INTERNATIONAL TRADE AND CUSTOMS NEWSLETTER PREPARED FOR THE CLIENTS AND FRIENDS OF THE FIRM, FOR VIEWING ON THE WORLD WIDE WEB.

Volume, XI, Number 1
January, 1997

U.S. PUBLISHES
TEXTILE ORIGIN
PROPOSALS

The U.S. International Trade Commission (ITC) has published draft rules of origin for textile and apparel products classified in Chapters 50 through 63 of the Harmonized System of tariff nomenclature. After considering public comments, the ITC will formally transmit the proposed rules, modified as appropriate, to the ongoing Uruguay Round Rules of Origin Study, which is considering possible Uniform Rules of Origin for worldwide application.

The U.S. proposal is strikingly similar in many respects to controversial textile origin rules enacted in Section 334 of the Uruguay Round Agreements Act (URAA). Fashion accessories, home textiles, fabrics, and a wide range of non-apparel textile articles would have their origin determined by a "fabric forward rule", that is, according to the country where their constituent fabrics are woven in the "greige" state. Yarns, threads, rope, and cordage would be considered to originate in the country where they are spun or extruded. While the proposed rules do not feature a clear "multicountry rule" of origin for apparel manufactured in two or more countries, it appears that such apparel would be considered to originate in the last country where a substantial assembly operation was performed.

The U.S.' Section 334 textile origin rules, which entered into force on July 1, 1996, have been denounced by some trading partners as non-tariff trade barriers. The draft U.S. textiles proposal for the Uruguay Round Study is likely to be equally controversial. The ITC is seeking public comment on the proposed rules. Copies of the rules, together with our firm's analysis, are available from our offices [GTR #97-101].

WTO MEMBERS
WORK TO FINISH
INFOTECH PACT

Officials from the Office of the U.S. Trade Representative are working with their counterparts from the European Union, Canada, Japan and other nations to put the finishing touches on the proposed Information Technology Agreement (ITA), which seeks to establish global duty-free trade in a wide range of computer, semiconductor and telecommunications products by January 1, 2000. The 28 World Trade Organization (WTO) member countries who signed the Singapore Ministerial Declaration announcing the ITA (and who account for 84% of world trade in information products), are busy recruiting other nations to sign the agreement and fine-tune its coverage.

It is also expected that the U.S. and the European Union will accelerate their ITA tariff eliminations for many items, cutting tariffs in two installments rather than four. "Nuisance" tariffs (less than 3.0% ad valorem) for some ITA-covered goods may be eliminated immediately on July 1, 1997.

Some critics have complained that, by eliminating tariffs only, the proposed ITA pact ignores more serious nontariff barriers to market entry in the computer and related industries. Still, the ITA is expected to be signed by March, 1997, and to be followed by a broad-based study of tariff classification issues arising under Chapters 84, 85 and 90 of the Harmonized System of tariff nomenclature.

CIT AFFIRMS
MARKING EXCEPTIONS
FOR NAFTA GOODS

The "substantial transformation" exception from country of origin marking still applies to articles made in the U.S. with Canadian or Mexican inputs, the U.S. Court of International Trade has confirmed. In CPC International, Inc. v. United States, Slip Op. 97-1 (January 6, 1997), the CIT declined to reconsider its July, 1996 ruling that Customs may not substitute its NAFTA Marking Rules [19 C.F.R. Part 102] for the traditional "substantial transformation" test in determining who is the "ultimate purchaser" of articles imported from an NAFTA country.

In turning aside Customs' motion for rehearing, Senior Judge Bernard Newman stressed that the NAFTA Implementation Act authorized the Treasury Department to impose NAFTA Marking Rules only for the purposes specified in Annex 311 of NAFTA, and that no changes to U.S. law were to be made unless explicitly provided in the statute. The Court affirmed that Customs must accord two marking exceptions to goods made from Canadian and Mexican inputs -- the traditional "substantial transformation" exception and a new exception based upon the NAFTA Marking Rules.

The decision invalidates Section 134.35(a) of the Customs Regulations, as amended by Treasury Decision 94-1, which sought to replace the case-specific "substantial transformation" test with NAFTA Marking Rule tests based on changes in tariff classification. The decision also deals a blow to Customs' proposal to adopt the NAFTA Marking Rules as a uniform country of origin code for goods imported from all foreign countries.

The government is expected to appeal the CIT's decision, which also figures to feature prominently in Congressional hearings later this year regarding Customs' administration of the marking laws.

Copies of the CPC International decision are available from our offices [GTR #97-102].

CUSTOMS PROPOSES
DRAWBACK REGS
OVERHAUL

The U.S. Customs Service has published a comprehensive set of proposed new duty drawback regulations, and is seeking public comment through March 24, 1997. The massive new regulatory proposal, which is the product of a cooperative effort between the public and private sectors, seeks to implement drawback law changes prescribed in the Customs Informed Compliance and Modernization Act, and make a number of other changes to drawback procedures. The new regulations would add a number of new definitions for drawback terms, require proof of "commercial interchangeability" for all substitution unused merchandise drawback claims filed under revised 19 U.S.C. 1313(j)(2), clarify the concept of "possession" of merchandise for drawback purposes, provides new rules concerning "successorship" for drawback purposes, and implement legal changes regarding the eligibility of agricultural produce for certain types of drawback.

Procedural changes are proposed for the establishment of manufacturing drawback contracts, and the completion of drawback claims. Under the new regulations, the filing of drawback claims using the Exporter's Summary Procedure (ESP) would be elective with the claimant, rather than a "privilege" conferred by the Customs Service. However, accelerated payment of drawback and waiver of prior notice of exportation [for Section 1313(j) claims] would remain "privileges" which must be requested by application -- and drawback claimants currently holding such privileges would be required to re-apply for them.

CUSTOMS OUTLINES
DB "COMPLIANCE"
PROGRAM

Customs proposed regulatory overhaul also sets out rules for participating in the agency's "Drawback Compliance Program", which is designed to allow certain drawback claimants to have their procedures reviewed by Customs and given advance approval. "Certified" drawback claimants will receive some advantages under the new drawback regime, including limited immunity from the new civil drawback penalties prescribed under Section 593 of the Tariff Act, as added by the Customs "Mod Act". Customs' new proposal, however, does not implement the penalty provisions.

The proposed new regulations are extensive and complex. Copies of the regulations, together with an analysis, are available from our offices [GTR 97-103].

COMMERCE PUBLISHES
ENCRYPTION EXPORT
RULES, GETS SUED

The Commerce Department's Bureau of Export Administration (BXA) on December 30, 1996 published its interim regulations concerning the export licensing of encryption software and information. The controversial regulations limit the exportation, for national security and foreign policy reasons, of encryption software and hardware to various foreign countries, and impose licensing restrictions on exports to others. The rules also restrict the electronic transmission of encryption software, and prohibit U.S. firms from granting certain foreign nationals access to certain encryption hardware, software, or the work product of same. The BXA regulations, which are effective immediately, will require companies to adopt some new and innovative export compliance techniques.

Like their State Department predecessors, the BXA encryption export rules have proven controversial. An Illinois university professor, aided by the Electronic Frontier Foundation and other groups, has already filed suit to enjoin the regulations, on the ground that they violate free speech guarantees under the First Amendment to the U.S. Constitution.

Copies of the new regulations, together with our firm's analysis, are available from our offices [GTR #97-104].

CUSTOMS ANNOUNCES
RECONCILIATION"
PROGRAM TESTS

The U.S. Customs Service is seeking importers to volunteer for participation in a test of the agency's "reconciliation" program, this time within an emphasis on Customs value issues. "Reconciliation" is a new procedure, authorized by the Customs Informed Compliance and Modernization Act, which allows Customs entries to be "liquidated" as to most issues (e.g., admissability, classification), while allowing other issues requiring extended consideration to be to be transferred to a "reconciliation" transaction. Customs has previously announced "tests" of the reconciliation process involving certain transfer pricing and antidumping duty issues.

The new test will focus on Customs valuation issues, with particular emphasis on "maquiladora" operations (which often involve the use of cost-based "computed value" appraisements) and the treatment of non-dutiable freight costs in steel industry transactions. However, Customs is inviting interested importers to propose other valuation issues for inclusion in the reconciliation prototype.

Copies of the Customs notice announcing the "reconciliation" program are available from our office [GTR #97-105].

CUSTOMS ISSUES
NEW PUBLICATION
ON "SALES FOR
EXPORTATION"

The U.S. Customs Service has issued a new "advanced level" Informed Compliance monograph entitled What Members of the Trade Community Need to Know About: Bona Fide Sales and Sales for Exportation. The new publication restates Customs' position on what is perhaps the most important issue in administration of the "transaction value" statute - namely, when a sale constitutes a bona fide sale of goods "for exportation to the United States" and can be used as the basis for fixing dutiable value. The new monograph discusses the Nissho-Iwai "first sale" rule of appraisement, as well as Customs' position concerning the validity of "back to back" sales by middlemen.

Copies of the new informed compliance publication are available from our offices [GTR #97-106].

HMT: COURT WILL
UPHOLD IMPORT
TAX

A class action lawsuit challenging the validity of the Harbor Maintenance Tax (HMT) as applied to waterborne imports apparently will not be successful, a recent U.S. Court of International Trade hearing suggested. In Sarne Corporation v. United States, importers are attempting a class action challenging the 0.125% ad valorem HMT on waterborne imports on the ground that Congress has mismanaged the Harbor Maintenance Trust Fund, and has not appropriated collected taxes to allow the Army Corps of Engineers to conduct dredging and other harbor maintenance operations. However, in a January 6th, 1996 hearing, U.S. Court of International Trade Judge Jane A. Restani indicated that she was unwilling to overturn the fee, or even force the Corps of Engineers to spend the money collected from it -- a political decision which, she indicated, must come from the Congress. Judge Restani suggested that the importers invoke political remedies to either have the HMT on imports rescinded, or have the proceeds from the tax appropriated for harbor projects. The court is expected to issue a written opinion in the case shortly.

HMT; FEDERAL
CIRCUIT SETS
EXPORT TAX HEARING

The Constitutional challenge to the HMT as imposed on waterborne exports continues its slow, but so far successful, progress through the courts. The U.S. Court of Appeals for the Federal Circuit has scheduled a Friday, February 7, 1997 oral argument in U.S. Shoe. Corp. v. United States, Appeal No. 96-1210, the "lead" case among more than 2000 filed to date which assert that the HMT violates the export clause of the Constitution. The U.S. Court of International Trade struck down the tax in October, 1995, paving the way for exporters to recoup up to $1 billion in tax refunds.

CLINTON CONTINUES
SUSPENSION OF
HELMS-BURTON
PROVISIONS

President Clinton has suspended indefinitely, but for at least six months, those portions of the controversial Helms-Burton Act that would have allowed U.S. citizens to sue foreign corporations whose investments in Cuba utilize property seized by the Castro regime without compensation. The President's action follows outcry from U.S. trading partners, who believe that the law unfairly attempts to restrict their trade relations with Cuba. [The Castro regime in fact compensated most foreign governments for property which it nationalized. The U.S., refusing to recognize the Castro government, refused to file compensation claims].

Various foreign countries have passed "blocking statutes" which prohibit their citizens from cooperating with U.S. investigations into possible Helms-Burton violations. Canada's Helms-Burton blocking statute took effect on January 1, 1997.

CUSTOMS CONTINUES
"MOD ACT" PROGRAMS

Continuing efforts to implement the Customs Informed Compliance and Modernization Act, Customs on January 1, 1997 initiated its Remote Entry Filing Prototype II, which allows importers to file Customs entry documents at a single port of entry, while obtaining release of the cargo at a remote port of arrival. Twelve entry filers have been certified to participate in the Remote Filing Prototype Two program. Customs has also extended its test of the Automated Protest Filing System.

Other Customs initiatives, however, are meeting some opposition. Certain West Coast Customs brokers groups have indicated that they plan to oppose Customs' proposed Automated Export System on the ground that it requires exporters to transmit too many data elements, including irrelevant and unavailable information, in order to obtain outbound clearance of cargo. This position puts the West Coast brokers at odds with the National Customs Brokers and Forwarders Association of America (NCBFAA), which believes that Customs has been relatively receptive to brokers' concerns in adopting AES procedures.

Finally, Customs recently held a public meeting in Washington, D.C. to discuss the definition of the term "Customs business" under Section 641 of the Tariff Act, as amended by the Customs "Mod Act". The meeting was called to address some of the questions which importers have raised concerning when the use of outside counsellors constitutes "reasonable care" in importing. Customs intends to furnish guidance concerning when the use of attorneys, Customs brokers and Customs "consultants" constitutes "reasonable care".

NAPHTHA IMPORTERS
NEED NOT CERTIFY
USE, COURT SAYS

Importers of naphtha need not certify the actual use of their goods in order to secure a lower rate of duty, the U.S. Court of International Trade recently ruled. In Clarendon Marketing, Inc. v. United States, Slip Op. 97-7 (January 17, 1997), the Court ruled that the Harmonized Tariff Schedule subheading 2710.00.25 provision for "Naphthas (except motor fuel blending stock) is an eo nominee provision which does not require the importer to prove (or disprove) the actual use of its merchandise. Rather, held Judge R. Kenton Musgrave, an importer need only prove the actual use of naphtha if it enters its merchandise under HTS subheading 2710.00.18, which provides for "Motor fuel blending stock". [Customs had taken the position that, to secure classification under HTS subheading 2710.00.25, an importer was required to prove that its naphtha was not used in motor fuel blending].

The remarkable aspect of the Court's decision is that the subheading 2710.00.18 "motor fuel blending stock" provision carries a duty rate five times as high as the HTS subheading 2710.00.18 provision for other naphthas -- so no importer would ever have reason to certify the actual use of its merchandise.

Left unstated in the CIT's decision is whether the government, in the absence of an importer certification, can prove the actual use of the merchandise on its own initiative, and assess the higher rate of duty. However, the Court noted that classification under actual use tariff provisions requires a certification by the importer, and suggested that the filing of such a certification was purely at the importer's election. Copies of the Clarendon Marketing decision are available from our offices [GTR #97-107].

DENTAL IMPLANTS
ENTITLED TO DUTY
FREE ENTRY: CIT

Titanium dental implants used to anchor dentures in a person's gumline are articles special designed for the use of the physically handicapped, and are entitled to duty free entry under the Nairobi Protocol, the U.S. Court of International Trade recently held. In Nobelpharma U.S.A. Inc. v. United States, Slip Op. 97-6 (January 13, 1997), Judge Thomas Aquilino held that edentulism -- the loss of natural teeth -- was a physical handicap for purposes of the Nairobi Protocol. The Court also held that dental implants are not a cure for the condition, but rather a means for coping with it. Although the implants might have a cosmetic function, the Court determined that their principal purpose was to allow persons to deal with the conditions of edentulism.

Furthermore, the Court ruled that the implants were not merely "parts" of prostheses, but were independent articles, separate from the dentures which they support. [Although "parts" of articles for the handicapped formerly did not qualify for Nairobi Protocol treatment, this condition was rectified by Presidential Proclamation in 1995]. Copies of the Nobelpharma decision are available from our offices [GTR #97-108].

TEXTILES: U.S.
WILL MONITOR
DATA ACCURACY

Asserting that information appearing on textile visas and entries of quota-class merchandise is often inaccurate, and distorts trade statistics, the Customs Service has announced that it is cracking down on clerical and other reporting errors on quota-class entries. Effective January 1, 1997, Customs officials are directed to reject entries containing incorrect information, to limit the use of "dummy" visas, and to reject all visas bearing hand-written corrections, with the exception of certain Hong-Kong visas bearing a red stamp. Copies of Customs' announcement are available from our offices [GTR #97-109].

For additional information concerning subjects discussed in the Global Trade Report, please call Martin Neville, John Peterson, Maggie Polito, Jim Marino or Arthur Purcell at (212) 635-2730 or George Thompson at (202) 861-2959.