Importers Be Aware – if you are importing products that could be caught up in an Antidumping and Countervailing Duties (AD/CVD) order then you need to be aware of the major changes to these regulations, which were issued by the Department of Commerce (“DOC”) on September 20, 2021. The intent of the updated regulation is designed to help enforce import tariff evasion and Customs and Border Protection (“CBP”) identification of importer circumvention of the defined additional U.S. tariffs.
Since the issuance of the Tariff Act of 1930, and a subsequent update in 1997, when an AD/CVD order is released, DOC is required to provide a description of the class or kind of the merchandise subject to the order. The identification of the merchandise determines the scope of the order, but Commerce has been given the ability under the statute to define the scope of the ‘order’ based on the AD/CVD petition. Once the ‘scope’ has been defined by Commerce, then it falls to CBP to determine if specific products are subject to the AD/CVD duties. The regulatory changes are intended to augment and standardize the various processes DOC uses to uncover tariff evasion and help with the broader crackdown of evasion practices.
There are several changes to existing standards and the initiation of new provisions. Below is a synopsis of what an importer can expect with the regulation changes:
- Standardization of Scope Ruling Applications – Previously there were no consistent requirements for an interested party to submit a ‘scope ruling application’. Now a detailed and standardized scope ruling application must be submitted, which DOC must accept or reject within 30 days of submission of the application. An accepted application becomes a scope inquiry, and the agency reviews must be completed within 120 days or if extended within 300 days. The intent with this change within the regulation is to allow DOC to issue scope ruling more efficiently.
- Country of Origin Determinations – There are a set of factors taken into consideration when DOC begins determining country of origin or said another way, the point in the production process that establishes an item’s country of origin (substantial transformation). The new rule gives the agency wide discretion in determining the factors to be used and they are not obligated by any other agencies findings (i.e., CBP).
- Circumvention Inquires – Enhanced procedures for circumvention inquiries and final determinations are clearly established. DOC has always had the statutory authority to conduct circumvention inquiries concerning an AD/CVD order to determine if a product falls within the scope of the order. Several of the procedures include:
- Self-Initiation – Under this procedure DOC has the prerogative to self-initiate a circumvention inquiry if the presented factors warrant them to do so. While the agency has always had the ability to conduct such inquires, the new regulations establish their ability to do so whenever there is such an inquiry is deemed appropriate, (see 19 C.F.R. § 351.226(b)).
- Circumvention Inquiry Requests – Similar to the process of filing an application for a scope request; now an ‘interested party’ can request a circumvention inquiry by following the application process and its requirements- see 19 C.F.R. § 351.226(c)).
- Third-Country Processing and Assembly – The analysis for determining third-country processing and assembly is now identified in the regulations. While like that of country-of-origin analysis in scope rulings, DOC has equivocally stated each serves a distinct purpose. Country-of -origin is the substantial transformation test. Third-Country Processing and Assembly analysis is aimed at detecting circumvention by minor alterations to merchandise in a third country to obfuscate the true production location, see Section 781(b) of the Tariff Act). This may include but not limited:
- Determining if the process of assembly or completion in the foreign country is minor or insignificant;
- If the value of the merchandise in the country subject to the order is a significant portion of the merchandise exported to the U.S., and;
- If the action is enough to prevent evasion of such order or finding
- Enforce and Protect Act (EAPA) – Since 2015 the EAPA has been an important enforcement tool for the U.S. government. The law provides CBP the authority to investigate whether an importer has evaded AD/CVD duties. It also allows CBP to implement interim measures after being advised of an allegation against a suspected tariff evader and the agency may even levy ‘adverse inference’ against an importer who fails to provide requested documentation during the investigation.
- The regulation introduces procedures to improve the “covered merchandise referral” mechanism available to CBP when performing a tariff evasion action under this act. Such a referral will occur if CBP is unable is unable to determine if the merchandise in question is covered under an AD/CVD order and then ‘refers’ the issue to DOC for a determination, which may lead the referral to become part of a scope or circumvention inquiry.
- Enforcement Trends – As with any other regulatory oversight there has been increased focus on compliance of the regulations and CBP and DOC are no different in their efforts to eliminate tariff evasion.
- Transshipments through third countries, such as Malaysia and Vietnam in Southeast Asia, of Chinese manufactured items account for the majority of CBP’s EAPA enforcement actions in calendar year 2020 (evasion of 301 tariffs).
- There has been an increase in the number of DOC-led Circumvention inquires where it is believed merchandise subject to an AD/CVD order is completed or being assembled in the U.S. from parts and components imported from a country subject to the AD/CVD order and the process of assembly or completion in the United States is minor or insignificant.
- DOC has also focused on the County of Origin determinations and the concept of ‘substantial transformation’ to ensure the appropriate duties are being paid and Free Trade Agreements are not being misused.
Areas Importers Should Review
U.S. importers need to be aware of these changes and take a close look at their supply chain and strategically assess the impact getting caught up in an AD/CVD order. Below are a couple of areas to review:
- Review the current AD/CVD orders, which may be found here: AD-CVD Orders, or if you have an established Automated Commercial Environment (ACE) account you will be able to find the same information in the reports section.
- Have you vetted your suppliers recently?
- Do they still manufacture in the location when you initiated the relationship?
- Have they got other manufacturing locations where your purchased merchandise is being made and may get caught up in an AD/CVD order?
- If you had to move to another supplier to avoid such an AD/CVD order, what would it take your company to do so, (i.e., product lead times, potential increased pricing, etc.)?
- What would the impact to your business model be to make such a significant change?
We suggest reviewing these things carefully in light of the changes in order to determine what impact they will have on your business. If you need assistance navigating these changes, please contact Export Solutions for a free consultation.
Beverly Demma is a Sr. Consultant for Export Solutions -- a full-service consulting firm specializing in U.S. import and export regulations.