Trump Tariffs Impact on Sourcing

The recent set of tariff revisions to section 301 of the Trade Act of 1974 are the latest in an expanding and extensive set of the Trump Administration’s controversial tariffs. Effective July 6th, 2018 this revision added duties of 25% to select Chinese goods with the USTR announcing in the current edition of The Federal Register that additional increases (on over $200 billion worth of Chinese goods) are under proposal and awaiting comment. Moreover, while the dollar amounts of the U.S. tariffs and the Chinese counter-response are known for specific goods, the final effect of the tariffs and the overall outcome of what China calls “the largest trade war in history” is still uncertain and disputed.  

Of chief concern to many is the effect that these tariffs may have on corporate profits and sourcing. Many companies have come out against the tariffs for this reason; in fact, Walmart and other top retailers who together generate over $1.5 trillion in GDP jointly sent out a letter to President Trump this past March.  The concern has only grown with the implementation of the tariffs and a report that Walmart has recently asked its beauty suppliers if they would be able to change the sourcing of their products to a country other than China.  While the effect has, so far, been relatively small, according to their latest earnings reports companies such as Walmart have already taken hits to their current and predicted bottom lines as a result of the tariffs.  However, while some large companies such as Hasbro and Puma have announced a move away from China to other South-Asian countries, most large corporations seem to be only contemplating the possibility of changing production while they try to gauge how long these tariffs may last or if they can garner tariff exemptions for their products. Additionally, small businesses seem to have the most to fear regarding the additional section 301 tariffs and potential shifts in sourcing as 46% of small business owners have indicated that they anticipate the tariffs will have a negative impact on their businesses. 

Aside from China, this set of tariff revisions, designed to hurt China's economy due to an "unbalanced trade deficit" and "intellectual property issues," has not been without consequence to the U.S. economy. Companies such as BMW and Moog Music have announced that they may need to shift production from the U.S. to China as a result of retaliatory tariffs.   This result should not occur as a surprise. After all, after the Trump administration levied tariffs on the European Union, iconic American manufacturers such as Harley-Davidson were forced to move production to Europe from the U.S., costing certain states billions in exports and jobs.  

A recent study by the National Retail Federation indicated that American consumers stand to lose $6 billion this year as a result of the currently proposed tariffs on Chinese "furniture, travel goods, and handbags" alone. Even if American companies can successfully re-source their products to countries other than China, American consumers will likely still be worse off due to increased prices and competition in these other countries.  No figures on whose economy will be most affected are available, but initial reports seem to indicate that U.S. economic growth remains relatively stable, while China's has weakened just slightly.  Either way, what is clear is that the economic effect of the tariffs on both countries will only grow over time and companies are necessarily considering long-term strategies to minimize the hit to their bottom lines.

Transition to New ACE System Begins July 8, 2017

U.S. Customs and Border Protection (CBP) announced that July 8, 2017 is the effective date for the transition to the new electronic CBP authorized system for entry filings.  This transition had been delay repeatedly, but it is finally ready for implementation, and all electronic drawback, duty deferral entries and entry summary filings will need to be processed using this system.  ACE will be used for all flagging of entries as well. The old system, ACS, will no longer be a CBP-authorized EDI (Electronic Data Interchange) system after the transition.

Additional information about the Automated Commercial Environment (ACE) is available on the CBP website and includes the types of entries that will be supported by ACE, along with details related to filing protests, drawbacks, duty deferrals, reconciliations, liquidations, and other filings. 

In December of 2016, CBP described in detail that changes that will affect reconciliation; these can be found on the first CBP site listed under sources, below.  Two important changes pertain to flagging of entries and the filing of reconciliation entries.  Under the new system, blanket flagging will be eliminated. Where filing of reconciliation entries is concerned, importers and their brokers will no long be able to submit entries using CD/ROMs or paper.  The type 09 reconciliation entry using ACE is to be used even though the entries being reconciled were not initially filed using ACE.  “Entry by entry” or “aggregate” reconciliation entries will still be accepted. 

Consequences of Non-Compliance – Lacey Act Enforcement

One particular area where U.S. companies have failed to comply with stringent import laws, knowingly or unknowingly, involves wildlife and natural products. The Lacey Act, 16 U.S.C. 3371, is one of the primary federal statutes employed to combat the illicit trafficking of products within these categories. Initially enacted to protect animal species, the Act was amended in 2008 to more broadly include plant species. Specifically, the Act now prohibits the U.S. importation of illegally-harvested timber, meaning it is unlawful to trade in any plant that is taken, possessed, transported or sold in violation of the laws of any U.S. state, Indian Tribe, or any foreign law that protects plants. The Lacey Act does not impose U.S. law on other countries. “Illegally sourced” is defined by the content of a sovereign nation’s own laws. In addition, it is unlawful to falsify or submit falsified documents, accounts or records of any plant covered by the Lacey Act.

Violations of the Lacey Act carry serious penalties for companies and individuals. In addition to civil fines and forfeiture of goods, criminal penalties may also attach to the companies and individuals found to have knowingly violated the Act. A misdemeanor violation of the Lacey Act is punishable by up to one year in prison and a fine of $200,000.00 for companies and $100,000.00 for an individual. Felony culpability is punishable by up to five years in prison and a $500,000.00 fine per violation for a company and $250,000.00 for an individual.

Two Lacey Act enforcement agreements that demonstrate the severity of violations and highlight the importance of companies having compliance infrastructure that properly functions to avoid such violations are the Gibson Guitar Corporation Settlement and the Lumber Liquidators Settlement.

Gibson Guitar Corporation (“Gibson”) came under federal scrutiny not once but twice, first in 2009 and again in 2011 for violations of the Lacey Act. Gibson is headquartered in Nashville, Tennessee and manufactures a variety of musical instruments, most notably guitars. The violations involved parts of the guitar called fretboards. The imports at issue were orders of Madagascar ebony fingerboards (used to make fretboards) from a supplier called T.N. GMBH (“TN”), located in Hamburg, Germany. Gibson failed to verify that TN was sourcing its wood legally from Madagascar, and it turned out that it was illegally sourced. In addition, Gibson knowingly ignored red flags that the wood TN was providing was illegally obtained. For example, TN’s failed to provide documentation to Gibson evidencing that the ebony sourced from Madagascar was harvested lawfully. Madagascar law states that all ebony harvested after a specific date was illegal unless it was considered “finished wood” or had received “exceptional authority” from the government.

In addition, prior to purchasing the wood, Gibson had sent a specialist to Madagascar to assess the potential for supporting sustainable forestry. During his investigation, the specialist obtained the Madagascar Order regarding the particularities about finished and unfinished wood and in his report highlighted that this would be an issue for Gibson. Despite this knowledge, Gibson continued to purchase wood from TN.

These violations resulted in the finding of a Lacey Act misdemeanor violation with a fine of $300,000.00 plus a $50,000.00 community service payment to the National Fish and Wildlife Foundation. In addition to the monetary fines, Gibson also was required to strengthen its compliance program.

Gibson established a new compliance program that clearly stated the objectives of maintaining compliance with relevant laws and in particular the Lacey Act. The new program provided the history and applicable penalties for the Lacey Act, listed the due care standard that it would apply to its processes to assure compliance with applicable law, and then listed the internal checks and balances that would be implemented to demonstrate the satisfaction of this duty. The compliance program also stressed Gibson’s commitment to developing policies and procedures for the procurement of wood and for verifying that all necessary foreign licenses and/or certifications are obtained prior to approval of a purchase. The compliance program listed resources to obtain current applicable law and stated a commitment to an annual audit of its wood purchasing processes, a commitment to training its employees, and plans for retaining adequate records.

The compliance program created by Gibson emphasizes the necessary steps required under the Lacey Act to specifically detail the unique company processes and procedures created to effectuate compliance and satisfy reasonable care in conducting imports.

The second settlement involved Lumber Liquidators (“LL”). LL is a Virginia-based flooring retailer that was sentenced to pay a total of $13.15 million for five counts of Lacey Act violations. The fines included 7.8 million in criminal fines, $969,175.00 in criminal forfeitures, $1.23 million in community service payments, and 3.15 million in civil forfeitures. They were also sentenced to a five-year probationary term during which they were to create an Environmental Compliance Plan and engage an outside accounting and environmental consulting firm. The $13.5 million dollar penalty constitutes the largest financial penalty ever for illegal trafficking in timber under the Lacey Act.

The retailer pleaded guilty to one felony count of importing goods through false statements and four misdemeanor violations of the Lacey Act. The charges stated that Lumber Liquidators was using timber that was illegally logged in Far East Russia and had submitted false Lacey Act declarations that obfuscated the true species and the source of the timber. Although, LL had a compliance program in place that identified this activity, it ignored the red flags and continued to purchase the timber.

LL imports wood flooring from China and distributes it throughout the U.S. However, the timber used to manufacture the flooring in China was harvested from different countries, two of which were Far East Russia and Myanmar. LL had a compliance program at the time of the violations and, in fact, employees were aware that some of the wood was harvested from Far East Russia and posed a significant compliance risk. In addition, LL had also been conducting employee training discussing the compliance risk of Far East Russia. But despite this information, LL continued to import wood coming from Far East Russia and Myanmar. Thus, although the compliance program was in place, LL failed to uphold the policies in its manual. In addition, LL also submitted inaccurate information on Lacey Act documentation required upon importation.

What these examples illustrate is that the enforcement of U.S. Customs laws, and in particular the Lacey Act, has significant monetary and functional consequences. There is a strict duty to comply imposed on the party conducting the international trade and the responsibility to develop processes to comply with U.S. Customs laws is imposed on both the business and individual level. The penalties go far beyond mere monetary fines, and include forfeitures, corporate governance and operational restrictions.

Furthermore, having a compliance program alone does not protect against violations or mitigate penalties. Compliance programs will be judged on their actual application to relevant internal processes, the effectiveness of their implementation, and their actual capacity to successfully identify and remedy trade violations. Ultimately, the law imposes a corporate responsibility to educate employees and management who oversee trade functions and instruct them on how to effectively remedy identified violations.

What does this mean for the US business? Investing resources into developing a compliance program and implementation is an upfront cost that is absolutely necessary and indirectly required to avoid the significant consequences of violating US Customs laws.

Amber M. Johns, Global Trade Expertise Intern

Mistaken Importer of Record Held Liable for Duties After Liquidation

Lifestyle Furniture has been pursuing two separate federal court cases in an effort to avoid paying antidumping duties, which are being assessed because it was incorrectly listed as the importer of record on an entry.  According to CBP ruling HQ H157616, Lifestyle Furniture was listed as the importer of record for an entry to Puerto Rico in 2005 and is liable for antidumping duties of in the amount of 216.01% for wooden bedroom furniture from China.  

According to Lifestyle, Starcorp, the Chinese exporter, was supposed to be listed as the importer of record, but the customs broker listed Lifestyle Furniture by mistake.  Starcorp hired C.H. Robinson as its broker, but entries subject to antidumping duties were not eligible for remote filing under national permits.  Therefore, C.H. Robinson brought in Nestor Reyes, a local Puerto Rican customs broker to file entry.  Reyes had power of attorney (POA) for Starcorp, but not for Lifestyle.  Reyes proceeded to file the entry, but listed Lifestyle as the importer of record in error.  Both C.H. Robinson and Reyes have admitted fault in this error, but claim no responsibility for the duties owed.

Although Lifestyle protested paying the antidumping duties due to error, CBP advised that Lifestyle is liable because it is the parties’ responsibility to determine who will be listed as importer of record.  Because Lifestyle is actually an eligible importer of record as the consignee, CBP is not responsible to determine which eligible party to accept entry from.  While CBP sent a notice of liquidation to Lifestyle one month prior to liquidation, Lifestyle stated that it was not notified until receiving the final bill of liquidation, arguing it was not given time to correct the entry.  CBP held that it is the responsibility of the importer to maintain processes of checking entries to ensure that all entries with their name as importer of record are correct if they do not want to be held liable for errors, such as these.  Furthermore, Lifestyle, nor CBP can go after Starcorp for the duties owed because it has gone out of business.   

Lifestyle Furniture has now filed a lawsuit against CBP regarding its initial protest in the Court of International Trade, as well as seeking a ruling against both Reyes and C.H. Robinson in the district court of North Carolina.  At this time, neither case has been heard before the courts.

Aaron Ambrite, Extern, Global Trade Expertise

Supreme Court Denies to Hear Trek Leather Case

On May 26, 2015, the Supreme Court denied a petition to hear an appeal of Trek Leather, firmly establishing the lower court’s decision to hold corporate officers and employees of companies listed as the importer of record liable for customs violations.  The denial comes amidst a long list of other cases denied without explanation or comments.  The Supreme Court’s denial effectively lets stand the U.S. Court of Appeals decision finding that Harish Shadadpuri is personally liable for the corporation’s failure to declare assists on entry documentation. 

Although Shadadpuri was not listed as the importer of record, the U.S. Court of Appeals found him personally liable because he introduced goods into the United States by providing invoices that did not report assists provided to the manufacturer.  The court found that the transmission of the inaccurate invoices to the customs broker amounted to the “introduction” of the merchandise into United States commerce under 19 USC 1592.  Shadadpuri argued that he could not be held personally liable for a corporate importer of record unless he was found to have personally “aided and abetted” the violation, but, ultimately, the court sided with the government.

The decision has garnered significant criticism from importers and their representing bodies as the judgment is expected to dramatically expand the scope of liability for corporate executives, compliance officers, and other employees involved in daily import transactions or transmissions.  One such representing body, the American Association of Exporters and Importers (AAEI), filed a brief in support of Shadadpuri stating that the court’s decision has effectively lowered the government’s burden of proof for finding a natural person liable for customs violations by eliminating the requirement for the court to prove fraudulent intent. Further, AAEI feels that the term “introduce” has been wrongly reinterpreted to include “all activities to bring goods to the threshold of the process of entry,” so that, in effect, “every negligent entry by a corporate importer of record will always be accompanied by a negligent introduction.”  AAEI is concerned that this court decision will increase the trade industry’s risk and cost of doing business due to subjecting import compliance managers to massive penalties.  Some employees may not wish to work in jobs associated with higher personal risk of liability, or employees might seek additional compensation for their duties.  Further, AAEI suggested that some importers might choose to allow foreign suppliers to act as non-resident importers of record in order to have import transactions handled outside the reach of US jurisdiction.

Importers anxiously awaiting a Supreme Court hearing on Trek Leather are likely to be disappointed by the denial as the decision will have definite repercussions for the trade community.  Importers will surely continue to watch other cases to determine how far the court will take the Trek Leather case in applying it to other importers.   

Aaron Ambrite, Extern, Global Trade Expertise

AAEI Files Brief with Supreme Court to Overturn the Expansion of Corporate Officer Liability in Trek Leather Decision

On March 16, 2015, The American Association for Exporter and Importers (AAEI) filed an amicus brief arguing that the Supreme Court should hear and overturn the Court of Appeals decision to hold the President and sole shareholder of Trek Leather, Harish Shadadpuri, liable for Trek’s negligent omission on entry documentation.  By holding Shadapuri liable, the court subjects shareholders, executives, and compliance officers to penalties for their organizations’ negligence in filing customs entries.

Trek Leather, who is listed as the Importer of Record, provided its foreign manufacturers with fabric either free of charge or at a reduced cost to produce its suits.  When Trek imported the suits, they failed to include the fabric as an “assist” in determining the total dutiable transaction value.  By failing to include the assist’s value, Trek understated the dutiable value to CBP.  The court found Shadadpuri personally liable for violating §1592(a)(1)(A) under the theory that he negligently “introduced” the imported goods into U.S. commerce by means of false statements.  The court determined that Shadadpuri satisfied the definition of “introduced” under §1592(a)(1)(A) because he “sent manufactures’ invoices to the customs broker for broker’s use in completing entry filings to secure release from CBP.”  

According to the brief, AAEI argues that the court distorts the scope of liability intended by Congress in §1592(a) by expanding the definition of “introduce” to encompass all activities that necessarily “bring goods to the threshold of the process of entry.”  AAEI argues that by expanding the scope of liability, every negligent entry will always be accompanied by a negligent introduction by an importer’s employee or agent.  AAEI’s concern is that the Trek Leather case now subjects thousands of corporate importers’ employees to personal liability for making routine entries on behalf of their employer.

Furthermore, AAEI argues that the court misinterpreted the term “introduction” to include Shadadpuri’s negligent submission of invoices.  The submission of documents to a customs broker for the purpose of valuation is not the actual “introduction” of merchandise, but is rather related to the entry process.  The brief states that applying the term “introduction” to negligent submissions of entry documents eliminates the need for §1592(a)(1)(B) in which the court can apply personal liability to natural persons for fraudulently aiding and abetting in entry or introduction of merchandise with the knowledge and intent to further fraudulent conduct.  AAEI is concerned that removing the requirement for the court to find fraudulent intent before a natural person can be held personally liable relaxes the government’s burden of proof.  The brief explained that this will allow the government to pick and choose amongst any of an importer’s employers who took part preparing documentation or handling imported merchandise without those employees having requisite knowledge of the wrong doing. 

AAEI ultimately is concerned that the appellate opinion in Trek Leather puts an undue burden on importers which could ultimately result in their employees either requiring additional compensation or seeking jobs with lower associated risk of personal liability.  Due to this undue burden, importers may elect to let foreign suppliers act as non-resident importers of record and CBP could no longer enforce the penalties because those importers of record would be outside of Federal jurisdiction.  The brief states that either of these outcomes would be against the United States’ best interest.

Aaron Ambrite, Extern, Global Trade Expertise

CBP Rules that Importer Cannot Claim Post-Pricing Sales Adjustments

In an August 18, 2014 ruling, U.S. Customs and Border Protection ("CBP") determined that a pharmaceutical product importer cannot claim post-import pricing adjustments without first meeting the standards CBP has set for related party transactions and post-import adjustments.  The redacted ruling, HQ H204329, stemmed from a 2012 request for internal advice regarding the treatment of extra payments the importer made to its related supplier for tax purposes.  

The importer contends that it used the proper transaction value method for appraisement, but CBP stated that the company cannot claim post-import adjustments unless it produces the documentation necessary to satisfy the five-factor criteria CBP says is applicable in these kinds of cases involving adjustments related to the value of imported goods.  

Counsel for the importer argued that the criteria did not apply in this case; they further argued that even through the post-import adjustments the importer declared were assigned to certain products, the payments submitted were made only for tax purposes and did not have any bearing on the customs value of the merchandise.  CBP disagreed and put forth this explanation in the ruling:

The ultimate selling price (operating profit) of Company A in the United States takes into account the costs of the product throughout each step, in sale from the manufacturer to the consumer.  Thus, by working back from the arm’s length net margin (or profit) of Company A, the arm’s length COGS (or price actually paid or payable for customs purposes) can be deduced.  Accordingly, we find that the customs value of the imported merchandise is affected every time the related parties reduce or increase their profitability pursuant to the APAs or transfer pricing studies, which cover the imported goods, resulting in payments, transfer of funds, or credit/debit transactions between the related parties.  We also note that even though in this case, Company A’s complex APA covers tangible and intangible transactions between the parties, as well as services, the related parties made the adjustments to their profitability, which resulted in the transfer of funds between the parties, the adjustments booked to COGS, and the revised supply Agreements.  Therefore, these adjustments must be reported to CBP since they directly relate to the imported goods; however, in order for Company A to claim post-importation adjustments to the value of the imported goods, Company A must satisfy our five-factor criteria, specified in HRL W548314, dated May 16, 2012, which is applicable to cases that involve compensating (post-importation) adjustments made to the profitability of related parties pursuant to APAs or transfer pricing studies.

A second point at issue was whether or not the price actually paid for the imported merchandise was influenced by the relationship of the parties.  CBP maintains that the importer did not successfully demonstrate that the adjusted prices were not influenced by the relationship for purposes of the circumstances of the sale or test values tests.  

In conclusion, CBP ruled that in the absence of the required information needed to meet the five-factor criteria called for in W548314, the importer cannot claim the downward adjustments.  Therefore, transaction value was not the proper method of appraisement in this case, and to the extent that the value of the goods has increased, the importer will be required to submit payment for any duties owed.

by Suzanne DeCuir

2014 ACE Satisfaction Survey for the Trade is Now Available

U.S. Customs and Border Protection (CBP) has made the 2014 Automated Commercial Environment (ACE) Satisfaction Survey available for the trade on its website. CBP is inviting anyone employed as or by a broker, importer, or a land border, ocean, or rail carrier and have an ACE portal account to take the survey. CBP would like feedback on the problems and benefits users are experiencing with ACE.

Participation is completely voluntary and the survey may be taken anonymously. The survey only takes about 5-10 minutes to complete unless extensive comments are added.

According to CBP, new for this year is:

This year CBP is asking that broker and self-filing importer respondents provide us with cost and time saving information for Periodic Monthly Statement processing, Post Summary Corrections, and Census Warning Override functionality, as appropriate. This information will allow us to better document the benefits of ACE to our stakeholders. It also asks all respondents to identify the most useful functionality currently being used and the most anticipated functionality that is scheduled for delivery.