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

Volume XI, Number 4
May, 1997

FTC PROPOSES
"MADE IN USA"
LABELING GUIDES

The Federal Trade Commission (FTC) has proposed controversial origin labeling "Guides" designed to govern the use of "Made in USA" claims on products and packages offered for sale in the U.S., and in product advertising. The proposed Guides, issued a year after the FTC conducted a two-day workshop on origin labeling, would allow the use of an unqualified "Made in USA" claim where a product is "substantially all made in the United States".The Guides would create two "safe harbor" rules which would permit "Made in USA" claims in cases where; (1) the product is last "substantially transformed" in the U.S. and U.S. manufacturing costs constitute at least 75% of total manufacturing costs, and (2) the product is "substantially transformed" in the U.S. and each of its significant inputs were "substantially transformed" here as well.

Historically, the FTC has held that an unqualified "Made in USA" claim is deceptive unless a good is "all or virtually all" made in the U.S. (parts and labor). The proposed Guides(which representthe official position of the FTC, but are not regulations), represent a liberalization of that policy. Interestingly, however the Guides would embrace the traditional "substantial transformation" test of a change in name, character and use, just as the U.S. Customs Service is trying to abandon it. Businessmen are also concerned that the proposed guides would give them additional complex rules of origin to follow.

The FTC is accepting public comments concerning the proposed Guides through August 22, 1997. Copies of the Guides, plus our firm's summary and analysis thereof, are available from our offices. [GTR 97-401].

CUSTOMS SEEKS
COMMENT ON DRAFT
"DRAWBACK PENALTY"
REGULATIONS

The U.S. Customs Service has published a draft of its proposed regulations and guidelines for Section 593A of the Tariff Act of 1930, as amended [19 U.S.C. Section 1593a], which authorizes the agency to impose civil penalties for false or fraudulent duty drawback claims. Section 593A, enacted in 1993 as part of the Customs Informed Compliance and Modernization Act, authorizes civil drawback penalties of as much as 300% of any improperly claimed drawback. The penalty provision will become effective once Customs implements a computerized drawback selectivity system.

Customs' draft penalty regulations closely track the agency's procedures for assessing civil penalties under Section 592 of the Tariff Act. The proposed penalty mitigation guidelines establish final penalty ranges for negligent and fraudulent drawback claims, and address violations by participants in Customs' voluntary Drawback Compliance Program.

Customs will consider public comments before formally proposing the regulations in the Federal Register. Copies of Customs' proposal, together with an analysis, are available from our offices. [GTR #97-402].

FEDERAL CIRCUIT
UPHOLDS TEXTILE
RULES. . .

The Customs Service's controversial rules of origin for textile and apparel products, established under Section 334 of the Uruguay Round Agreements Act (URAA) are valid, according to the U.S. Court of Appeals for the Federal Circuit (CAFC). In Pac Fung Feather Co. v. United States, No. 96-1211 (April 8, 1997), the appellate court held that Customs' regulations interpreting Section 334, and particularly the regulations which impose a "fabric forward" rule of origin for a wide range of non-apparel textile goods, represent a permissible reading of Section 334's mandate. Although the regulations apply the statutory rule of origin for fabrics to a wide range of articles which, by Customs' own admission, have been advanced beyond the "fabric" stage, the Federal Circuit held that Customs was justified in selecting the "fabric" rule as the "most appropriate" rule to govern the origin of non-apparel textile goods.

The Federal Circuit's decision sustaining the rules is likely to shift the battle over the rules to the international arena, and particularly, the European Union's threatened complaint to the World Trade Organization (WTO). Copies of the Pac Fung decision are available from our offices [GTR #97-403].

. . . BUT A WTO
FIGHT MAY LIE
AHEAD

The Federal Circuit's affirmance of the Section 334 rules is likely to move the controversy over the rules to the World Trade Organization (WTO). The European Union, reacting to complaints by Italian scarf makers, German bedding manufacturers and British fabric convertors, has given the U.S. an ultimatum to amend Section 334 of the URAA, or face a WTO challenge. The EU claims that the rules, and particularly their "fabric forward" aspect, constitute non-tariff barriers to trade in violation of the Uruguay Round Agreement on Textiles and Clothing, an also constitute an invalid interim rule of origin which contravenes the Uruguay Round Agreement on Rules of Origin.

The U.S. recently used textile quota concessions to defuse similar challenges by the Philippines and South Korea, but this tactic is unlikely to work with the EU. A U.S. offer to appease the EU by amending origin marking requirements for silk scarves was rejected.

ITA: U.S., EU
PUBLISH TARIFF
ELIMINATION
SCHEDULES

The U.S. Trade Representative (USTR) has made public the U.S.' duty elimination "offer" for the Information Technology Agreement (ITA). The offer contains a timetable, showing, on a tariff item basis, how the U.S. will reduce and eliminate duties on a wide range of computer hardware, software, semiconductor manufacturing and related goods beginning July 1, 1997.

The U.S. has also published its official "Rectification", showing how it will amend its Uruguay Round duty reduction commitments to reflect the ITA changes. The Rectification also gives an indication of some of the changes to the Harmonized Tariff Schedule which will be needed to implement the ITA. While the ITA requires signatory countries to eliminate duties on covered products no later than January 1, 2000, the U.S. will eliminate duties on a wide range of covered products immediately on July 1, 1997, and will eliminate many other duties by July 1, 1999, a year ahead of the required schedule.

The European Union has also made public its ITA tariff reduction schedule and Rectification as well.

Copies of the U.S. [GTR 97-404] and EU [GTR 97-405] tariff reduction offers for the ITA are available from our offices.

NAFTA: USTR
SEEKS "ACCELERATION"
PETITIONS

The U.S. Trade Representative (USTR) has announced that the U.S., Canada and Mexico are accepting a "second round" of petitions to accelerate the elimination of particular tariffs for "originating" goods under the North American Free Trade Agreement (NAFTA).   Petitions will be accepted through June 13, 1997; decisions will be announced by December 15, 1997, and changes will become effective January 1, 1998.

Obviously, the NAFTA countries will not consider petitions to accelerate the reduction of tariffs which are scheduled to be eliminated January 1, 1998. As a practical matter, this means that petitions must address preferential tariffs in U.S.-Mexico or Canada-Mexico trade.

The NAFTA countries accepted a first round of acceleration petitions in 1994, but, following delays occasioned largely by Mexico's peso devaluation, only a few petitions were granted. USTR has indicated that "first round" petitions may be resubmitted, but must contain updated data.

Copies of USTR's announcement, and a model tariff acceleration petition, are available from our offices. [GTR 97-406].

CIT IMPOSES
$1.5M CIVIL PENALTY
ON IMPORTER,
FOREIGN SELLER

In a lengthy, detailed decision, the U.S. Court of International Trade (CIT) has imposed a $1.5 million civil penalty under Section 592 of the Tariff Act of 1930, jointly and severally on a U.S. importer and the foreign seller of imported merchandise. In United States v. Hitachi America, Inc. et al, Slip Op. 97-46 (April 15, 1997), the U.S. branch of a Japanese trading company and its joint venture partners, secured a contract to supply subway car assemblies and components to the City of Atlanta. The purchase/sale contract established a base price for the imported goods, and contained "escalation clauses", based on inflation and currency adjustments. The U.S. trading company and its foreign affiliate entered the cars at estimated Customs values based upon the base contract price, apparently believing that they could settle with Customs for the price escalations after the contract had been fulfilled. Indeed, the importer was preparing a "prior disclosure" to Customs when, tipped off by a corporate employee-turned-informer, Customs agents raided the importer's premises, executing a search warrant.

Following a lengthy trial, the CIT, per Judge R. Kenton Musgrave, ruled that the government had proven that the importer had underpaid duties by reason of negligence, and that the maximum penalty of twice the duty underpayment should be assessed. However, the CIT ruled that the foreign seller of the railcars should also be held liable for the Section 592 duties jointly and severally, on the theory that it had "aided and abetted" the importer in the underpayment of duties. The Court's decision hinged significantly on Tariff Act provisions which were interpreted to require that the escalation payments be declared to Customs promptly.

The Hitachi America decision seemingly yields a harsh result, especially since the importer was apparently planning voluntarily to declare the escalation payments. It should remind importers, however, that in complex appraisement matters, nothing should be assumed, and understandings with Customs should be reduced to writing. Copies of the Hitachi America decision are available from our offices [GTR #97-407].

PROPER SERVICE
ESSENTIAL TO
PENALTY PROSECUTION,
CAFC HOLDS

The Government may not pursue a Section 592 penalty action against an importer unless it properly invokes the CIT's jurisdiction over the defendant, the Court of Appeals for the Federal Circuit recent held. In United States v. Ziegler Bolt & Parts Co., Inc., No. 95-1408, 1479 (April 14, 1997), the Government served its Summons and Complaint in a Section 592 penalty lawsuit upon the attorney who had represented the importer during administrative proceedings. However, the importer had not authorized the attorney to accept service of process on its behalf. Under the circumstances, the CAFC held, the Government had not correctly invoked the U.S. Court of International Trade's personal jurisdiction over the defendant, and had not timely commenced its penalty enforcement action. The CAFC upheld a 1996 CIT decision dismissing the government's case.

Copies of the Ziegler Bolt & Part decision are available from our offices [GTR #97-408].

TEXTILE QUOTAS:
TRADE GROUP FILES
"WHISTLEBLOWER"
LAWSUIT

Continuing the trend toward direct action against suspected trade violators, the American Textile Manufacturers Institute (ATMI) has filed a qui tam or "whistleblower" lawsuit in Federal District Court in Los Angeles, charging major importers and retailers of apparel of unlawful transshipment, to evade textile quotas. The lawsuit, United States ex rel. American Textile Manufacturers Institute v. The Limited, et al., was filed last fall. It charges The Limited, Inc. a large specialty apparel retailer, and Tarrant Apparel Group, a Los Angeles-based apparel importer, with knowingly representing Chinese-origin apparel as originating in Hong Kong. The suit asks the Court to assess marking duties and steep civil penalties and liquidated damages against the defendants for alleged violations of various Customs, trade and Federal Trade Commission (FTC) labeling laws. ATMI asks that, as "relator" of the information, it be paid an informer's compensation from any amounts recovered.

The Court unsealed the Complaint after Customs declined to prosecute the action itself. According to our firm's information, additional qui tam suits against textile importers and retailers are in the works, and some may have already been filed. The ATMI action, if successful, could accelerate the trend toward seeking direct private remedies for alleged trade and Customs law violations. Copies of the ATMI qui tam Complaint are available from our offices [GTR #97-409].

CUSTOMS SETS NEW
RULES FOR HONG
KONG TEXTILE
IMPORTS

Reacting to claims that Chinese-origin textiles and apparel are being unlawfully transshipped through Hong Kong, the U.S. Customs Service has announced the adoption of stringent new rules for imports of textile products whose origin is listed as Hong Kong.

Effective June 1, 1997, Customs will be reviewing continuous bond coverage for all firms importing Hong Kong textiles and apparel. An earlier Customs proposal to require a Customs bond with a liability amount equal to 50% of the total value of the importer's Hong Kong textile imports for 1996 has been shelved for now.

Furthermore, the Hong Kong Trade Department has indicated that more than two dozen firms in that country have been identified as likely "transshippers" of textile products, and are being prosecuted. As of this writing eleven (11) such firms have been identified publicly. U.S. Customs has indicated that shipments from these firms will be treated as suspect merchandise, and importers may be required to provide extensive documentation to support claims of Hong Kong origin.

A memorandum summarizing Customs' new rules for Hong Kong textile imports is available from our offices. [GTR 97-410].

CUSTOMS PROPOSES
RECORDKEEPING REGS

The U.S. Customs Service has issued for public comment proposed regulations governing recordkeeping requirements and systems for importers and other persons conducting "Customs business". The proposed regulations explain importers' legal obligations to retain for a period of five years all records related to import transactions, including "hard copy" and electronic records. The proposed regulations would also codify Customs' Importer Recordkeeping Compliance Program, a voluntary program which would allow importers to have their recordkeeping systems reviewed and approved by Customs. Perhaps most importantly, the regulations would codify the system of recordkeeping penalties authorized by the Customs Informed Compliance and Modernization Act. Customs is accepting public comments on the proposed recordkeeping regulations through May 23, 1997.

Customs has also proposed a regulation to authorize the publication of a list of Customs "entry filer codes", the three-digit codes assigned to Customhouse brokers and to importer who self-file entries.

Copies of Customs proposed recordkeeping regulations [GTR #97-411] and entry filer publication [GTR #97-412] regulations are available from our offices.

JAPAN'S TRADE
BARRIERS WORST,
USTR SAYS

Japan's barriers to trade are the most harmful to U.S. exporters, according to the U.S. Trade Representative's recently-published National Trade Estimates (NTE) report on foreign trade barriers. USTR noted that Japan still maintains the largest bilateral trade deficit with the U.S., and criticized what it called a lack of progress in Japan's efforts to privatize Nippon Telephone & Telegraph (NTT), Japan's former telecommunications monopoly. The report also warned of possible "backsliding" in Japan's 1995 commitment to increase purchases of U.S. auto parts. The NTE Report also expresses concerns regarding Japanese standards, certification, inspection and labeling practices, which, it challenges, are unfair non-tariff trade barriers.

USTR also singled out the European Union for criticism, particularly in matters relating to agriculture trade, asserting that EU import restrictions and health and safety requirements have been challenged as unfair trade barriers. [The U.S. recently scored a major victory in this area, when a World Trade Organization panel struck down the EU's ban on imports of hormone-fed beef, as lacking any basis in scientific fact]. The NTE report is available from the Government Printing Office, and can be downloaded from USTR's website, WWW.USTR.GOV.

JAPANESE REPORT
CRITICIZES U.S.
TRADE POLICIES

Japan's Ministry of International Trade and Industry (MITI) released its own 1997 Report on the WTO Consistency of Trade Policies by Major Trading Partners,criticizing alleged unfair trade practices by the U.S. and other countries. MITI deplored U.S. use of unilateral trade measures, such as Section 301 of the Trade Act, while conceding that the U.S. has followed multilateral WTO dispute resolution procedures. Japan also assailed the U.S. Helms-Burton Act, which creates a private right of action for U.S. citizens against those who "traffic" in property confiscated by Cuba's communist government, and the U.S. import embargo on certain shrimp and shrimp products.

COURTS OWE NO
DEFERENCE TO
CUSTOMS DECISIONS,
CAFC SAYS

How much deference should reviewing courts give to classification decisions of the U.S. Customs Service? None at all, according to two recent decisions of the U.S. Court of Appeals for the Federal Circuit (CAFC).

In Universal Electronics, Inc. v. United States, No. 96-1345 (April 124, 1997), the CAFC upheld Customs' decision to classify certain universal remote control devices under Harmonized Tariff Schedule subheading 8537.10, as bases for electric controls. In doing so, however, the Court noted that, while Customs' classification decision was entitled to an evidentiary "presumption of correctness", reviewing courts are not obligated to give any deference to Customs' decision. "[I]n classification disputes, neither this court nor the Court of International Trade defers to Customs' decisions, whether factual or legal", the Court held. Although the Federal Circuit applies a deferential standard of review to the CIT's findings of fact, this standard does not extend to Customs' factual conclusions; moreover, the Federal Circuit reviews legal conclusions de novo.

Similarly, in Rollerblade, Inc. v. United States, No. 96-1397 (April 24,l 1997), a different CAFC panel confirmed that Customs' classification decisions are not entitled to judicial deference. In reversing a CIT decision which held that boots for in-line roller skates were classifiable as parts of skates, rather than as footwear, the CAFC stressed that reviewing courts have an independent obligation to determine the correct meaning of a tariff classification term, without regard to any presumptions regarding Customs' findings of fact or conclusions of law.

The two new decisions will probably prove of help to importers challenging Customs' determinations in the courts. Copies of the Universal Electronics [GTR # 97-413] and Rollerblade [GTR # 97-414] decisions are available from our offices.

NAFTA: CHEMICALS
PRODUCER SUES
CANADA OVER
LEGISLATION

Ethyl Corporation, a Richmond, Virginia-based manufacturer of gasoline additives and other chemicals, has filed a $250 million claim against Canada's Government, alleging a violation of Article 11 of the North American Free Trade Agreement (NAFTA). The suit follows Canada's enactment of a bill banning imports and inter-provincial trade in methylcyclopentadienyl manganese tricarbonyl (MMT), a fuel additive. Ethyl, the sole North American producer of MMT, charges that the import ban unfairly discriminates against the company, and will force it to close its Ontario MMT operations, effecting an expropriation of the company's property. Ethyl also claims that the Canadian legislation violates NAFTA's "national treatment" requirement, as it affects only one foreign company and does not affect any Canadian sellers of MMT.

NAFTA provides for Ethyl's claim to be heard on an expedited basis by a three-member binational panel.

GSP: ARGENTINA
LOSES BENEFITS

The United States Trade Representative (USTR) has announced that Argentina will lose duty-free benefits under the Generalized System of Preferences (GSP) for products valued at approximately $270 million annually, as punishment for Argentina's failure to protect U.S. intellectual property rights. The sanctions represent withdrawal of GSP benefits for 50% of Argentina's eligible exports, and covers a wide range of chemicals, metals, manufactured goods and agricultural products. In announcing the sanctions, USTR Charlene Barshefsky criticized Argentina's new patent legislation as inadequate and ineffective. Argentine government officials indicated that they will continue negotiations with the U.S., with a view toward resolving remaining trade disputes.

Copies of the list of Argentine products denied GSP treatment is available from our offices [GTR #97-415].

As of this writing, Congressional authorization for the GSP is scheduled to expire on May 31, 1997. As no GSP renewal legislation has been advanced through Congress, importers face the likely prospect that the GSP will once again expire, and that they will be forced to tender estimated duties pending Congressional renewal.

COALITION ANNOUNCES
ANTI-SWEATSHOP
CODE OF CONDUCT

A coalition of apparel and footwear manufacturers, working under guidance from the White House, have announced a proposed Workplace Code of Conduct which they hope will eliminate the importation of goods made abroad with "sweatshop" labor conditions. The proposed code of conduct would require subscribers to voluntarily agree not to purchase or import goods produced with forced or indentured labor, or produced with illegal child labor in the foreign countries. The code would also require that all workers engaged in the production of goods be paid legal wages in the country of manufacture, and be given rights of free association and organization. Signatories to the code would also be required to develop and implement an independent external monitoring system to ensure that companies adopting the code comply with its requirements.

Critics of the proposed workplace code note that it would permit as many as 60 hours of labor per week by workers as young as 14 years old. Because "sweatshop" practices are often concealed by unscrupulous contractors, commentators believe that the rules' main impact will be to enrich sweatshop owners.

Copies of the industry coalition Workplace Code of Conduct and Monitoring Principles are available from our offices [GTR #97-416].

CHEMICAL WEAPONS
PACT RATIFIED,
IMPLEMENTATION DUE

In the face of spirited opposition, the Senate has ratified the Chemical Weapons Convention, pledging the U.S. to follow internationally-agreed rules to limit production and shipment of chemical weapons and precursors to such weapons. Congress is expected to enact implementing legislation shortly, and the Commerce Department's Bureau of Export Administration (BXA) will publish governing regulations.

It is anticipated that, under the Convention's regulations, all U.S. chemical producers will be required to file "data reports" for each of their facilities, periodically listing the nature and quantity of the chemicals which they produce. Firms identified as producing chemical weapons or precursors -- about 140 U.S. plants -- will be required to provide more detailed data reports, and will be subject to periodic announced inspection visits by international verification teams. Other plants will be subject to unannounced "spot check" visits.

Additional information concerning implementation of the Chemical Weapons Convention will be available from our offices as regulations are implemented.

"DEEMED LIQUIDATION
ENDS CUSTOMS'
POWER TO SUE,
SAYS CAFC

Where an entry is liquidated "by operation of law", it terminates the Customs Service's ability to assess further duties or taxes, according to a recent decision by the U.S. Court of Appeals for the Federal Circuit (CAFC). In United States v. Cherry Hill Textiles, Inc. et al., No. 96-1097 (May 5, 1997), an entry of imported machines was liquidated "by operation of law", when Customs failed to effect a liquidation within the time permitted by law. Thereafter, however, Customs reliquidated the entry, charging additional duties. After the importer and its Customs bond surety failed to protest the liquidation, Customs brought suit in the U.S. Court of International Trade to enforce its claims to additional duties. The CIT entered judgment in favor of the government, holding that the importer's failure to protest the reliquidation deprived it of the right to challenge the validity of the reliquidation.

On appeal, the CAFC reversed. While agreeing that an importer must ordinarily exhaust its administrative protest remedies if it wishes to challenge the validity of a Customs assessment -- even in the context of a collection action brought by Customs -- the CAFC held that "deemed liquidations" present a different situation. Reviewing the legislative history, the CAFC held that the "deemed liquidation" of an entry by operation of law renders the duty assessment "final and conclusive" as to both parties, and deprives the government of the right to further liquidate or reliquidate the entry. Thus, the Court held, the reliquidation was void -- not merely voidable -- and could not create or impose a liability on the importer. The government's collection action should have been dismissed for failure to state a claim upon which relief could be granted.

Copies of the Cherry Hill Textiles decision are available from our offices. [GTR 97-417].

PERSONNEL CHANGES
AT CUSTOMS, USTR

There are some major high level personnel changes in store for U.S. trade agencies. Commissioner of Customs George Weise has announced that he will retire from government service in June. While Weise will be remembered for improving Customs' relationship with commercial importers, most notably through his stewardship of the Customs "Mod Act", Congressional critics have suggested that his replacement should have a law enforcement background, and should focus on the interdiction of narcotics and contraband.

Perhaps frustrated by the lack of fast track negotiating authority, several key officials have recently departed the Office of the U.S. Trade Representative (USTR), forcing a number of position changes and realignments. Lee Sands, Assistant USTR for Japan and China, and his chief assistant, Deputy Assistant USTR Deborah Lehr, recently resigned to join former USTR Mickey Kantor in the private sector. Sands and Lehr have been the chief U.S. negotiators for China's accession to the World Trade Organization (WTO), and their departure is viewed as a sign that accession will not be completed this year. Their roles in negotiations with China will be assumed by Assistant USTR Robert Cassidy.

In other USTR news, Susan Esserman has been named General Counsel of the agency, and Peter Scher has been named Special Trade Ambassador for Agriculture. Chief Textile Negotiator Rita Hayes has been rumored as the next U.S. Ambassador to the WTO.