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 7
September, 1997

EXPORT HMT:
GOVERNMENT ASKS
SUPREME COURT
FOR REVIEW

As expected, the U.S. Customs Service has petitioned the United States Supreme Court for a writ of certiorari, asking the Court to review the recent Federal Circuit court decision in United States Shoe Corporation v. United States, which held unconstitutional the Harbor Maintenance Tax (HMT), as applied to waterborne exports. Customs claims that the Federal Circuit erred in find the export HMT to be a Constitutionally-prohibited tax on exports, and asserts that the tax is actually a proper "user fee" which regulates commerce through the promotion of port use. Although the Federal Circuit held that the HMT, which is assessed at a rate of 0.125% ad valorem on all merchandise exported by water, did not reflect a "fair approximation" of port use, the government argues that the funding formula, although imperfect, is nonetheless constitutionally satisfactory.

The Supreme Court is not obligated to hear an proposed appeal from the United States Shoe decision. However, if any four of the Court's nine Justices vote to grant the writ of certiorari, the appeal will be heard. Copies of the Government's certiorari petition are available from our offices. [GTR #97-701].

EXPORTS: COURT
STRIKES DOWN DOC
ENCRYPTION REGS

The Commerce Department's new rules regulating the exportation of encryption software are an unconstitutional "prior restraint" on free speech, according to the U.S. District Court for the Northern District of California. Ruling in Bernstein v. U.S. Department of State (August 25, 1997), Judge Marilyn Hall Patel held that the government could not justify the encryption export ban on national security or trade policy grounds, and held that Commerce's licensing regulations did not afford exporters appropriate due process protections.

In 1996, the Court had ruled that encryption software source code was constitutionally-protected speech, and struck down a prior State Department licensing scheme. Reviewing the Commerce regulations that replaced those struck down, Judge Patel ruled that, to the extent Commerce's new rules "apply to or require licensing for encryption or decryption software and related devices or technology", the are "irrational and administratively unreliable".In this regard, the Court noted that the regulations' exception for software in printed form -- which can be converted into a working computer program -- belied the Government's contention that encryption software inherently posed a threat to national security.

Noting the importance of the issue presented, the Court stayed enforcement of its order striking down the new regulations, pending further appeals. The Justice Department has promised further litigation, noting that a Federal District Court in Washington, D.C. in 1996 upheld the prior encryption regulations as serving a legitimate national interest.

Copies of the Bernstein decision are available from our offices [GTR #97-702].

ADMINISTRATION
PUSHING "FAST
TRACK" AGAIN

President Clinton on September 10, 1997 proposed new legislation to extend his "fast track" trade negotiating authority. The new proposal is expected to set off a bitter legislative fight, with business leaders strongly supporting a "fast track" extension and labor groups implacably opposed. Republican Congressional leaders indicated that they will oppose the addition of any environmental or labor conditions in the fast-track bill, unless the provisions are directly related to trade. Rep. Robert Matsui (D-CA) is expected to lead a Democratic effort to support "fast track" -- bipartisan support is considered essential to passage -- but faces a split within his own party on the issue.

The Administration requires "fast track" negotiating authority in order to complete negotiations to bring Chile into NAFTA, conduct WTO agriculture negotiations scheduled to get underway in 1999, and set the agenda for the proposed Free Trade Agreement of the Americas (FTAA).

CIT LIMITS
CHALLENGE TO
INFOTECH PACT

A recent U.S. Court of International Trade (CIT) decision limits, but does not completely end, the challenge brought by certain domestic makers of resistors and capacitors to the new Information Technology Agreement (ITA). In Kemet Electronics, Inc. v. Barshefsky, Slip Op. 97-115 (August 19, 1996), CIT Judge Jane A. Restani denied the manufacturers' request for a preliminary injunction against implementation of the ITA [the Court had previously denied an application for a temporary restraining order against the pact]. The CIT also held that the plaintiffs lack standing to challenge the ITA except with respect to its elimination of U.S. tariffs on capacitors and resistors, the specific "passive electronics" they manufacture.

Considering the merits of the plaintiffs' challenge, the Court rejected their claim that Congress, in authorizing the President to negotiate the ITA, had unconstitutionally delegated its power to set tariffs. The Court found that Congress had validly delegated power to the President to conduct post-Uruguay Round tariff reduction negotiations, and had furnished him with clear guidelines for conducting such negotiations. However, the Court ruled that the plaintiffs were entitled to carry their case forward on the question of whether capacitors and resistors had been the subject of tariff-elimination negotiations during the Uruguay Round -- an essential condition for further tariff reductions. However, if the government shows that these products were included in Uruguay Round "zero-for-zero" tariff elimination talks, then the remaining parts of the case will presumably be dismissed.

Copies of the latest Kemet Electronics decision are available from our offices [GTR #97-703].

USTR SEEKS COMMENT
ON "ITA II"
AGREEMENT

The U.S. Trade Representative (USTR) is seeking public comment through September 30, 1997 on a proposed "Information Technology Agreement II" -- a pact to eliminate tariff and non-tariff barriers on even more hardware, software and telecommunications products. In particular, USTR is seeking comments regarding tariff nomenclature issues that threaten to deprive U.S. firms of the benefits of the first ITA, plus recommendations for additional products whose duties should be eliminated in an "ITA II".

The ITA II negotiations will be conducted under World Trade Organization (WTO) auspices. The current negotiation schedule calls for ITA signatory countries to define their negotiating objectives during the last quarter of 1997, with tariff reduction talks beginning in early 1998. The ITA II negotiations should be concluded by mid-1998, with the pact's tariff cuts being implemented beginning as early as January 1, 1999.

The ITA II negotiations provide an unparalleled opportunity for information technology companies to secure permanent tariff reductions worldwide. Copies of USTR's solicitation of comments are available from our offices [GTR # 97-704].

CIT ALLOWS
SUPERCOMPUTER
DUMPING PROBE
TO SUCCEED

The U.S. Commerce Department did not improperly prejudge the outcome of an antidumping investigation of Vector Supercomputers from Japan, and the investigation should not be halted, according to the U.S. Court of International Trade (CIT). In NEC Corporation et al v. United States Department of Commerce et al., Slip Op. 97-117 (August 20, 1997), makers of Japanese supercomputers charged that Commerce had improperly prejudged the outcome of an antidumping investigation initiated pursuant to a petition filed by Cray Research, Inc. The plaintiffs charged that senior Commerce officials, examining an offer of Japanese computers to the federally-funded University Corporation for Atmospheric Research, concluded that they were sold at "dumped" prices, and then improperly conveyed these pre-investigation findings in meetings with Congressional representatives, senior Administration officials, and others.

The CIT disagreed. Judge Donald Pogue conceded that "prejudgment of an antidumping investigation, wherein the decision maker has a closed mind at initiation, would undermine the statutory procedures that Congress has prescribed". However, the Court assumed that the key Commerce officials charged with making case decisions -- particularly the Assistant Secretary of Commerce for Import Administration -- would not prejudge an investigation, and that the burden was on the plaintiffs to prove the contrary. The Court found little evidence that the Assistant Secretary had a closed mind from the outset of the investigation; in any event, the Assistant Secretary making the determination took office shortly before the decision was rendered, and had not participated in the pre-initiation activities. Moreover, the Court held, pre-decisional memoranda, which "can be read as a prediction of a possible outcome" do not prove that the final conclusion has been prejudged.

Shortly after the Court rendered its decision, Commerce entered a final determination, finding high antidumping duty margins with respect to Japanese supercomputers. Copies of the NEC Corporation decision are available from our offices [GTR #97-705].

FEDERAL CIRCUIT
DEFINES "FESTIVE
ARTICLES"
BROADLY

The Harmonized Tariff Schedule (HTS) subheading 9505 provision for "festive articles", which carries a free rate of duty, must be defined broadly, even to the extent of including some utilitarian articles, the U.S. Court of Appeals for the Federal Circuit recently confirmed. In Midwest of Cannon Falls, Inc. v. United States, No. 96-1271, 1279 (August 14, 1997), the Federal Circuit upheld a prior CIT decision that "Christmas decorations" were not required to be hung from a tree, and that, like other "festive articles", they could be non-traditional, and expensive. However, the Federal Circuit went further than the CIT, holding that articles with a utilitarian nature with but a holiday motif -- such as earthenware mugs and pitchers featuring holiday designs -- were properly considered "festive articles".

The Federal Circuit's Midwest decision paves the way for importers to seek duty-free treatment for a wide array of holiday articles. Although Customs is reluctant to apply the decision until the time for further appeals has expired, it seems unlikely that any such appeal will be heard.

Copies of the Midwest decision are available from our offices [GTR #97-706].

MARKING: CUSTOMS
AMENDS REGS ON
PACKAGING

Customs has published a final rule amending Section 134.46 of the Customs Regulations, which sets out special marking requirements for goods and packages bearing a geographic designation other than the product's country of origin. Previously, all such goods were required to bear an additional marking of country of origin, preceded by the words "Made in" or "Product of", located in "close proximity" to the geographic designation. However, Treasury Decision 97-72 amends that requirement to provide that the country of origin must be noted in "close proximity" only in cases where failure to do so would be "misleading or deceptive" to "ultimate purchasers in the U.S. Under the new version of the regulation, additional marking is only required where a geographic reference on a product or its package "may mislead or deceive the ultimate purchaser as to the actual country of origin of the article".

Copies of Treasury Decision 92-72 are available from our offices [GTR #97-707].

CBI PARITY, GSP
RENEWAL MEASURES
FOUNDER IN CONGRESS

Should Customs require that packages containing imported frozen produce be marked on their front panel to show country of origin? This long-simmering debate, which has been the subject of multiple lawsuits and administrative proceedings, appears to be roaring back to life. The U.S. Customs Service recently announced that it was reopening, for 60 days, the period for public comment regarding a proposed "front panel labeling" rule for frozen produce packages. The avowed purpose of the reopening is to let interested parties comment on the large number of Congressional and other comments which Customs has received since the previous comment period closed in September, 1996. There has been renewed lobbying in favor of a "front panel" marking rule in recent months, and the Senate Appropriations Committee recently urged Customs to complete work on the proposed regulation by the end of the year. The recent groundswell of support for the rule suggests that it may be finalized shortly.

Customs' notice soliciting additional comments is available from our offices [GTR #97-708].

FEDERAL COURT
BARS IMPORTATION
OF SOME WOOD
PRODUCTS

The U.S. District Court for the Northern District of California has issued an order which has the effect of barring importation into the U.S. of certain unmanufactured wood products. In Oregon Natural Resources Council v. Animal and Plant Health Inspection Service (APHIS), the Court enjoined APHIS, an agency of the U.S. Department of Agriculture, from issuing any new permits for the importation of unfinished non-tropical wood products (such as Monterey pine logs and lumber from Chile and New Zealand, Douglas-fir logs and lumber from New Zealand, and temperate hardwoods), and other forms of logs and lumber until APHIS prepares a new Environmental Impact Statement (EIS), and issues regulations governing the importation of unmanufactured wood products. The injunction does not affect imports of these woods by persons already holding APHIS permits, nor does it prevent the importation of tropical hardwoods, and manufactured wood articles.

The purpose of the injunction is to prevent the importation of materials bearing certain wood pests, pending completion of the EIS. It does not matter whether an importer can prove that the wood it seeks to import is not infested; the injunction simply bans the granting of an import permit under all circumstances. Copies of the Court's injunction are available from our offices [GTR #97-709].

TEXTILES: MORE
"TRANSSHIPPERS"
IDENTIFIED

The governments of Hong Kong and Macau have identified numerous enterprises in those countries which have been penalized under local law for the unlawful transshipment of quota-class textile products. Following these announcements, the U.S. Customs Service has taken action to require importers to produce additional documentation to substantiate the origin of textile products imported from the named entities. Customs had already published additional documentation requirements for products from Hong Kong factories suspected of transshipping: these requirements will be applied to goods from the newly-named enterprises. Customs has also published a new quota bulletin [TBT-97-081] specifying additional documents to be filed in connection with imports from the named Macau companies. All of the newly-named companies are likely to be added to Customs' "Section 592A list" of suspected transshippers. Copies of Customs' notice of additional documentation requirements for certain Macau textiles is available from our offices [GTR #97-710], together with Customs' updated "Section 592A list" of suspected transshippers [GTR #97-711].

SOFT-SIDED COOLERS
NOT "LUGGAGE",
COURT RULES

Soft-sided "cooler bags" used to keep food and beverage cold during storage and transportation do not fall within the Harmonized Tariff Schedule heading 4202 provisions for "luggage" or "travel bags", according to the U.S. Court of Appeals for the Federal Circuit (CAFC). In SGI, Inc. v. United States, No. 96-1272 (September 5, 1997), the CAFC ruled that, while the tariff's luggage provisions cover a wide range of goods used to store, carry, transport and protect personal effects, they are no so broad as to include carriers designed to hold foods and beverages. The CAFC's decision reversed a January, 1996 ruling by the U.S. Court of International Trade, which held that the HTS "luggage" provisions were broader than those under the former Tariff Schedule of the United States (TSUS). Rather, the CAFC found that the bags were more properly classified as household articles of plastics -- dutiable at a rate of 3.4% ad valorem, rather than the 20% charged by Customs.

The CAFC's decision may pave the way for importers of bottle bags, food containers and similar articles to have their products reclassified outside of HTS heading 4202, obtaining significant duty reductions, and removing some products from the scope of quota provisions. Copies of the SGI, Incorporated decision are available from our offices [GTR # 97-712].

CANADA ACCEPTS
DEAL ON USDA SUGAR
RE-EXPORT PROGRAM

The U.S. will be allowed to continue its Department of Agriculture Sugar Re-Export Program in respect of exports to Canada, under a deal recently announced by the U.S. and Canadian governments. Canada had argued that the program -- which allows U.S. companies to import "world price" sugar without payment of duties, provided "sugar-containing products" are exported within a given time thereafter -- violates NAFTA Article 303's ban on continuation of duty drawback and deferral programs. The ban became effective with respect to U.S. exports to Canada on and after January 1, 1996.

Under the terms of the two-year agreement, Canadian sugar producers have reluctantly agreed to drop their challenge to the program in exchange for increased U.S. market access for Canadian refined sugar.

Special Announcement:

     Neville Peterson LLP will hold its Second Annual Corporate Counsel Institute on Wednesday, November 20, 1997 at the Williams Club in New York City. Topics to be discussed include Customs Issues in Commercial Agreements, Making Sense of Origin and Marking Rules, Private Rights of Action in Customs and Trade Matters, Global Customs Planning, Customs "Due Diligence" Reviews, Trade Lobbying in the U.S. and Abroad, and Other Government Agency Regulation of Trade. Last year's inaugural Institute was attended by corporate counsel, senior executives and Customs compliance officers from companies nationwide. Continuing Legal Education (CLE) credits are available.

     For registration materials and a seminar schedule, please call Camella Gonzalez at (212) 635-2730 or e-mail us. We hope to see you on November 20!