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Will Feds Acquiesce To Pressure From Importers?
Little Publicized Customs Proposal To Change 'First-Sale' Rule Would Lead To Big Increases In Duties
By Richard McCormack
richard@manufacturingnews.com
Importers, foreign companies selling products into the United States, law firms that represent them in trade cases, retailers, trade associations and members of Congress have reacted with vigorous opposition to a proposal by U.S. Bureau of Customs and Border Protection (CBP) to change the way it determines the value of imports.
The Customs proposal would lead to an increase in duties paid on imports by requiring companies to value products based not on the "first sale" of the product in the country in which it is being produced for export to the United States, but on the value of the last sale of the product made prior exportation.
"Under this proposal, transaction value will normally be determined on the basis of the price paid by the buyer in the United States," said the Bureau of Customs and Border Protection in a January 24, 2008, Federal Register notice announcing its desire to make the change. Currently, the duty is assessed on the value of the product as it leaves the factory -- the "first-sale" price -- in the country in which it is produced.
In comments submitted on the proposal, only a few domestic manufacturers who knew anything about the change came out in favor of the idea, along with the AFL-CIO. The overwhelming number of responses submitted by the trade community during the public comment period ending April 24 were adamantly opposed.
"From the day CBP first published its intent to radically alter [its import duty rules], broad based and well-respected segments of the importing community in the United States have been marshalling their efforts and expertise to prepare comments in an attempt to dissuade CBP from pursuing this ill-conceived course of action," notes the New York City-based law firm of Sharretts, Paley, Carter & Blauvelt.
The proposal "is not only flawed and highly objectionable but is also particularly disturbing with regard to the timing process and manner CBP employed to publish its position," added a letter organized by the American Apparel and Footwear Association and signed by 100 companies and trade associations including the Chamber of Commerce, the National Association of Manufacturers, Target, Home Depot, Lands End, Liz Claiborne, Mattel, Perry Ellis, and other companies, such as Chrysler, that manufacture products in the United States. "The Administration and Congress have just completed work on an economic stimulus package that will promote more consumer spending, yet CBP is proposing a move that would undercut essential goals of that legislation."
Other companies submitting opposition briefs to the proposal include Nikon, Boeing, Waterford Wedgwood of Ireland, Onkyo and Funai Corp. Dozens of law firms provided Customs with 20- to 40-page legal briefs citing cases they argue uphold the current practice. Many of them took time in their filings to belittle Customs for even considering a change. Many claim that it is up to Congress and not Customs to change the rules by which it determines duties.
In making its final determination on the proposed rule, Customs and Border Protection will have a tough choice: sticking with a proposal that would make it easier for the bureau to figure out the true value of imports (and providing a benefit for U.S. producers and workers), or acquiescing to the vociferous demands from the trade community that the proposed rule be unequivocally rescinded.
The briefs submitted against the proposal use such expressions as "extremely surprised by this proposed change," "exceeding legal authority," "ill timed," "procedurally flawed," "specious arguments," "severely damaging to Customs-trade relations," "arbitrary and capricious," "unknown impact on trade agreements," "tax increase," "no analysis has been performed," "it will surely be challenged in the courts," "blatant deficiencies," "erroneous interpretation," "bad policy," "reverses 20 years of legal precedent," "withdraw it immediately," etc.
The current duty is assessed by following a 20-year-old practice of determining the lowest possible value on imports coming into the United States -- the price of the product as it leaves the manufacturing plant overseas -- the so-called first sale. This has led to a surge of foreign production and record trade deficits, say domestic manufacturers. The economic benefits of the rule have accrued to overseas companies, companies that have shifted production offshore, importers, U.S. retailers and consumers. The rule has left U.S. producers and workers at a competitive disadvantage, they say.
"Many U.S. retailers use the first sale rule in their import transactions, which substantially reduces their cost of business by saving them millions of dollars in import duties they would have otherwise have to pay," says the National Retail Federation in its April 24 submission to Customs and Border Protection.
The practice of using "first sale" is likely undercounting the trade deficit tallied by the U.S. government, notes Robert Baugh of the AFL-CIO Industrial Union Council. "When an importer purchases an import from a middleman, CBP relies on the much lower price paid by the middleman to the actual producer as the entered value instead of the higher price paid by the U.S. importer to the middleman," Baugh explains. "This first-sale rule causes less than the full amount of revenues to be collected and results in the undercounting of entered value for purposes of determining the nation's trade balances."
Given such strong opposition to the rule change among those in the importing community, Baugh adds: "It seems certain that the understatement of import values and the avoidance of duties by means of this practice is massive. Thus it is both important and laudable that the CBP has stated its intention to correct this significant problem."
The Bureau of Customs and Border Protection says that it is following precedent set by the Technical Committee on Customs Valuation, and that adopting the change in valuation of imports "would conform the U.S. interpretation regarding the application of transaction value in a series of sales to the current interpretation of most other WTO members." Customs also says it "difficult" to determine the "first-sale" value of products that are -- according to the regulation -- "sold for exportation to the United States."
By using the "manufacturers' price" as the value of products destined for export to the United States, importers, retailers and consumers have saved billions of dollars on duties. Currently, duties are an important source of government revenues, generating about $30 billion. For more than 120 years, duties were the only form of government revenue. The proposed changes are expected to increase duties by 8 percent to 15 percent.
"Even for goods that are duty free, revoking the first-sale rule will raise the Merchandise Processing Fee and Harbor Maintenance Tax, which are assessed against imports on an ad valorem basis," says the National Retail Federation, which notes that it represents 1.6 million U.S. retail companies, more than 25 million employees -- about one in five American workers -- and 2007 sales of $4.5 trillion.
Higher duties will result in higher prices for imports, which will be passed on to American consumers, at a time when the weak dollar is increasing the price of imports and the American economy is in trouble, note virtually all of those opposed to the change.
"For 20 years, retailers and many other U.S. companies have organized their business relationships with their supply chains and their sourcing operations, partly in reliance on judicial decisions and customs' practices that endorsed the use of the first-sale rule as a legitimate valuation methodology," writes to the National Retail Federation. "Moreover, the rapid growth of international trade and the global economy has resulted in American companies creating more flexible, multi-tiered supply-chain systems and international sourcing transactions, including the more frequent use of buying agents, subcontractors and other intermediaries." All of these added layers increase the "export price." If the new rules were adopted, many of those layers of middlemen could be eliminated, says the Retail Federation.
Bob Baugh of the AFL-CIO notes that China, Korea and Japan are collecting duties on the final price paid by the importer. "Right now, however, our workers and domestic manufacturers are placed at an additional significant competitive disadvantage against foreign competitors," he writes.
The American Manufacturing Trade Action Coalition (AMTAC) submitted the most comprehensive document in support of the proposal, a 23-page legal brief signed by director Auggie Tantillo and National Textile Association president Karl Spilhaus. "In that the United States runs chronic and excessive federal budget deficits, it would seem wise to ensure that duties are collected on the full rather than a partial value of imports as they enter the customs territory of the United States," says the AMTAC submission. "To apply duty rates on the partial value of imports through the first-sale process makes a mockery of the 50-year GATT/WTO negotiating process."
The current system puts domestic producers and their workforce "at a disadvantage," says AMTAC. "Because the proposed interpretation bases transaction value on the last sale occurring prior to the introduction of goods in to the United States, the proposed interpretation is more closely aligned with the legislative purpose of the tariff to raise revenue and support numerous U.S. policy objectives....The proposed interpretation is easier for CBP to administer. Less fact-finding by CBP is required."
AMTAC studied the customs laws in various countries and found that many countries assess duties on the final transaction value of the goods headed into their markets, including Japan, Korea, Brazil, China, Australia, Mexico, New Zealand and South Africa. Even the EU and Canada have similar language in their Customs law, AMTAC notes.
The New Zealand Manufacturers and Exporters Association concurred: "It seems to us that the last transaction prior to importation is the logical and reasonable transaction of the calculation of import duty," it wrote in the only foreign organization submission to Customs supporting the change.
Small companies that import specialty products were particularly upset by the changes. "Elimination of the first-sale rule will negatively impact our business because the first-sale rule helps moderately-sized companies compete with large multinational corporations," wrote Joseph McConnell, senior vice president of operations for Biflex, a producer of bras, underwear and sleepwear for Wal-Mart, Sears and JC Penny. "This change will also immediately decrease profits, making it difficult for Biflex to reinvest in expansion, further stifling our ability to compete."
The proposed change in duty collection "will dramatically interfere with exportation commerce of my sport fishing product line," wrote James Cundall, of IDEA America. "How on earth are small businesses expected to make solid importation inroads when these kind of brick walls are being thrown up to stifle international trade? Please don't initiate this proposed law. It will sound a death knell for many American businesses."
Other small company importers note that big companies with large amounts of imports will benefit at their expense because they are not buying products through third parties. The big purchasers have much lower overhead costs per each unit purchased. "It seems that this proposed change in the method of calculating duty is a clear introduction of a value-added tax system of taxation which seems not authorized by our present tax code or duty rules," notes Jack Young in an individual submission to Customs. "VAT taxation systems are generally based on a selling-price calculation rather than on a cost-of-goods calculation."
Some of those companies opposed to the change signed form letters -- or slightly altered versions of form letters -- to the CBP. Other American organizations that submitted individual opposition comments include the American Petroleum Institute, the Consumer Electronics Association, the Distilled Spirits Council of the United States, the Business Alliance for Customs Modernization and the American Association of Exporters and Importers. Companies that said no to the idea include Phillips-Van Heusen Corp., Perry Ellis International, ASICS America (a shoe and sportswear company based in California), Meyer Corp. (the country's largest seller of aluminum and stainless steel cookware) and the consulting firm KPMG.
Boeing called the change "inappropriate" and said it should be "withdrawn." Any change must be introduced by legislation "and not through a Federal Register Notice of Proposed Interpretation," said Boeing.
Nikon Inc., said the change would "jeopardize Nikon Inc.'s preference and the continued viability of its manufacturing facilities in Thailand and the Philippines and result in a significant price increase to its distributors and, ultimately, to consumers."
Democratic Sen. Charles Schumer of New York said the proposal, if implemented, would require companies in his state to "restructure and possibly eliminate business units that have been built around this long-standing precedent." With higher duties, "more U.S. jobs [will] be pushed offshore," he wrote.
In an April 23 letter to Homeland Security Sec. Chertoff and Treasury Sec. Henry Paulson, Schumer, who not long ago proposed huge tariffs on Chinese imports, said New York's apparel industry "would be particularly hard hit. The industry injects billions of dollars into the New York economy and employs tens of thousands of New Yorkers in apparel design, production, distribution, sales and marketing operations. Fashion industry leaders such as Jones Apparel, Phillips-Van Heusen and Carole Hochman Design Group are headquartered in New York. Clothing retailers, such as Macy's, JC Penny and David's Bridal employ an additional 127,000 people throughout the state. The continued health of these and other companies in the apparel industry, including Perry Ellis, Hanesbrands, Biflex, VC Corp., Ariela-Alpha, TellaS Ltd., and Smart Apparel, is critical to the New York economy....I understand that a number of other Senators have written to you on this issue, but I chose to write to you separately to underscore how important this issue is to the New York economy."
Other U.S. Senators signing a letter against the proposal include: Ron Wyden (D-Ore.), Elizabeth Dole (R-N.C.), Dianne Feinstein (D-Calif.), Jim DeMint (R-S.C.), Blanche Lincoln (D-Ark.), Bill Nelson (D-Neb.), Herb Kohl (D-Wisc.), Norm Coleman (R-Minn.), Patty Murray (D-Wash.), Tom Coburn (R-Okla.), Mike Crapo (R-Idaho), Mel Martinez (R-Fla.), Ken Salazar (D-Colo.) and John Ensign (R-Nev.),
Members of the House of Representatives signing a letter against changing the first-sale rule include: Ileana Ros-Lehtinen (R-Fla.), Carolyn Maloney (D-N.Y.), Bill Pascrell (D-N.J.), Tom Price (R-Ga.), Roy Blunt (R-Missouri), Edolphus Towns (D-N.Y.), James Moran (D-Va.), Mike Thompson (D-Calif.), Kevin Brady (R-Texas), Jon Porter (R-Nev.), Nita Lowey (D-N.Y.), Sue Wilkins Myrick (R-N.C.), Donald Payne (D-N.J.), Keith Ellison (D-Minn.), Virginia Foxx (R-N.C.), Connie Mack (R-Fla.), Mario Diaz-Balart (R-Fla.), John Boozman (R-Ark.), Tim Mahoney (D-Fla.), Kathy Castor (D-Fla.), Jim Matheson (D-Utah), Allyson Schwartz (D-Penn.), Pete Sessions (R-Texas), Mike Ferguson (R-N.J.), Dan Boren (D-Okla.), Edward Royce (R-Calif.), Jim McDermott (D-Wash.), Joseph Crowley (D-N.Y.), Earl Blumenauer (D-Ore.), Judy Biggert (R-Ill.), Gregory Meeks (D-N.Y.), Ron Klein (D-Fla.), Howard Coble (R-N.C.), Joe Knollenberg (R-Minn.), John Lewis (D-Ga.), Artur Davis (D-Ala.), Ron Lewis (R-Ky.), Zach Wamp (R-Tenn.), Alcee Hastings (D-Fla.), Ellen Tauscher (D-Calif.), Lincoln Diaz-Balart (R-Fla.), Jerry Weller (R-Ill.), Debbie Wasserman Schultz (D-Fla.), Kendrick Meek (D-Fla.), David Price (D-N.C.), Henry Cuellar (D-Texas), David Dreier (R-Calif.), Bennie Thompson (D-Miss.), John Conyers (D-Mich.), Jim Ranstad (R-Minn.) and Paul Ryan (R-Wisc.).
The American Apparel & Footwear Association said the proposal "is unacceptable and must be immediately withdrawn." The CBP "does not have the legal authority to propose such a reinterpretation" of its rules and has "failed to consult with key stakeholders." CBP has "no compelling reason to seek a change at this time," the footwear group added, reflecting comments from dozens of other entities.
Waterford Wedgwood's U.S. division based in Wall, N.J., says as an importer it has been "pummeled over the last several years" due to the sinking dollar. Additional duties would "serve to add to the mounting losses [Waterford] and other importers of luxury goods have incurred since the attacks on September 11, 2001. Make no mistake, passing the increased duties onto consumers at a time when the U.S. economy is in the midst of a credit, housing and consumer confidence crisis would be no simple thing."
The change would also mean fewer Americans going to Ireland. "Each year, 350,000 American tourists travel to Waterford, Ireland, to visit the factory that formed the basis of the Irish heritage for the designs of crystal that have come to our country for over 200 years," says the company. "If enacted, the proposed reinterpretation would add to the myriad of unduly harsh business factors which could force [Waterford USA] and its parent company to rethink its investment in the U.S., which may ultimately result in the loss of thousands of jobs and an end to decades of fruitful tourism."
Levi Strauss & Co., which recently shut down all of its U.S. production, said it "strongly opposes" the proposed changes. If Customs adopts the rule, Levi Strauss would have "an additional expense which would have to be absorbed by reducing other overhead expenses such as salaries and personnel, cutting into business profit and negatively impacting future investment. The CBP proposal risks causing serious damage to a U.S. economy already on a shaky footing."
Biflex Corp., an importer of bras, underwear and sleepwear for major retailers, says the new rule will not increase manufacturing production in the United States. "Certain products we import are no longer produced domestically in sufficient capacities," says the company's submission to Customs. "We will continue to source goods from outside the U.S. because it is a necessity, not a choice. The issue of U.S. manufacturing job losses as an argument against withdrawal of this proposal is a red herring. On the contrary, the elimination of the first-sale rule has the potential instead to harm the U.S. economy and exacerbate the current economic slowdown. As costs rise, companies like Biflex may be forced to eliminate jobs here in the U.S."
The American Dehydrated Onion and Garlic Association (ADOGA) supports the change, saying Chinese and U.S. importers have completely destroyed the U.S. garlic and onion industry by cheating on duties. "In ADOGA's experience, some traders understate the value of their goods to pay less in import duties, which ultimately results in a lower price used to compete against U.S. manufacturers," said the group in its public submission to the CBP.
The garlic industry was successful in having a 376 percent dumping order placed on the Chinese in 1994, but most of that country's fresh garlic was then diverted to dehydration. Chinese dehydrated garlic imports increased from 6.5 million pounds in 1989 to 110 million pounds in 2007.
"Through market research here and in China, ADOGA's members discovered that Chinese dehydrated garlic was, and still is, being systematically undervalued for purposes of import tariff applications," writes the trade group. "By doing so, Chinese importers mitigate the full weight of the import tariff and gain an unfair trade advantage. In cases like this, where the import tariff ranges from 20 to 30 percent, the incentive exists to gamble that under-valuation will not be discovered by U.S. authorities."
The trade association told Customs that this was happening, but the agency "found it very difficult to ascertain the true value of the product when based on a first sale occurring in China. Because of the geographic distance, language issues and dissimilar trading culture, it is easy for Chinese traders to supply doctored or inaccurate documentation to Customs. At that point the burden shifts to Customs to prove otherwise. Fact-finding in China presents a formidable task to an army of investigators, but for the limited investigators available at Customs, it is almost impossible to prove the real value at the level of first sale. Were the transaction value based on the last sale, however, the party to whom Customs would look for information would be a U.S. buyers, physically located in the United States."
Geoffrey Ratte, an individual, wrote to "heartily agree" with the CBP proposal. "U.S. manufacturers face tough enough hurdles competing with developing market wages, developing countries with little or no environmental regulation, subsidized commodity markets, etc." he wrote. The first sale valuation precedent handed down by the U.S. Court of International Trade in 1988 "was a slap in the face to U.S. manufacturers. If you are wondering why the U.S. has faced 80,000 lost jobs in the last month alone, you don't have to look much further than this un-level playing field we are on. The first sale rule looks like chicanery, and it smells like it too. I hope you go forward with a last sale doctrine."
In a letter to Manufacturing & Technology News, Nancy Gold (toughtraveler@aol.com), president of Tough Traveler Ltd. wrote: "Please get more U.S. domestic manufacturers to contact Congress, CBP and the media. Let them know that the CBP is correct to propose reinterpretation of customs value so that the customs value will be the actual price paid by the importer. There has been little media, and U.S. manufacturers and public are not aware. The CBP has plenty of 'comments' from importers and importer lobbyists, but only AMTAC, the AFL-CIO and a few small notes were submitted in support of the valuable plan by the CBP. Even Senator Schumer, who is in support of raising the China yuan, oddly does not want to collect the correct full customs from U.S. importers. The CBP has closed comments, but Congress and the media are far from closed!!! U.S. manufacturing has been hurt, and the CBP is being hurt, by importers, and the public needs to let Congress know that we expect duties to be paid on the actual value of imports, with no exceptions!"
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