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U.S. Trade Deficit Might Be Substantially Higher: Does The U.S. Government Have The Courage To Determine The Real Value Of Imports?
By Richard McCormack
editor@manufacturingnews.com
The U.S. trade deficit in manufactured goods might be 10 to 15 percent higher than the federal government has been reporting for the past 20 years. By allowing importers, retailers and foreign manufacturers to use the so-called "first-sale rule" for declaring the value of imports, the Department of Homeland Security's Customs and Border Protection has allowed them to substantially undervalue the true cost of imports.
CBP proposed earlier this year to change the way in which import values were determined, breaking with a 20-year-old first-sale legal ruling. The first-sale rule allows importers to declare the value of imported merchandize based on the price when it first leaves a manufacturing plant in a foreign country -- the so-called "first sale." This value is the absolute lowest possible amount for an imported product. It does not include the costs of logistics, third-party contract manufacturers, middle-men, transportation or any other intermediate costs in the foreign country prior to shipment to the United States. Importers say the rule has allowed them to substantially reduce duties paid to the U.S. federal government. It has given importers and foreign producers yet another advantage over U.S. manufacturers and has helped lead to record trade deficits.
But when CBP proposed in January to change the rule to the "last sale" price, making it easier for CBP import specialists at ports of entry to determine the value of merchandise, importers, retailers, foreign manufactures and their legal and lobbying representatives went ballistic. Led by Sandler and Travis, the law firm that originally litigated the adoption of the first-sale rule in 1988, the "Save First-Sale Coalition" upended the rulemaking process by successfully lobbying Congress to include a provision (Sec. 15422) in the Farm Bill to effectively scuttle the proposal.
But the game is not entirely up. Within that "Sense of Congress" provision is a requirement that CBP start collecting information from importers to determine "the basis of the price paid by the buyer in the first or earlier sale occurring prior to introduction of the merchandise into the United States."
Congress told CBP to start a data collection effort within 90 days of the May 22, 2008, passage of the Farm Bill (HR-2419 ENR). After a year of collecting data, Congress then wants the International Trade Commission to write a report describing whether the value of imported merchandise is the price paid by the buyer "in the first or earlier sale occurring prior to introduction of the merchandise into the United States."
As it is right now, an importer can claim either first or last sale price. For some importers of commodities, it is beneficial to claim the last-sale price because it makes their products more expensive and reduces their tax burden more than it reduces their duty charge. But for many manufactured products, the duty is a bigger burden than taxes, so they report the lower first-sale value on their Customs' forms.
The CBP has issued a notice to the import community of its intent to comply with the provisions of the Farm Bill and require that they indicate when they are using the first-sale transactional value on imported merchandise. "This special indicator code will enable CBP to fulfill its information collection obligation under the Act," says CBP.
But the agency is running into problems. "Due to the complexity of the programming changes required, CBP is delaying the enforcement of the First Sale Declaration Requirement for 30 days," writes CBP spokeswoman Lynn Hollinger in response to questions submitted by Manufacturing & Technology News. "CBP will provide further guidance describing the amendments shortly."
CBP did not respond to questions concerning whether the use of the first-sale rule is undercounting the true value of imports into the United States. When the same inquiry was made to the Bureau of Economic Analysis at the Department of Commerce the director of BEA's international trade division said they get all of their data from CBP: all questions on data integrity need to be answered by CBP.
Those who are following the issue aren't sure about the quality of the data that CBP will be receiving during its year-long study. There are indications that CBP will be getting less information from the import community than is required to determine the difference between the first-sale and last-sale price. There is also skepticism about importers' unwillingness to disclose how they are determining values on every imported product, especially those that carry high tariffs.
The difference between the first-sale price and the last-sale price is the important number to calculate "if you are concerned that the process is being misused," explains trade lawyer Terence Stewart of Stewart and Stewart. "Because there is no data, you won't be able to know whether first sale has a value difference of 5 percent or 80 percent" of the last-sale value. The Farm Bill statute was not written in a clear manner requiring both pieces of information -- first-sale and last-sale prices -- to be reported. As a result, "people won't be able to make an honest appraisal," says Stewart.
By not requiring importers to declare both first sale and last sale data, there will be no way to determine how much imports are being under-stated, the revenue that CBP is losing on duty collection and the actual U.S. trade deficit.
The other problem with the process is importers can easily lie about the price they pay on the documentation they provide Customs, undervaluing merchandise so they pay less in duties. It is up to the importer or broker to submit invoices on the value of imported merchandise. Import specialists at ports of entry review the value based on their past experience and validate what the importers claim.
"For the most part, we think the importers are accurately reporting," says Sherri Hoffman, CBP's director of field operations for trade in the Long Beach/Los Angeles Port. But there are many times that importers mis-classify their merchandise in order to pay a lower duty rate. "If a product is made out of cotton, which has a higher duty rate, they classify it as being polyester," says Christina Gamez, public affairs officer for CBP at the Long Beach/Los Angeles Port.
If you were to ask people on the street how the government determines the value of imports, many say it's the price of a product just prior to it being loaded onto a vessel in a foreign port, or after it is offloaded in a U.S. port. Others believe the calculation is done based on the price paid by a U.S. retailer or even the final price paid by an American customer. Few people would say it is the price of the product as it leaves a sweatshop someplace in China.
For those involved in the CBP first-sale data collection and analysis process, there is a sense that imports are being substantially undervalued, and that if the truth comes out, there will be an uproar when the BEA has to revise its trade statistics for the past 20 years and increase the actual size of the deficit in manufactured goods by upwards of 15 percent. There is a sense that CBP does not have the courage to either discover or to tell the truth.
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