CUSTOMS AND INTERNATIONAL TRADE

NAFTA

Customs Update: Ford vs. Customs
[Published in the Journal of Commerce Online Sep 13, 2006]
for a printable version of this article

In May ("Record what?", May 4) we wrote about a case brought by U.S. Customs seeking to recover nearly $42 million from Ford Motor Co.

Traders will remain vitally interested in the outcome of this case because if Customs prevails, it will turn NAFTA on its head and put a whole raft of previously unknown responsibilities on traders under this and every other trade preference program.

The case originated in an investigation initiated by El Paso (Texas) Customs in January, 2001. Readers may recall, as part of that investigation, Customs issued a demand that Ford provide its underlying NAFTA Certificates of Origin. Ford complied.

Customs then sought records maintained by Ford's Mexican supplier. In so doing, Customs issued a summons to Ford, instead of initiating a verification of the supplier as provided in NAFTA. Admittedly, Ford did not provide all the demanded records, only those the supplier volunteered, but rather than seek to enforce the summons by contempt proceedings, Customs opted instead to initiate a $41,931,997 record-keeping penalty against Ford. Not surprisingly, the automaker challenged Customs' choices and methods. When the parties could not resolve their differences, two lawsuits followed.

Acting first, Ford in October, 2005 filed in Detroit federal court seeking declaratory relief. Three months later, Customs filed in the federal court in El Paso, seeking recovery of the full penalty. As noted in the May column, Customs then sought to dismiss Ford's lawsuit claiming, in summary, that NAFTA was an agreement between three countries and so only the federal government could rely on it.

In its complaint, Ford argued that Customs acted in an arbitrary and capricious manner and contrary to law. Ford asserted it was not required to maintain the supplier's records. Ford also argued the (a)(1)(A) list (the records importers are required to maintain) conflicts with 19 C.F.R. 181.22 and that Customs failed to notify importers they were required to maintain and produce records relating to the country of origin and tariff classification of parts of NAFTA goods (not the goods being imported, but the parts and components the suppliers use to make those imported goods). Further, Ford argued Customs may not apply record-keeping penalties to goods entered before 2000 as it was only then that Customs finalized those penalties. Ford also urged that Customs not be allowed to assess a 1509 (record-keeping) penalty against an importer for failing to comply with a summons for records, that Customs failed to comply with the Administrative Procedures Act in promulgating the record-keeping regulations, and, finally, that Customs' failure to be sufficiently specific about the records importers are expected to maintain violates basic principals of due process.

In January, 2006 Customs filed its own case seeking to collect the penalty. Customs then sought dismissal of Ford's suit, or its transfer to the El Paso court where its own case was filed. The May column mentioned the Motion to Dismiss had been filed and a decision was pending. On August 23, the judge issued her decision.
 
While Customs' motion was granted, it was not for the NAFTA reasons asserted. First, the court held it did have subject matter jurisdiction, meaning it had the power to hear the case, despite the government's claims about NAFTA, because Ford was challenging the implementing regulations, not the agreement itself.

Several additional procedural and substantive objections were raised by Customs, but the one which seemed to have the most sway with the court claimed Ford filed suit first in order to be before the most favorable forum and so the race to the courthouse should not be favored in this instance (although the first to file usually succeeds in fending off later filings in other jurisdictions).

At the same time, the court found Customs filed suit in El Paso because that is where the matter arose, where its employees and attorneys are located and where the summons was issued. Put another way, the court found Customs did not arbitrarily pick a geographic location which was inconvenient for Ford, but rather El Paso was a natural one given the surrounding facts. The court also seemed impressed by the fact Ford filed suit in anticipation of Customs' filing its own case.

Additionally, the court held the issues raised by Ford in the Michigan lawsuit could just as easily be interposed as defenses in the Texas case. So, in the end, Customs won simply because it was the natural plaintiff (the party most likely to bring suit) and because it picked a reasonable forum. It is important to keep in mind that Customs has only won Round One -- where the lawsuit will be heard. It is a long way from succeeding on the merits of the case.

For traders, the implications of the case are profound. Can you imagine now having to receive your suppliers' proprietary information about sourcing, input costs, labor and overhead costs and the like before making entry just to be sure you qualify? If that becomes the standard for American traders, we will quickly be out of the free trade agreement business for good!

FORD WINS – SORT OF
08/06

In a civil record keeping penalty case being closely watched for its precedential value, Ford won, in a manner of speaking.  While the case was ordered dismissed in Michigan, Customs was also reminded the Michigan court did have jurisdiction, but the matter could just as easily be heard where Customs filed it – in El Paso.
 

NAFTA CERT CHANGES
08/05

In July 2005, Customs issued a Directive regarding NAFTA Certificates of Origin (C/O). Specifically, it summarized the existing law but emphasized that Import Specialists are to pay particular attention to whether the C/O is signed and dated timely. If not, importers are given five (5) days to obtain a proper C/O, not one that is backdated. If the importer does not have a valid C/O in its possession at the time the entry is filed, the claim will be denied. If the C/O is dated after the 520(d) refund claim is filed, that claim, too, will be denied. Of course, it can only be filed within one (1) year from date of entry.

Not only are Import Specialists told to deny claims under specific circumstances, but Customs also mentions they are to consider assessing penalties, too! The Directive goes on to confirm that false statements will lead to penalties. Triunfo-Mex, Inc. learned that the hard way. It ended up paying more than $5 million in penalties and three (3) of its executives have pleaded guilty to charges. The company imported milk and instant drink mixes subject to quota and NAFTA through Calexico. While the quota was open, the importer declared the correct value. Once it closed, the value was reduced by approximately 90%, thereby avoiding proper duty payments. The loss of duty totaled $3.5 million. The firm agreed to repay that amount plus $2.1 million in fines. Sentencing is due soon for the executives.

Appeals Court Rules Against NAFTA Trucking Regulations
2/03

The Ninth Circuit Court of Appeals ruled last week that the Dept. of Transportation failed to conduct required environmental analysis (environmental impact study and Clean Air Act conformity determination) before enacting regulations which permit Mexican motor carriers to operate in the U.S. beyond the current 25 mile border zones .

NAFTA CONFERENCE SLATED
08/01

The U.S. Department of Transportation will hold a North American Free Trade Agreement conference in San Antonio, Texas, on October 21-24, 2001. The event will include U.S., Canadian and Mexican government officials from regulatory agencies that affect cross- border transport operations. Panel sessions will provide information about each agency's requirements for motor carrier operations under NAFTA.

For further information about the conference, access DOT's web site at http//www.dot.gov/NAFTA, or contact Eddie Carazo at (202) 366-2892.

CUSTOMS UPDATE: WILL NAFTA TIFFS EVER END?
6/01
(Published in the Journal of Commerce on 6/12/01)

Click here for a printable version of this article

Like a serial novel, the controversy surrounding NAFTA and trading between the U.S., Canada and Mexico continues unabated.

For example, NAFTA Article 303 was designed to induce manufacturing operations to return to North America. The method to accomplish this goal: luring suppliers to the region to make their products, thereby allowing manufacturers to use regionally made parts and components in making their finished goods. The benefit would be the end product becomes NAFTA-eligible, thereby enjoying duty free treatment. The final stage of implementation occurred in Mexico at the first of this year.

The Americans insisted on the inclusion of Article 303 in NAFTA out of concern that unless there was actual manufacturing taking place, non-NAFTA suppliers would use Mexico or Canada as a platform for gaining duty-free access to the U.S. market. Put bluntly by some of the negotiators at the time, the concern was Mexico, in particular, would be nothing more than a "screwdriver" operation, meaning the Americans insisted on rules of origin which rewarded manufacturing rather than assembly.

In reality, few suppliers relocated, although some of the largest corporations continue to insist they do so to this day. Until the NAFTA drawback provisions took effect on January 1, 2001, this was not much of an issue relative to Mexican production. However, now that goods imported into Mexico, which are intended for the U.S. and Canadian market, are subject to duty payment (with refund coming, if at all, through the application of the complicated and record intensive NAFTA drawback provisions), some Mexican products are becoming more expensive than those produced elsewhere. [Unlike Canada where the relevant duty rates have all dropped to zero, the duty phaseout continues in Mexico.]

While American labor unions might be elated at such a turn of events, the situation is problematic, especially for the many American companies which have invested heavily in Mexico. Simply put, Mexican produced goods are now subject to the limitations of the NAFTA drawback program while foreign made goods are not.

Another source of the problems Article 303 is causing is the lack of raw materials in North America. In the case of shortages, it is commonplace for the regional-made raw materials to be put into production in the U.S. while the foreign sourced raw materials end up in Mexico. The average duty rate into the U.S. is now somewhere around 3% whereas the average Mexican duty rate is considerably higher. Whether made in the U.S. or Mexico, often times the finished good ends up in the U.S. market with a resulting increase in consumer cost.

This increased cost may be attributed to the higher Mexican duty rate, but generally that is not the only cause. Another element is the high cost of transportation when the company decides to redirect the originating raw materials to Mexico to reduce duty liabilities while moving the foreign raw materials to the U.S. for production purposes.

As a general rule, the non-NAFTA inputs used in Mexico are not available in North America either due to lack of production, insufficient capacity or noncompetitive pricing, quality or delivery times. These factors cause production costs to rise, an increase which is enhanced by the administrative burdens imposed to qualify for NAFTA and especially its drawback benefits. The net result is the beginnings of change. A few North American-based manufacturers are starting to look at relocating offshore in order to be quality and price competitive. The importance of this phenomenon is in the overall approach of the negotiations taking place regarding likely trade agreements between the U.S. and Chile, Singapore and the Free Trade Area of the Americas.

In a recent Federal Register publication, the U.S. Trade Representative announced he wanted input regarding the potential U.S.-Chile Trade Agreement and, in particular, sought comments about the NAFTA rules of origin. It seems clear, the existing NAFTA rules of origin will serve as a model for future trade agreements. The key question for all of us then is, should they? If so, should they be changed? If so, how? Traders are encouraged to make their views known. If you are having trouble qualifying for NAFTA because you cannot obtain sufficient regional inputs, let the U.S. Trade Representative know.

Elsewhere, the issue of opening the borders to Mexican trucks, on the other hand, has proven more difficult. A recent proposal by the Administration was to grant full access in early 2002. Feeling the U.S. is not moving quickly enough, Mexico has threatened to impose punitive sanctions. In other words, the Mexicans are threatening to impose 100% duty rates on selected American products. At the same time, a resolution has been introduced in the House of Representatives calling for delays in allowing Mexican trucks to operate in the U.S. until the Administration certifies to Congress that there are no dangers to the health, safety and welfare of Americans. A companion bill is expected to be introduced in the Senate shortly.

The House Bill lists a number of conditions, such as that sufficient permanent inspection facilities be built at all commercial border crossings, sufficient staffing to conduct meaningful inspections, sufficient staffing at all hours of operation, plus assurances that the Mexicans have in place and working an adequate safety rating process, domestic roadside safety programs, adequate drug and alcohol testing programs, hours of service regulations and accessible safety databases.

At the same time, the California Truckers Association (CTA) is said to be prepared to challenge opening the borders to Mexican operators focusing on environmental regulations, especially fuel standards. The Teamsters Union is reported to be working closely with the CTA in seeking a way to bring to out evidence that Mexico is violating its version of the Clean Air Act, coupled with the claimed lack of U.S. preparedness to inspect arriving vehicles for fuel standards compliance. [CTA has generally been supportive of NAFTA but states its concern in this context to be the California environment.] The CTA/Teamster complaint is expected to be filed with the North American Commission for Environmental Cooperation whose process carries with it no enforcement tools, only a final report with findings which the various governments are free to implement in any way they choose.

Another trouble spot in Mexican-American relations is the recent dumping complaint filed by a group of California table grape growers against Mexico and Chile. The basis of the complaint is that table grapes grown in the two countries and imported between April 1 and June 30 are being sold to the U.S. market at less than production costs. The complaint recently cleared its first hurdle when the International Trade Commission found petitioners represented a sufficient portion of U.S. domestic industry to be allowed to proceed, a finding made despite active opposition from several sectors within domestic industry.

Also causing concern, particularly with the Canadians, is the Byrd Amendment which was passed in the last session of Congress and requires Customs to refund the dumping duties collected to the domestic industry found to have been harmed. The Canadians have already indicated their displeasure (a concern which has been heightened by the softwood lumber case) and are threatening to file a complaint through the dispute resolution mechanism in NAFTA. Their argument, and that of the Europeans and Japanese who threaten a similar complaint before the World Trade Organization, is that refunds of dumping duties to domestic industry are not in accord with either the standards of NAFTA and/or the WTO. A particular concern is whether the net result will be to generate a lot of litigation, much of which is feared to be unfounded, simply because of the potential dollars at stake. Given the nature and complexity attendant to dumping cases, their resolution takes a long time, they are costly to defend (and prosecute) and, even in the face of a finding that dumping is not warranted, many companies end up going out of business. For proof of this result, one need look no further than the unsuccessful dumping case a few years ago which involved sweaters made in Hong Kong.

To comply with the Byrd Amendment, Customs must enact regulations which are still being worked on. The monies must be refunded no later than December 2001. It is unclear whether Customs has completed those regulations or whether Treasury is holding them up. In either case, they must still be published in the Federal Register for public comment.

Against this backdrop, it appears we are seeing that the lower the duty rates, the more room there is for disputes between trading partners in other areas. Canada remains the U.S.'s largest trading partner. Mexico has leapfrogged over Japan to be our second largest trading partner. Again, American importers and exporters are cautioned to keep a close eye on events in Washington. There are daily changes and being out of the loop can prove to be devastating.

CUSTOMS UPDATE: NEW NAFTA TRUCKING RULES
5/01
(Published in the Journal of Commerce on 5/24/01)

Click here for a printable version of this article

On May 3, after the Bush Administration's agreed to implement Nafta's trucking provisions, the Federal Motor Carrier Safety Administration (FMCSA), a division of the U.S. Dept. of Transportation (DOT), published regulations laying out the new environment in which all Mexican trucks will operate in the U.S., making them subject to the same safety regulations as U.S. operators.

The new rules will help determine the readiness of Mexican truckers to meet the U.S. requirements. The announcement included proposed new rules which implement safety oversight programs while allowing Mexican applicants to operate either in the border area (as was allowed pre-Nafta) or beyond.

Mexican truckers wishing to operate throughout the U.S. will use the new Form OP1 to register. The purpose of this new form (and the Form OP2 for those truckers continuing to limit their operations to the border area) is to provide FMCSA and DOT with information about the applicant's operations, domicile, Mexican registration, and the system currently in place by which driver qualification, hours of service, drug and alcohol testing, vehicle safety and conditions, accident monitoring and hazardous materials transportation are documented.

Arbitration of disputes is required for household goods applicants so their willingness to offer it as the means to settle claims and losses must be affirmed. Compliance with U.S. Dept. of Labor and other regulations must also be affirmed through these new forms.

The proposed regulations list the forms which must accompany the OP1, such as proof of payment of federal highway taxes. There is also a $300 filing fee. Even those few Mexican truckers currently authorized to transport goods beyond the border region will be required to file the new application form and pay the filing fee, but have a year to do so. They remain subject to a safety audit within 18 months of approval. Those truckers continuing to operate within the border zone must also file the new Form OP2 and comply with its requirements, including proof of financial responsibility.

Part of the new procedure is a Safety Monitoring System and Compliance Initiative. It includes training workshops by FMCSA that provide written materials to aid Mexican operators in becoming conversant with the applicable U.S. laws and regulations. One result of the intensified roadside inspections will be to generate data identifying those carriers with serious safety problems warranting immediate attention and then to focus on those problem carriers, if any.

Mexican truckers will be required to comply with the Federal Motor Carrier Safety Regulations, Motor Vehicle Safety Standards and Hazardous Materials Regulations. Within 18 months, the operations of every Mexican trucker will be audited for the purpose of determining a carrier's compliance with the relevant safety standards. The audits may be conducted either at the trucker's business facility (in Mexico) or at designated locations, e.g., U.S.side border area sites. Mexican truckers can also expect roadside inspections at which they will be required to provide any records needed to adequately evaluate safety compliance. Failure to comply with reasonable requests for safety documentation can lead to revocation of any certificate to operate in the U.S. (called the Certificate of Registration).

All Mexican truckers currently authorized to transport cargo in the U.S. will retain their certification until the safety audit is completed, presuming they file the new forms. Continuance of certification is tied to the results of the audit. If the audit is not completed within 18 months (a likely result given limited staffing and the number of companies to audit), operations will be allowed to continue until a safety audit is completed. If a carrier is suspended because of failing an audit, the trucker will be given an opportunity to cure any deficiencies, and failing that will have its certification revoked.

The safety audits will also identity truckers conducting unsafe operations or whose systems lack basic management controls to ensure protection of public safety. Records subject to review include driver medical qualifications, driver hours of service, drug and alcohol testing and vehicle inspection, maintenance and repair records.

If Mexican operators are found to have committed certain violations, expedited action will result. If operators employ drivers who do not possess or operate without a valid Mexican or U.S. commercial driver's license and/or test positive for or refuse to submit to requested alcohol or drug testing; operate vehicles taken out of service for violations of the Commercial Vehicle Safety Alliance North American Standard Out-of-Service Criteria without making required repairs; fail to carry appropriate insurance; or have an out-of-service rate of 50% or more based upon three (3) inspections within a consecutive 90 day period, those operators will be subject to an expedited safety review or could be issued a deficiency letter identifying the violations and directing an immediate response to FMSCA demonstrating corrective action. Failure to respond could lead to suspension of certification. If a response remains outstanding, revocation of certification follows.

Given the tremendous volume of trucks crossing north into the U.S., there is understandable concern regarding safety and so the obvious question is, how many Mexican trucks can realistically be inspected? The FMCSA clearly hopes that the proposed system will satisfactorily answer that question.

Another key issue is the apparent lack of inspectors and inspection facilities in the border states. As part of its implementation plan, the Bush Administration announced approximately $88 million in additional federal funds to aid the four states bordering Mexico in their efforts. California announced its readiness in 1994, having built two multimillion dollar facilities, one within a half mile of the Otay Mesa crossing south of San Diego, and the other near the new border crossing station in Calexico. But given its immense volume of Mexican trade, it was surprising to learn that Texas is not ready to handle the increased inspections. A bill, which would have required the state to build eight inspection facilities, has since died, but debate over where to locate the facilities continues. Texas has yet to make any decisions, and New Mexico and Arizona are equally lagging in their preparations.

Also weighing in was New Mexico's senior senator, Pete Domenici, on May 15 introduced a bill the Southwest Border Port of Entry Infrastructure Improvement Act authorizing expenditures of at least $585 million over the next five years to greatly improve ports of entry on the Southwest border. The bill is cosponsored by Sen. Kay Bailey Hutchison of Texas.

While the negotiations between the U.S. and Mexico continue, publicly Mexico has said it wants immediate implementation while the U.S. has counseled a phased-in approach. The safety issue has lit fires anew with the release by DOT of 2000 service figures that showed U.S. trucks were removed from service 25% of the time, with that figure having risen to 36% for Mexican trucks.

Keep in mind that many trucks operating at the border are often short haul or shuttle vehicles which neither side would use for access outside the border zone, i.e., for longer hauls. Nonetheless, such high out-of-service rates are intolerable, whether by U.S. or Mexican owned trucks.

NAFTA TRIBUNAL ACCEPTS THIRD PARTY BRIEF
01/01

In what some see as a surprise, a NAFTA environmental panel has ruled it will accept amicus briefs. The case is noteworthy for that reason but also because of the substantive issue it seeks to raise. Methanex Corporation, a Canadian company, seeks recovery for claimed lost profits as the result of the State of California banning MTBE. The State's decision was based upon environmental problems allegedly caused by the MTBE additive, a suspected carcinogen.


NAFTA DECISION APPEALED
11/99

The United Steelworkers of America recently filed an appeal seeking to again overturn NAFTA. The union claimed that NAFTA was not legally enacted by claiming it is a treaty which required 2/3 Senate approval.  It was approved as a trade agreement by a majority in both Houses of Congress.  The trial court found the agreement was properly ratified.  It is expected to take many months before the appellate court hears the case or reaches a decision.


NAFTA FOUND CONSTITUTIONAL
9/99

Attracting yet more attention, this time in Alabama, NAFTA was recently found to be constitutionally enacted despite the objections of the Made in USA Foundation and the United Steelworkers of America who argued NAFTA was really a treaty and so required a 2/3 majority vote in the Senate, which, of course, did not happen. The judge decided the treaty clause was not the only way to enact an international trade agreement. One other method was by relying on the President’s responsibility to regulate foreign affairs. Another is Congress’ power under the foreign commerce clause. An appeal is expected by the plaintiffs.


ONCE MORE TO THE SUPREME COURT
9/99

In the current session, the U.S. Supreme Court has twice dealt with trade related cases. One decision had to do with the harbor maintenance tax which was found to be unconstitutional as a tax on exports. The second involved Haggar and its Mexican jeans assembly operation which found Customs was due quite a bit of deference when it made its classification decision based upon properly enacted regulations. Now Bestfoods has appealed a decision which found its Skippy peanut butter did not meet the NAFTA marking rules and so had to be labeled Made in Canada. Bestfoods has argued twice before lower courts that the NAFTA marking rules fail to meet the existing substantial transformation test and, therefore, are not validly enacted. It has lost twice and now hopes to convince the high court.

CUSTOMS REBUKED OVER NAFTA RULES

Reminding Customs that the NAFTA marking rules add to, and do not replace, the principals and rules already in the law, in CPC International, Inc. vs. U.S. (July 8, 1996), Slip Op. 96-106, the Court of International Trade overruled Customs regarding the manner in which it interpreted the NAFTA marking rules. The court reminded Customs that in making a determination about marking, the existing rules regarding substantial transformation (producing a new and different article of commerce) cannot be ignored when the importer claims that he is the ultimate purchaser of the intermediate product. This decision is significant because it reminds Customs once again that existing laws on the books cannot be ignored.