November 30, 2010    Volume 17, No. 19

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Importers Defeat Customs' Proposed Ruling To More Accurately Value Imports

By Richard McCormack

After almost two years of political arm twisting, trade associations, lobbyists and law firms in Washington, D.C., that represent importers, foreign shipping companies, foreign manufacturers, multinational companies that have shifted their production offshore and foreign countries have successfully killed a proposal by the U.S. Customs and Border Protection to change the way the United States government determines the value of imports.

Customs and Border Protection (CBP) in early 2008 proposed valuing imports based on the price paid by the buyer in the United States. Importers immediately objected, saying the change would lead to them paying higher duties on products made overseas. They successfully lobbied Congress to insert an amendment to kill the proposal in the 2008 Farm Bill (known formally as the Food, Conservation and Energy Act of 2008).

As a result, Customs and Border Protection recently issued a formal withdrawal of its proposal and will continue to determine the value of imports based on the "first sale" rule. This rule was put in place more than 20 years ago, and allows importers to place the lowest possible value on imports coming into the United States -- the price of a product as it leaves the manufacturing plant overseas, the so-called "first sale." This price does not include the cost of transactions associated with getting a product to a foreign port or to the United States.

Customs and Bureau Protection said the first-sale rule was difficult to manage, since it was virtually impossible for officials to track tens of thousands of products back to the foreign factories where they were made to confirm the real cost paid by the importer. Instead, the CBP favored the "transaction value method of valuation" since it was much easier to look at paperwork to determine the value of an import so that duties could be fairly assessed.

In comments submitted against the proposal in 2008, U.S. retailers claimed that the first-sale rule undervalued the cost of imports by as much as 15 percent. As a result, the true cost of imports -- as well as the trade deficit -- is much higher than the United States government calculates. The National Retail Federation said that retailers used 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 had to pay" to the federal government.

Customs and Border Protection said changing the rule to the "transaction value" would conform with practices used by "most other WTO members."

That did not matter to importers.

CBP's formal decision to withdraw its proposal to change the first sale rule "is directly related to our efforts," claims Sandler, Travis & Rosenberg, a customs and international trade law firm based in Washington, D.C. The firm says on its website that it is "committed to assisting our clients achieve the lowest dutiable value permissible by law. To this end, we work with each company to develop specific strategies, such as utilizing the 'first sale' rule or altering terms of sale, to reduce import value and resulting duty liability." It adds that when CBP first proposed the change "our team acted immediately urging stakeholders on Capitol Hill as well as administration officials to insist that CBP formally withdraw its notice proposing elimination of first sale valuation."

By under-reporting the value of imports, the United States government loses revenue that could lower the federal budget deficit and provide an advantage to domestic manufacturing companies. But domestic manufacturers and their workers are not represented on the federal advisory committees overseeing import rules and regulations, and their interests in Washington are drowned out by lobbyists representing the interests of foreign production.

Customs and Border Protection collected $23.5 billion in duties in 2009, on total imports of more than $1.7 trillion. Seventy percent of imports come into the United States duty free, according to the CBP's "Import Trade Trends, Fiscal Year 2009 Year End Report." Meanwhile, China's General Administration of Customs reported in October that the Chinese government collected $150.4 billion in revenues from duties, tariffs and import taxes in 2009, an increase of almost 50 percent from the previous year.

CBP's decision to drop changes to the first-sale rule is located in the Federal Register:

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