US to Impose Trade Measures on China as a Result of Section 301 Investigation

Dear Friends,

The President signed an executive memorandum earlier today that all companies that (i) import anything from China, (ii) do business in China, or (iii) export anything to China, should be aware of.  A copy of the memorandum is attached.

The memorandum was issued in response to an investigation the U.S. Trade Representative (USTR) conducted into whether “China’s laws, policies, practices, or actions that may be unreasonable or discriminatory and that may be harming American intellectual property rights, innovation, or technology development” under section 301 of the Trade Act of 1974, as amended.  Based on the USTR’s investigation, the President has concluded that:

“First, China uses foreign ownership restrictions, including joint venture requirements, equity limitations, and other investment restrictions, to require or pressure technology transfer from U.S. companies to Chinese entities.  China also uses administrative review and licensing procedures to require or pressure technology transfer, which, inter alia, undermines the value of U.S. investments and technology and weakens the global competitiveness of U.S. firms.

Second, China imposes substantial restrictions on, and intervenes in, U.S. firms’ investments and activities, including through restrictions on technology licensing terms.  These restrictions deprive U.S. technology owners of the ability to bargain and set market-based terms for technology transfer.  As a result, U.S. companies seeking to license technologies must do so on terms that unfairly favor Chinese recipients.

Third, China directs and facilitates the systematic investment in, and acquisition of, U.S. companies and assets by Chinese companies to obtain cutting-edge technologies and intellectual property and to generate large-scale technology transfer in industries deemed important by Chinese government industrial plans.

Fourth, China conducts and supports unauthorized intrusions into, and theft from, the computer networks of U.S. companies.  These actions provide the Chinese government with unauthorized access to intellectual property, trade secrets, or confidential business information, including technical data, negotiating positions, and sensitive and proprietary internal business communications, and they also support China’s strategic development goals, including its science and technology advancement, military modernization, and economic development.”  

Based on this, the President has directed the USTR to:

(1)    Publish a list of products imported from China to subject to increased duties by Friday, April 6, 2018;

(2)    Pursue WTO challenges to China’s “discriminatory licensing practices”; and

(3)    Report back to the President on progress on (1) and (2) within 60 days.

The President also directed the Secretary of the Treasury to propose appropriate actions to “address concerns about investment in the United States directed or facilitated by China in industries or technologies deemed important to the United States” and to report back within 60 days.

It is being widely-reported that the list of products to be targeted with increased duties represents approximately $60 billion in Chinese imports and impacts a range of industries, including high tech products, consumer electronics, apparel, footwear, etc.  The draft list is reported to include approximately 1,300 tariff lines.  Once published, the public will have 15 days to provide comments on the USTR’s proposal.  Any duties ultimately imposed will be in addition to any other duties currently payable (e.g., normal duties, AD/CVD, etc.).

On the investment front, there are underway efforts in Congress to update/strengthen the Committee on Foreign Investment (CFIUS) process, but this signals a desire by the President to not wait and, possibly, go further than what Congress is currently contemplating.

Finally, it is expected that China will impose retaliatory measures on articles imported from the United States in response to today’s announcement.  It is expected that a range of U.S. exports will be impacted, but most notably, agricultural exports. 

We hope that this update is helpful.  We will continue to monitor and provide updates on developments as they arise.  In the meantime, if you would like to discuss the issues involved here further, just let us know.

Best regards,

Ted

 

Advertisements

More Private Party-Initiated Trade Enforcement Actions

Dear Friends,

We wanted to bring to your attention two recent qui tam case settlements involving the underpayment of customs duties.  They are as follows:

  • Further to our message below where Z Gallerie agreed to settle with the U.S. Department of Justice (“DOJ”) for $15 million, the DOJ recently announced that Bassett Mirror Co. (“Bassett”) agreed to pay $10.5 million to settle allegations that it violated the False Claims Act (“FCA”) by underpaying antidumping duties.  Total settlements in this case have now reached $25.5 million.  The underlying complaint, initiated by a competitor, alleged that between January 2009 and February 2014, several companies deliberately misclassified wooden bedroom furniture as non-bedroom furniture on its official import documents to avoid paying antidumping duties.  A copy of the most recent DOJ press release is available here.
  • DOJ announced that a textile importer, American Dawn, and three company executives, agreed to pay more than $2.3 million to settle allegations that they violated the FCA by intentionally misclassifying goods in order to pay lower duty rates.  The underlying complaint, initiated by a former employee, alleged that for more than a decade American Dawn intentionally misclassified certain textile articles, including bath towels and shop towels, as polishing cloths in order to pay a lower duty rate.  The press release is available here.

These cases and settlements are interesting for a few reasons.

First, both cases were initiated by whistleblowers under the FCA.  In Bassett/Z Gallerie, a competitor initiated the court action and, in American Dawn, it was a former employee.  The whistleblowers in these cases with receive a sizeable portion of the settlements.  This incentive will continue to feed the trend of there being an increasing number of private-party initiated trade enforcement actions.

Second, DOJ appears to be settling these cases for less than is available to it under applicable laws.  Under the FCA, maximum liability includes the unpaid duties, three times the unpaid duties, $11,000 for each false claim (i.e., each import entry), plus attorneys’ fees.  In addition, under the Tariff Act of 1930, maximum penalties include the full value of the imported merchandise (because the government alleged intentional evasion of duties, rather than negligence or gross negligence).  Considering that the PRC-wide rate for wooden bedroom furniture is ~216%, the importers could have been liable for many millions more than the government ultimately agreed to settle for.  It is unclear why the government would agree to what could be considered “generous” settlements , particularly since they appear to be “global” in nature (they resolve not just the FCA liability, but the liability imposed under the Tariff Act of 1930, as well), but it is unlikely that such generous terms would be afforded by CBP in an stand alone administrative proceeding.

Finally, in both press releases, government agencies restated their commitment to protecting the economy by investigating alleged evasions of customs duties.  For example, in the American Dawn settlement announcement, the director of the CBP field office in Atlanta stated, “[t]his settlement agreement is another example of CBP’s day to day collaborative efforts between U.S. Customs and Border Protection Officers at ports of entry, Import Specialists with the Centers of Excellence and Expertise, and Immigration & Customs Enforcement Homeland Security Investigations to protect the American public and the U.S. economy.”

In light of this, all importers should make sure that they effective internal controls in place over customs matters that include a mechanism for employees to raise legitimate compliance-related concerns.  In our experience, companies can generally protect themselves from enforcement actions (FCA or otherwise) by having reasonable internal controls.

We hope this is helpful.  If you have any questions, or if you would like to discuss these issues further, please let us know.

Best regards,

Ted

Interesting Customs Enforcement Action

Dear Friends,

I recently came across a story about customs enforcement in Singapore that I thought you might find to be of interest.

The case involves a marketing manager in Singapore who was sentenced by a Singapore court to a fine of SGD$92,000 (roughly, $68,000) for counterfeiting U.S.-Singapore Free Trade Agreement Certificates of Origin provided to a U.S. customer, and for making false statements to the Singapore government when applying for the certificates.  It appears that the marketing manager was engaged in a scheme to help defraud the U.S. government of antidumping duties (i.e., passing Chinese-origin uncovered innerspring units as being of Singapore origin) and, in the process, making false statements to Singapore Customs.  A copy of the Singapore Customs press release is available here.

There are several interesting things about this case.  First, the prosecution was based on information supplied to Singapore Customs by U.S. Customs and Border Protection (CBP).  It appears that CBP may have uncovered the fraud on the U.S. side and then provided information about the exporter to the Singapore authorities.  Second, it appears that CBP may have uncovered the fraud when the U.S. importer/customer underwent a CBP audit.  See Headquarters Ruling #h270834 (March 2, 2017).

We hope you find this interesting/helpful.  If you have any questions, please let us know.

Best regards,

Ted

 

More Private Party-Initiated Trade Enforcement Actions

Dear Friends,

We are writing to let you know about two recent court actions, both of which involve allegations of companies evading antidumping duties evasion on imports of wooden bedroom furniture.  They are as follows:

  • The U.S. Department of Justice (“DOJ”) announced last week than a California importer of wooden bedroom furniture, Z Gallerie LLC (“Z Gallerie”) agreed to pay $15 million to settle allegations that it violated the False Claims Act (“FCA”) by underpaying antidumping duties.  The underlying complaint, initiated by a competitor, alleged that between 2007 and 2014, Z Gallerie purposefully misclassified bedroom furniture on import-related documentation in order to avoid paying antidumping duties to U.S. Customs and Border Protection (“CBP”) upon importation.  A copy of the DOJ press release is available here.
  • The American Furniture Manufacturers Committee for Legal Trade and domestic manufacturer Vaughan-Bassett Furniture Co. (collectively, “the Petitioners”) filed a lawsuit in the Court of International Trade (“CIT”) on Tuesday, alleging that the Department of Commerce (“Commerce”) failed to properly investigate allegations that a Chinese exporter of wooden furniture acted as a “funnel” for other Chinese manufacturers to avoid anti-dumping duties on bedroom furniture exported to the United States. Specifically, the underlying complaint alleged that the Chinese exporter, which had been afforded a separate (and significantly lower) antidumping duty rate of ~7% on exports of wooden bedroom furniture, purposefully put its name on other Chinese manufacturers’ wooden bedroom furniture exports to help those manufacturers avoid being subject to the (much higher) PRC-wide entity rate of ~216%.  The complaint alleged that the Petitioners had alerted Commerce to several suspicious furniture shipments in 2015, but Commerce neither alerted CBP, nor initiated its own investigation.  A copy of the complaint is attached.

These cases are significant for several reasons.

First, they underscore the continued trend of private parties initiating their own trade enforcement actions.  While private party-initiated trade compliance actions are already common (as evidenced by our emails below), the types of private parties initiating such actions is expanding.  Here, these cases were initiated by an e-commerce retail competitor and a U.S. trade group, respectively.

Second, they highlight the government’s continued interest to prosecute antidumping and countervailing duty evasion (particularly when the case is served up to them).  In announcing the Z Gallerie settlement, CBP Commissioner R. Gil Kerlikowske stated that “[u]nder the new Trade Facilitation and Trade Enforcement Act, CBP will likely see an increase in these types of settlements as the streamlined processes take effect concerning allegations of duty evasion.  The Act reinforces CBP’s existing authorities and tools to collect and investigate public allegations of duty evasion improving the overall effectiveness and enforcement of CBP law enforcement actions concerning illicit trade activity, specifically in the area of antidumping and countervailing duty evasion schemes.”

Finally, they illustrate that all companies, regardless of size or sophistication, could find themselves entangled in these types of costly enforcement actions if they lack proper internal controls.  In response to its settlement, Z Gallerie released a statement stating that its “intent was never to defraud the government or evade customs duties.  As a small company navigating a complex set of import rules and trade laws, there is confusion about how the government’s anti-dumping order applies to certain categories of wooden bedroom furniture imported from China”.

With good internal controls, most companies will be able to protect themselves from these types of costly enforcement actions.  If you have any questions, or if you would like to discuss these issues further, please let us know.

Best regards,

Ted

Are you importing articles subject to AD/CVD? Are you sure?

Dear Friends,

We are writing to let you know that US Customs and Border Protection (CBP) is continuing to place significant emphasis on antidumping/countervailing duty enforcement.  For many years, AD/CVD enforcement has been a top priority for CBP, and statistics from FY 2015 indicate that this trend is continuing.  Last year, CBP identified $29 million in AD/CVD noncompliance, and imposed $45.5 million in penalties on imports of steel products alone.  The agency conducts enforcement activities through a combination of targeted inspections and entry summary reviews, but also reports increased involvement on the part of the Centers for Excellence and Expertise (CEEs), as well as collaboration with the private sector.  CBP increasingly looks to the domestic industry protected by AD/CVD orders to educate CBP officials and to monitor the marketplace for instances of potential noncompliance.

It also bears noting that the stakes are growing for companies which intentionally seek to evade lawful antidumping and countervailing duties.  The Customs Reauthorization Bill (which was finally passed by Congress today—more on this later) includes significant substantive provisions targeting AD/CVD evasion.

In light of all this, we recommend that importers periodically review the orders that are in effect to ensure that in-scope merchandise has not gone unnoticed—particularly for some of the wider ranging orders, such as those on aluminum extrusions and various steel products.

If you would like to review a summary of the products and countries covered by current AD/CVD orders, just let us know—we are happy to forward a summary chart.

Best regards,

Ted

CBP and AD/CVD Scope Issues

Dear Friends,

We are writing to bring your attention to a recent decision by the U.S. Court of International Trade (CIT) (Sunpreme, Inc. v. United States) with significance for importers of products which may or may not be covered by an antidumping or countervailing duty order.  The decision highlights that unless an importer’s products are clearly covered by the scope of an AD or CVD order, CBP is powerless to require the importer to file Type 03 entries and pay cash deposits of antidumping and countervailing duties until Commerce issues a decision finding the products to be in-scope.

The products imported in Sunpreme had some features described by the scope of the AD and CVD Orders on Crystalline Silicon Photovoltaic Cells (solar panels), and some features specifically excluded from these orders.  For several years, the plaintiff filed Type 01 entries for its product without issue, before CBP began rejecting entries, requiring that they be refiled as Type 03 with cash deposits of AD and CV duties.  The importer engaged in a protracted discussion with CBP over the applicability of the orders, which included visits by CBP to the importer’s U.S. manufacturing facilities, written correspondence, and testing by a CBP lab.

When CBP ultimately decided that the products were covered by the orders, the importer responded by formally requesting a scope ruling from Commerce and by filing suit at the CIT challenging the cash deposits CBP had already collected, and challenging the suspension of liquidation.  Commerce considered the importer’s scope request, and decided that a full-blown scope inquiry was warranted (which is still underway).  The CIT considered and granted the importer’s request for a preliminary injunction, forbidding CBP from collecting further cash deposits during the pendency of litigation.  In granting the injunction, the Court ruled that the importer is likely to prevail on the merits of its underlying case (which would result in obtaining refunds of the cash deposits CBP had previously collected).

The key takeaway from the case is that CBP’s handling of AD and CVD matters is limited to a ministerial (i.e., administrative) functions.  In cases when CBP must decide if a product is covered by AD and CVD orders, it can only conclude that a product is in scope based on “observed factual information” and clear scope language.  In other words, CBP may only require an importer to file Type 03 entries and collect cash deposits of AD and CV duties when the scope decision is clear cut.  CBP may not interpret ambiguous scope language in reaching that outcome.  As the CIT put it:

“At the point CBP realized it was unsure that the language of the Orders included Plaintiff’s merchandise, it could not place the goods within the scope of the Orders because Congress charged Commerce with clarifying and interpreting its antidumping and countervailing orders.”

If you find yourself in a good faith dispute with CBP regarding whether or not your imports are subject to an AD or CVD order, we encourage you to keep this case in mind (and to give us a call!).

Best regards,

Ted

Another Customs-Related Qui Tam Action

Dear Friends,

We are writing to let you know about the settlement of a False Claims Act (“FCA”) case, involving the payment of antidumping duties on imports of wooden bedroom furniture.

Earlier this week, the U.S. Department of Justice (“DOJ”) announced that a U.S. furniture company (and its general partner) (“the Company”), agreed to pay $15 million to settle allegations that it knowingly evaded the payment of antidumping duties on wooden bedroom furniture from China.  The underlying complaint alleged that between 2009 and 2012, the Company purposefully misclassified bedroom furniture as office furniture (and other types of furniture not subject to antidumping duties), and falsified invoices and other documents in order to import the Chinese-manufactured furniture without raising a flag with U.S. Customs and Border Protection (“CBP”).  A copy of the DOJ’s press release is found here.

This case is important for a couple of reasons.

First, the case is part of a growing trend of private parties initiating their own trade enforcement actions.  Here, this suit was initiated by a U.S. competitor.  After being underbid on several large-scale contracts, the competitor launched its own investigation (which included attending tradeshows, pretending to be an client, and engaging in email correspondences discussing how antidumping duties could be avoided on purchases, etc.).  The competitor handed all of the evidence it gathered over to the DOJ, and was awarded $2.25 million as its share of the settlement.

Second, this settlement displays the government’s continued willingness to prosecute trade compliance violations under the FCA.  In announcing this settlement, the U.S. Attorney stated that “companies that cheat by fraudulently mislabeling their imports undermine U.S. manufacturers and others that obey the rules, and hurt consumers and taxpayers”.  Principal Deputy Assistant Attorney General Benjamin C. Mizer, head of the DOJ’s Civil Division, echoed the U.S. Attorney’s statement and declared that “[the DOJ] will zealously pursue those who seek an unfair advantage in U.S. markets by evading duties owed on goods imported into [the U.S.]”.  Although, as noted previously, one wonders if the government really collected as much as it could/should have here (particularly, given that intentional actions appear to have been involved here).

The increase in the number of private party-initiated trade compliance FCA actions, coupled with increased enforcement by the government agencies involved, should provide significant incentive for companies to review their internal controls — particularly with respect to antidumping and countervailing duty issues — and ensure that they are working effectively.   Otherwise, companies may find themselves embroiled in expensive enforcement actions, like the one described above.  Similarly, if you are aware of non-compliance by others that is unfairly tilting the playing field (e.g., a competitor not paying antidumping duties rightfully owed to get a competitive advantage), there are steps you can take to address it, even if the responsible agency has not done so.

We hope that this is helpful.  If you have any questions about this case, or if you would like to discuss the issues raised here further, please let us know.

Best regards,
Ted