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

Volume XIV, Number 1
March, 1999

FEDERAL CIRCUIT
UPHOLDS NAFTA
MARKING RULES
FOR DOMESTIC
GOODS

In a surprising decision, U.S. Court of Appeals for the Federal Circuit (CAFC) has ruled that the Secretary of Treasury acted lawfully in promulgating regulations which apply the tariff-shift-based NAFTA Marking Rules to determinations concerning when goods, produced in the U.S. with foreign-origin components, must be marked to show a foreign country of origin. In Bestfoods (f/k/a CPC International, Inc. v. United States No. 98-1069 (January 25, 1999), the CAFC reversed a prior U.S. Court of International Trade (CIT) decision which held that the exclusive test for marking determinations was whether the product resulted from a "substantial transformation", resulting in a new article of commerce, having a different name, character or use than its imported components.

As a result of the Bestfoods decision, the U.S. origin marking statute has effectively been bifurcated. Goods made in the U.S. with NAFTA-origin components are exempt from marking only if the foreign components undergo a change in tariff classification as specified in the NAFTA Marking Rules. However, the same goods, produced in the U.S. with non-NAFTA-origin inputs, are subject to marking unless they are the product of a "substantial transformation".

BESTFOODS
DECISION LIKELY
TO HURT BUSINESS

The Bestfoods decision, while perhaps the most important pronouncement on the marking statute in half a century, is likely to cause headaches for business. In determining how products made in the U.S. should be marked, companies will need to consider both the NAFTA Marking Rules and the "substantial transformation" test, which could yield different results. Two identical products, made in the U.S. may be subject to different marking requirements, depending on the source of their ingredients. Moreover, the CAFC ruled that the NAFTA Marking Rules are to be applied in place of, rather than in addition to, the "substantial transformation" test, with the result that some goods, made with Canadian and Mexican inputs, and which which would have been exempt from marking under the "substantial transformation" test, will now be subject to marking.

The Bestfoods decision is likely to have the harshest impact on companies in the food processing and beverage-making industries, since the NAFTA Marking Rules for food and beverage products do not contain even a "de minimis" exception to tariff-shift requirements. In Bestfoods, a company making peanut butter in the U.S. with the use of a small amount of Canadian-origin peanut slurry was told to mark the peanut butter "Product of Canada" even though Canadian material accounted for only a minor percentage of the goods' value.

Further proceedings in the Bestfoods litigation are likely. Furthermore, Congress may take steps to reassert its control over the marking statute. For the time being, however, U.S. manufacturers and importers must deal with a marking statute that has effectively been split in two. Copies of the Bestfoods decision [GTR # 99-101], and our firm's memorandum analyzing it [GTR #99-102] are available from our offices.

U.S. IMPOSES PUNITIVE
TARIFFS ON SOME
E.U. GOODS, THREATENS
OTHERS

Angered at the European Union's refusal to implement a World Trade Organization (WTO) report which held that Europe's regime for sourcing bananas violated international trading rules, the U.S. Trade Representative on March 3, 1999 announced that certain EU-origin goods imported into the United States would be "liable" for 100% ad valorem retaliatory tariffs. USTR directed the Customs Service to withhold liquidation of entries of the subject goods, and to deposit additional security for the payment of these duties. The duties will not actually be collected until a WTO arbitration panel issues a final report on the banana dispute.

Goods subjected to 100% tariffs include certain pork products, pecorino cheese, sweet biscuits, waffles and wafers, candles, plastic handbags and flat goods, felt paper, noncorrugated cardboard boxes and cases, cashmere sweaters, cotton bed linens, lead storage batteries, and electric coffee and tea makers. A full list of affected products is available from our offices [GTR #99-103].

The U.S. has also proposed an additional list of EU products as candidates for 100% ad valorem retaliatory tariffs, in a dispute involving EU bans on imports of U.S. beef from hormone-treated cattle. USTR is requesting public comment on the goods contained in the list, which includes a wide range of meats, vegetables, fruits, jams, jellies, juices, dried flowers, and motorcycles. Copies of this list are also available from our offices [GTR#99-104].

FTC ENFORCING
"MADE IN USA"
GUIDELINES

The Federal Trade Commission (FTC) is stepping up enforcement of its new "Made in U.S.A." labeling standard. The controversial standard, promulgated last year after extensive public comment, asserts that it is an unfair trade practice for an importer, seller or distributor to make an unqualified "Made in U.S.A." labeling claim for any product which is not made wholly, or almost wholly, of U.S.-origin materials and labor.

Recently, the FTC announced that six major U.S. manufacturers --Stanley Works, American Honda Corp, Kubota Tractor Corp, Johnson Worldwide Associates, US Drive Corp and International Leisure Products, Inc. -- had settled charges that they had made misleading "Made in U.S.A." claims for a variety of products. The FTC has proposed that each of the named companies enter into consent decrees which would prohibit them from further misrepresenting the origin of the products in question.

The FTC has recently published a new pamphlet regarding the application and interpretation of its "Made in U.S.A." standard. Copies of the new pamphlet are available from our offices [GTR #99-105].

USTR REVIEWING
INDIA'S GSP
STATUS

Following receipt of a petition from U.S. Soda Ash Manufacturers charging that India unfairly blocks access to its markets, the U.S. Trade Representative has initiated an investigation to determine whether, as a sanction, India should be stripped of its status as a beneficiary developing country under the Generalized System of Preferences (GSP). The GSP is a program which extends duty-free treatment to a wide range of qualifying products from designated "beneficiary developing countries", such as India.

The petition to remove India from the list of GSP beneficiaries was submitted in accordance with USTR's annual review of the program. India previously lost GSP status for most chemical products as a result of a previous review of the country's market access practices. Copies of USTR's announcement notice are available from our offices [GTR # 99-106].

CUSTOMS TO EXCLUDE
"PHYSICALLY
DIFFERENT" GRAY
MARKET GOODS

After considering public comments, the U.S. Customs Service recently issued final regulations establishing procedures allowing the agency to exclude from U.S. commerce "gray market" goods which are "physically and materially different" from goods sold in the U.S. under the same trademark. While Section 526 of the Tariff Act of 1930, as amended [19 U.S.C. Section 1526] authorizes the government to exclude genuine "gray market" goods imported without the consent of the U.S. trademark owner, Customs has refused to exercise this power in cases where the U.S. and foreign trademark owner are the same person or are under "common ownership or control".

However, in the 1993 decision of Lever Brothers, Inc. v. United States, the U.S. Circuit Court for the District of Columbia held that Customs could be required to exclude "gray market" goods even in related party situations, where the imported goods are "physically and materially different" from goods sold in the U.S. under the same mark, and there is a possibility of consumer confusion.

Under Customs' new "Lever protection" regulation, which became effective March 26, 1999, Customs will exclude physically different gray market goods upon application by a U.S. mark holder if, following an examination of the circumstances, Customs determines that excluding such goods would be necessary to avoid consumer confusion. However, in a controversial move, Customs' new regulation would allow gray marketers to avoid exclusion of their goods by placing a label on the goods or their packages indicating that they are not authorized imports. The labeling proposal is opposed by U.S. trademark owners who argue that both Section 526(e) of the Tariff Act and the Lever Brothers decision provide for exclusion of gray market goods, and say nothing of labeling. Copies of Customs' "Lever-Protection" regulation, and our firm's memorandum analyzing it, are available from our offices [GTR #99- 107].

CUSTOMS AMENDS
PERIOD FOR ADMITTING
GOODS TO FTZs

Adding on to its recent regulatory changes which eliminated the "lay order" period and imposed a fixed 15-day period for entering goods after their arrival in a port, Customs has issued an immediately effective final regulation applying the same 15-day limit to the admission of imported goods to a Foreign Trade Zone or subzone. The new regulation mandates admission of goods to an FTZ within 15 days after arrival in the port, and eliminates the discretion of the port director of Customs to permit a longer period.

While the new regulation makes the FTZ admission period the same as for other types of Customs entries, critics have noted that the regulation is subject to challenge, because Customs never furnished notice of any proposed regulation, nor did the agency offer the opportunity for public comment. The lack of advance notice and comment renders the new regulation subject to nullification, although it is unclear whether any FTZ or subzone operators intend to challenge the new rule at this time.

Copies of Customs' new regulation, and our firm's memorandum analyzing it, are available from our offices [GTR #99-108].

CUSTOMS WITHDRAWS
PROPOSED RULE FOR
WEEKLY FTZ ENTRIES

In a move widely decried by the trade community, the U.S. Customs Service has withdrawn its proposal to allow the weekly entry of merchandise from non-manufacturing Foreign Trade Zones. While companies which manufacture goods in FTZs have long enjoyed the right to withdraw such goods using a weekly entry, companies using FTZs for non-manufacturing purposes have been required to file a separate entry for each withdrawal of merchandise from the FTZ. A pilot program to allow weekly entry for goods withdrawn from non-manufacturing zones, started in 1994, has been well received by traders. However, Customs' decision to pull the plug on its weekly entry proposal stems from the agency's concerns that allowing weekly entries would diminish collections of the Merchandise Processing User Fee (MPF), which is currently assessed at the rate of 0.21% ad valorem, but which is subject to a $485 per entry "cap". Customs is concerned that the proposal would encourage companies to use FTZs to reduce their weekly MPF payments to $485.

Customs has indicated that it is willing to work with the trade community on alternatives to weekly entry -- such as a weekly entry summary filing, with MPFs calculated on a per-withdrawal or daily basis. Copies of Customs' notice withdrawing its regulatory proposal are available from our offices [GTR #99-109].

SENATE REPORTS
MISCELLANEOUS
TARIFF BILL

The Senate has favorably reported the Miscellaneous Trade and Technical Corrections Act of 1999, and has forwarded it to the President for signature. The act contains provisions for temporarily suspending duties on a wide range of imported products, particularly chemicals, and will provide for modifications in the tariff treatments of a broad range of other articles, ranging from 13 inch television sets, rocket engines, loudspeakers and in-line skating boots to HIV drugs and polymers. The statute also makes miscellaneous changes to other tariff laws, for example, designating methyl tertiary butyl ether as a petroleum byproduct eligible for drawback substitution under Section 313(p) of the Tariff Act of 1930, changing the rules for drawback on certain packaging materials, extending the insular possessions program, amending procedures for the duty-free importation certain scientific instruments, and deferring duty payments for certain large yachts imported for sale at U.S. boat shows.

The bill also eliminates country of origin requirements for silk fabrics and silk products. This concession is an attempt to settle a long-running dispute with the European Union over U.S. textile country-of-origin rules. Copies of the bill and its legislative history are available from our offices [GTR #99-110].

WTO: TALKS ON
"ITA II" AGREEMENT
SUSPENDED AGAIN

Efforts to expand the Information Technology Agreement (ITA) have stalled again, as the pact's signatory countries, meeting under World Trade Organization (WTO) auspices, were unable to agree on further tariff eliminations for technology products. The ITA, implemented in 1997, is a post-Uruguay Round WTO agreement whose 40-plus signatories have agreed to reduce, and permanently eliminate, their tariffs on a wide range of information technology goods, ranging from computers, telecommunications equipment and semiconductors to various materials and capital goods used to produce these items. The ITA signatory countries account for more than 90% of world trade in the covered products. China, not a WTO member, has even expressed interest in joining the pact.

The recent ITA II meetings in Geneva produced accord on a number of additional tariff eliminations, but foundered when Malaysia repeated its demand that various consumer electronics products be included in the ITA, and when India objected to the treatment of various "defense sensitive" articles, such as radars, in the pact. Further ITA II discussions have been postponed until late April, and it has been suggested that, even if an agreement is reached, it will not be announced or implemented before the scheduled WTO ministerial meeting to be held in Seattle in early December.

REMINDER: DRAWBACK
RENEWAL APPLICATIONS
DUE APRIL 6

An important reminder: duty drawback claimants who currently have been authorized to receive accelerated payment of drawback or who have been issued blanket waivers of pre-export notification requirements (for unused merchandise drawback) must file applications with Customs to renew those privileges by April 6, 1999. The applications, required under Customs' new drawback regulations, are designed to allow Customs to re-evaluate drawback claimants' trustworthiness to receive accelerated payments and blanket waivers, and to amend the scope of these authorizations to allow Customs to temporarily suspend them without prior notice should circumstances warrant.

Drawback claimants who file the necessary applications by April 6 will be allowed to continue operating under their current accelerated payment and blanket waiver authorizations until Customs acts on their renewal applications. However, drawback claimants who do not file by the April 6 deadline will have their existing authorizations repealed, and will be ineligible for accelerated payment or blanket waiver of pre-export notification until entirely new applications for these authorizations are filed and approved -- a process which could be time-consuming. Additional information regarding the re-application process, together with sample applications, are available from our offices [GTR # 99-111].

RUSSIA TO CURTAIL
STEEL EXPORTS
IN DUMPING SUSPENSION

Russia has agreed to a six month moratorium on exports to the U.S. of hot-rolled steel, to be followed by export quotas and has agreed to cut back its exports of other steel products, as part of a recently-announced antidumping "suspension agreement". U.S. Commerce Secretary William Daley announced that the U.S. and the Russian Federation have entered into two separate export restraints pacts, as part of an agreement to suspend ongoing antidumping investigations of Russian steel products. The hot-rolled steel pack rolls back import quantities, and also establishes minimum prices, ranging from $255 to $280 per ton, for Russian hot-rolled steel. A separate "comprehensive" agreement calls for Russia to restrain its exports of all other steel products to levels approximating 1997 exports. In exchange for these agreements, the Commerce Department will "suspend" pending antidumping investigations against Russian steel. Secretary Daley said the pact does not prohibit the filing of antidumping petitions involving additional Russian steel products.

Neville Peterson LLP are pleased to announce that two new attorneys have joined the firm as associates in the New York City office.

Curtis W. Knauss is a graduate of the University of Michigan and of American University School of Law. He formerly served as Law Clerk to the Hon. R. Kenton Musgrave of the United States Court of International Trade. He has private law practice experience, and served internships with the United States International Trade Commission and the United States Department of Justice. He is admitted to the Bars of Maryland and the District of Columbia.

Maria E. Celis is a graduate of Columbia University and of the Benjamin Cardozo School of Law. She has interned with the Federal Trade Commission. A recent law school graduate, Maria recently sat for the New York Bar Exam.

For additional information concerning matters discussed in the Global Trade Report, please call Martin Neville, John Peterson, Maggie Polito, Curtis Knauss or Maria Celis at (212) 635-2730, or George Thompson, Mike Tomenga, Larry Bogard or Jack Detzner at (202) 861-2959.