumer and industrial electronics.”
In 2021, CBP issued additional WROs for disposable gloves produced in Malaysia by several different manufacturers. In January 2021, CBP issued a WRO against cotton and apparel products made with such cotton produced in the Xinjiang Uyghur Autonomous Region of China. In September 2021, CBP lifted its forced labor finding for Top Glove Corporation Bhd. following the submission of evidence that the indicators of forced labor at its Malaysian facilities had been resolved.
In FY 2021, CBP detained 1,469 shipments for possible forced labor concerns. CBP has not released statistics on the number of detained shipments released versus those that were excluded, exported, or destroyed. The ability of importers to submit sufficient supply chain evidence to CBP to support a claim that the goods were not produced with force labor has proven particularly challenging, as CBP has said in a protest decision involving Section 321(b) of the Countering America’s Adversaries Through Sanctions Act (CAATSA) and 22 U.S.C. § 9241(a), that the importer is required to show by clear and convincing evidence that the detained merchandise, in this case, apparel, was not produced with forced labor. “Clear and convincing evidence is a higher standard of proof than a preponderance of evidence, and generally means that a claim or contention is highly probable.” In HQ H317249, CBP concluded that a third-party audit report submitted by a U.S. importer was insufficient to demonstrate that the detained goods were not produced using forced labor.
CBP has issued informal guidance in its section on Frequently-Asked-Questions on the type of business documentation that can submitted to support the origin of the materials, including, but not limited to:
(1) Purchase orders, invoices, and proof of payment;
(2) A list of production steps and records for the imported merchandise;
(3) Transportation documents;
(4) Daily manufacturing process reports;
(5) A list of entities that supplied inputs for the products being imported;
(6) Any other relevant information that the importer believes may show that the shipments are not subject to the WRO; and
(7) Evidence regarding the importer’s anti-forced labor compliance program.
For cotton products, CBP has indicated that importers need to present information on:
(1) “The entire supply chain from the origin of the cotton at the bale level through the final production of the finished product.”
(2) Identities of the parties involved in the production process, including names, addresses, and a flow chart of the production process.
(3) “Maps of the region where the production processes occurred.”
(4) “Number each step along the production processes and number the additional supporting documents associated to each step of the process.”
CBP has noted that the above-listed documents are not exhaustive and that other documents might be requested to demonstrate admissibility, and that the agency will evaluate the evidence and supporting materials made available on a case-by-case basis. Given the volume of information to review for admissibility, CBP notes that it is helpful if the documents submitted are organized and include a road map of the supply chain. An English translation of vendor documents is also helpful and may be required, and that only documents relevant to the goods being detained should be included.
CBP’s Informed Compliance Publication (ICP) on reasonable care details the standard by which importers are expected to abide for compliance with forced labor prohibitions, including a checklist of 12 questions that importers should be able to answer when importing products into the United States, such as:
(1) “Have you established reliable procedures to ensure you are not importing goods in violation of 19 U.S.C. § 1307 and 19 C.F.R. §§ 12.42-12.44?”
(2) “Have you established a reliable procedure of conducting periodic internal audits to check for forced labor in your supply chain?”
(3) “Do you vet new suppliers/vendors for forced labor risks through questionnaires or some other means?”
CBP has also incorporated forced labor questions related to its Regulatory Audit activities and it is an expected requirement for its upcoming Trusted Trader Program.
VI. 2021 CIT and CAFC Cases
This portion discusses two pivotal CIT and CAFC cases published over the past year that have significant effects on or implications for customs business.
In Meyer Corp. v. U.S., the CIT denied “first sale” appraisement (which importers use to reduce duties) because the plaintiff failed to prove that the transaction price between the related manufacturer and middleman was not distorted by nonmarket influences from China’s economy.
The value dispute began when Meyer Corp. sought first sale appraisement for entries of cookware from China in 2006, which CBP denied, arguing that the relationship between the related Meyer entities affected the claimed price. When claiming first sale value in a multi-tier transaction, the importer must show that the “first sale” price (the price that the middleman paid to the foreign manufacturer) satisfies several requirements. While the CIT has traditionally focused on only three requirements, the Court in Meyer Corp. imposed the additional requirement that the transaction must be conducted “absent any distortive nonmarket influences” for transactions transpiring in a nonmarket economy because the merchandise was from China.
The CIT explained that the importer bears the burden of demonstrating that both inputs from China and the transactions from its manufacturer to its middleman were procured at undistorted prices, which Meyer Corp. failed to demonstrate. In its concluding remarks, the CIT stated that it had doubts if the “first sale” test was even intended to include transactions involving non-market economy participants or inputs, such as China, and that “the Court of Appeals for the Federal Circuit could provide clarification.” As one method to prove the absence of nonmarket influences, the CIT posed that the importer could provide the same information that company would provide to obtain a separate duty rate in an antidumping duty investigation involving non-market economy participants. At this time, CBP has not published any guidance or rulings related to this case, thus it is unclear whether CBP will refuse first sale treatment for goods from China. But more guidance should be forthcoming as the case is currently on appeal before the CAFC.
While certain Trump-Era steel and aluminum tariffs were upheld, others were cancelled as illegal duties beyond the President’s delegation of authority, and the dispute regarding China tariffs is progressing through the pre-trial stages in the CIT.
In the PrimeSource cases, the CIT determined that the President did not have the authority to impose Section 232 Duties on steel and aluminum derivative products, such as wire, cable, fasteners, and bands. The CIT found that the action taken by Proclamation 9980 to adjust imports of derivatives did not occur within the 105-day time prescribed in the statute conferring Section 232 tariff powers to the President.
Because the President issued Proclamation 9980 after the authority delegated by Congress had expired, the action described in the proclamation was “outside of delegated authority.” The government’s argument that Congress intended for the time limitations in Section 232 to be merely directory was rejected and the CIT determined the untimeliness to be a “significant procedural violation.”
In Transpacific Steel, the CAFC upheld the increase in Section 232 Duties on steel imports from Turkey, reversing the CIT’s judgment that held they were unconstitutional. The CAFC found that the President did not violate the conferring statute in issuing Proclamation 9772, which increased steel tariffs on imports from Turkey. On appeal, the plaintiffs-appellees argued, among other things, that Proclamation 9772 was an abuse of discretion and in violation of equal protection of the Fifth Amendment Due Process Clause. The CAFC rejected these arguments, holding that the President timely and specifically adhered to the Secretary’s finding of the target capacity-utilization level of domestic steel, applying the rational-basis standard to the national security decision.
While judicial review of the Trump-era steel and aluminum tariffs is concluding, the challenge against Lists 3 and 4A of the Section 301 duties against Chinese goods is presently before the CIT. The challenge comprises over 6,500 importers disputing close to billions of dollars in duties, arguing, among other things, that the Section 301 duties were enacted illegally, violating the timing requirements and other language under The Trade Act of 1974. The legion of lawsuits, which is stayed pending the outcome of the test cases in In re Section 301 Cases, was spurred by HMTX Industries LLC’s initial lawsuit filed in the CIT in September of last year. An end to the litigation is far on the horizon as the Biden Administration continues to argue in support of the Lists 3 and 4A duties and will likely oppose refunding billions of dollars to importers if the duties are held illegal.
VII. Updated Requirements for Subheading 9801 Claims and Other Customs Regulatory and Administrative Developments
This portion summarizes the recent regulatory developments that impact customs enforcement of imports into the United States, including updates to duty-free claims for U.S. goods returned under 9801.00.10 of the Harmonized Tariff Schedule of the United States (HTSUS), Section 232 Duties, and enforcement of Antidumping and Countervailing Duties (AD/CVD) circumvention.
A. Requirements for Duty-free Claims under Subheading 9801.00.10, HTSUS
CBP released updated requirements for claims under 9801.00.10, HTSUS, on August 20, 2021. The tariff provision includes foreign merchandise re-imported within three years after having been exported and U.S.-origin goods reimported any time, as long as the goods were not advanced in value or improved in condition by any process while abroad. The provision allows companies to only pay duties and fees, including Merchandise Processing Fees, upon first entry of the foreign origin merchandise, rather than when it is re-importedreimported later. The claim is particularly useful for companies who export their merchandise from the U.S. often and subsequently reimport the goods when no processing occurs abroad that increases the value of the items.
The updated requirements are focused on “(a) importer and broker responsibilities in filing duty free claims under [sic] HTSUS Subheading 9801.00.10 and (b) documents that CBP may request to support claims under [HTSUS] Subheading 9801.00.10,” especially for aircraft parts and equipment. These are rigid documentary requirements, and, if the correct documents are not provided with the required information, the claim is denied.
The most significant portion of the updated guidance provides that if a U.S.-origin good is returned more than three years after export and is not clearly marked with the name and address of the U.S. manufacturer, the importer may provide a declaration by the owner, importer, consignee, or agent with knowledge of the circumstances regarding the duty-free claim. The declaration can be signed by the president, vice president, secretary, or treasurer of a company, or may be signed by an employee/agent of the company who holds a power of attorney and a certification by the company that the employee/agent has knowledge of the facts of the claim.
Second, CBP can require a manufacturer affidavit in addition to the importer declaration and the foreign shipper declaration. The guidance thus provides that, if the item is clearly marked already with the U.S. name and address of the manufacturer, this will suffice in lieu of the affidavit, which broadens the scope of acceptable documents for HTSUS 9801 claims.
Third, the guidance confirms that the importer has the burden to substantiate 9801 claims. Because brokers act as agents for the importers, there is a duty of care needed in the filing of entry documents. If it is found that the broker did not provide responsible supervision and control when making the HTSUS 9801 claim, then CBP may address the deficiency through the broker informed compliance process. Essentially CBP is placing a higher burden of responsibility on the broker in filing these claims.
B. Updates to Section 232 Exclusions Following U.S.-E.U. Agreement
On November 2, 2021, President Biden released a statement following an agreement with the European Union (EU), which allows the United States to impose a tariff-rate quota (TRQ) for a fixed volume of EU imports to enter the United States free from Section 232 duties. Further, Section 232 Exclusions are extended for products imported from the EU for a period of two years without the need to reapply (until December 31, 2023). These changes are expected to take effect January 1, 2022.
The President’s announcement follows the Interim Final Rule published by the Bureau of Industry and Security, which modified the Section 232 Exclusion process. Section 232 Duty exclusion requests may now group the products in larger batches on the same single exclusion request if the range of products can be classified in the same ten-digit HTSUS statistical reporting number. Additionally, there are 108 General Approved Exclusions (GAEs) for steel products and fifteen GAEs for aluminum products presently available for use by any importer and do not include quantity limits.
C. Regulations regarding Circumvention of Antidumping and Countervailing Duties
The Department of Commerce’s International Trade Administration (ITA) published new rules regarding enforcement of AD/CVD on September 20, 2021, which are designed to target tariff circumvention. First, the regulations bolster CBP’s powers under the Enforce and Protect Act (EAPA) by creating the merchandise referral system. When CBP is unable to determine whether merchandise is covered in a circumvention investigation, CBP can now formerly refer the question to the Department of Commerce. Previously, the regulations lacked this formal referral procedure.
Second, the rules define how the agency determines whether a product is substantially transformed in a country-of-origin analysis to assess AD/CVD. Commerce conducts a different analysis from CBP’s substantial transformation test, which considers factors such as the downstream production, physical characteristics, essential character, intended end-use, cost, sophistication of processing, and levels of investment in-country. This rule provides Commerce with the authority to make its own country of origin assessments, distinct from CBP, which can result in merchandise having a country of origin for AD/CVD purposes which is distinct than that determined under the Customs regulations at Part 134.
VIII. Conclusory Remarks
Although 2021 continued to be a tumultuous year for global trade, there were significant developments on the trade front. Despite the disruptive effects of the COVID-19 pandemic and increasing enforcement actions by the U.S. government, many trade practitioners found ways to adapt to such unexpected changes to their business environment. These trends will likely continue in 2022.
