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

Volume XV, Number 2
July, 2000

NEW EXPORT REGS
PUBLISHED

The Commerce Department's Bureau of Export Administration (BXA) has published important new regulations defining who is considered the "exporter" responsible for securing export licenses under the Export Administration Regulations (EARs) and for filing Shipper's Export Declaration (SED) or Automated Export System (AES) records. The new regulations will likely force many exporters to make sweeping changes to the way they conduct export transactions.

The regulations recognize two "principal parties in interest" to each export transaction - the seller and buyer - and require that the U.S. principal party in interest be the "exporter" for licensing and other EAR purposes. In a "routed" export transaction, where a U.S. firm sells goods on an "ex works" basis, or delivers them to a U.S. freight forwarder designated by the foreign customer, the seller will remain responsible for export licensing - unless the foreign seller appoints in writing a U.S. forwarding or other agent to handle EAR responsibilities on the buyer's behalf. In such cases, the U.S. agent will be permitted to apply for export licenses and carry out other EAR responsibilities. However, the seller will be required to furnish the buyer's designated agent with the ECCN code for the exported goods or services, or with technical data sufficient to allow the agent to determine the ECCN.

For purposes of the Foreign Trade Statistics Regulations (FTSR), the new regulations provide that the "U.S. principal party in interest" must always be the party identified on the SED or AES record. Where the SED or AES record is being prepared by a foreign agent, the agent must provide the seller with information sufficient to allow verification that export data was accurately provided.

In addition a new regulation has been implemented requiring export licensees to communicate export license conditions to all persons receiving exported commodities or data, and to secure acknowledgment of the conditions where the license conditions so require.

The new regulations are effective July 10, 2000, but BXA has granted a 90-day "grace period", until October 10, 2000, before the new rules will be strictly enforced. A memorandum analyzing these new regulations is available from our offices [GTR #00-201].

NAFTA MARKING RULES:
"DE MINIMIS" RULE
HELD ARBITRARY

Withholding a "de minimis" exception from the NAFTA Marking Rules to agricultural products is arbitrary and capricious, the U.S. Court of International Trade (CIT) recently held.

In Bestfoods v. United States, Slip Op 00-73 (June 30, 2000), the CIT held that the Customs Service had furnished no good reason for withholding from agricultural products the 7% "de minimis" exception to tariff-shift-based marking rules accorded to all other products. Although Customs had asserted that "health and food safety concerns" motivated the decision to treat agricultural products differently, the CIT held that nothing in NAFTA or its implementing regulation authorized Customs to regulate health and food safety concerns using the marking rules. Furthermore, the CIT rejected Customs' assertion that the de minimis regulation codified a longstanding administrative practice regarding the marking of agricultural goods, noting that Customs indeed had allowed such exceptions before. The rule of "de minimis not curat lex" ("the law does not concern itself with trifles") applies to tariff laws generally, and to the country of origin marking law specifically, the Court held.

The Bestfoods litigation has been ongoing for several years, and stems from a U.S. manufacturer's challenge to a Customs ruling requiring that peanut butter, made in Arkansas with a small amount of Canadian-origin peanut slurry, was required to be marked "Made in Canada". The Court of Appeals for the Federal Circuit (CAFC) last year held that Customs could apply the rules to the marking of goods produced domestically, and the U.S. Supreme Court declined to hear the case. Now, however, the Court has struck down the rules themselves. If the Bestfoods decision stands, it could conceivably affect the origin marking of a wide range of processed food products made in, and imported into, the U.S. Copies of the decision are available from our offices. [GTR 00-202].

HOUSE APPROVES
CHINA PNTR

The House of Representatives recently approved legislation extending Permanent Normal Trade Relations (PNTR) status to the People's Republic of China. Senate approval of the PNTR legislation, expected in September, will help pave the way for China's re-entry into the World Trade Organization (WTO), and bring dramatic changes to the Sino-American trade relationship.

As part of the hard-won deal leading to China's WTO accession, the Chinese Government has agreed to reduce its tariffs (from an average of 24% to an average of 9%) on a broad range of U.S. products, and to liberalize rules for direct foreign investment in China. U.S. agricultural producers are expected to be among the biggest winners in the deal, gaining access for their products to a huge new market.

PNTR status means that China will enjoy permanent access to U.S. "Column I" Customs duties (formerly known as "Most Favored Nation"status). WTO membership will mean that U.S. tariff concession, "bound" under WTO rules, can only be withdrawn from Chinese products under WTO procedures. Future Sino-American trade disputes will increasingly be settled on under WTO rules, rather than bilateral negotiations.

China's WTO accession will have an immediate impact on trade in textiles and apparel. The U.S. has agreed that China will be included in the Uruguay Round Agreement on Textiles and Clothing, which features a 10-year "transitional" textile quota elimination program, as though China had been a WTO member since the program began in 1995. This means that the U.S. will immediately drop quota restrictions on certain Chinese products, such as infants' clothing, immediately when China joins the WTO. Many other Chinese textile and apparel products will be removed from quota controls on January 1, 2002, when the next ATC phase-out of textiles takes place.

The PNTR legislation contains special safeguard provisions designed to protect U.S. industries. An analysis of the China PNTR legislation, as passed by the house, is available from our firm. [GTR #00-203].

MAQUILADORAS:
MEXICO ANNOUNCES,
REVISES SECTORAL
PROGRAMS

Mexico's Secretaria de Comercio y Fomento Industrial (SECOFI) has issued a major new Decree establishing and amending the new Sectoral Programs, which are designed to give a wide variety of export-oriented Mexican manufacturing industries access to duty-free imports. The new Sectoral Programs become effective November 1, 2000, just before the "drawback sunset" provisions of NAFTA take effect, forcing Mexico to drastically curtail its Maquiladora and PITEX in-bond programs, which for many years have allowed the duty-free entry into Mexico of goods used to manufacture products for export.

Mexican manufacturers may participate in one or more of the Sectoral Programs if they produce goods covered by the programs. Each program authorizes participating Mexican manufacturers to import duty-free a wide range of materials and components, on condition that they actually be used to make specified goods. These goods need not be exported from from Mexico.

SECOFI's new decree amends the Sectoral programs previously announced for the Electrical Products and Electronics Industries, and establishes New Sectoral Programs for other industries, including furniture, footwear, metals and mineral products, photographic goods, toys, games and other children's articles, infants apparel, timepieces and more.

Mexico is accepting petitions to add more products to its Sectoral Programs, and expects to publish another decree shortly.

Electronic copies of SECOFI's Sectoral Programs Decree (in English) are available from our office by e-mail [GTR #00-204].

MEXICO CONCLUDES
FREE TRADE AGREEMENT
WITH EUROPEAN
UNION

Showing that it is committed to trade liberalization and ready to become a major competitor for manufacturing investment, Mexico on July 1, 2000 implemented a broad-based Free Trade Agreement with the European Union. MEFTA (the Mexico-Europe Free Trade Agreement) is intended to provide duty free treatment by 2004 for a wide range of goods which meet particular rules of origin. The origin rules, while similar to NAFTA's are somewhat simpler and easier to administer.

MEFTA also establishes rules for liberalizing foreign investments in a wide range of Mexican industries, including financial services. Moreover, MEFTA is the first significant trade pact concluded between the EU and North America, and is intended to make Mexico a focal point for investment by U.S. manufacturers seeking enhanced access to the European market, and by European producers seeking tariff advantages in the U.S.

An electronic version of MEFTA (in English) is available by e-mail from our offices [GTR #00-205].

SUPREME COURT TO
DECIDE JUDICIAL
DEFERENCE TO CUSTOMS
RULING

In a surprising development, the U.S. Supreme Court has agreed to decide the issue of whether reviewing courts are obligated to give deference to Customs Service positions, as expressed in ordinary Customs rulings. In accepting the government's petition for certiorari in Mead Corporation v. United States, a case involving the tariff classification of "day planners", the nation's highest court agreed to rule on Customs' claim that courts should be required to defer to Customs' rulings, so long as they are "reasonable". The U.S. Court of Appeals for the Federal Circuit (CAFC) and the U.S. Court of International Trade (CIT) have uniformly declined to give any special preference to Customs' positions, simply because the agency may have stated them in Customs rulings prior to the start of litigation.

Recent Supreme Court decisions involving rulings by other agencies have held that ordinary rulings may be entitled to some measure of "respect", but not to deference by the Courts. In its 1999 decision in Haggar Apparel Co. v. United States, the Supreme Court held that Courts must give deference to Customs' interpretative regulations which have been promulgated in accordance with the "notice and comment" rulemaking requirements of the Administrative Procedure Act (APA). Since that case was decided, Customs has argued that the Courts must likewise give reference to the agency's rulings, even if they do not rise to the level of a regulation.

The Supreme Court's decision in the Mead Corporation case, which will probably come this winter, could have a major impact on the future administration of Customs laws. It is unclear whether the Court wishes to use the case to delineate the limits of Haggar deference, or to provide for actual deference to Customs rulings. In either event, the case will be one of the most closely-watched Customs cases in recent memory. Copies of the Federal Circuit's Mead Corporation decision are available from our offices [GTR #00-206].

CIT: CUSTOMS RULINGS
DESERVE "RESPECT",
NOT DEFERENCE

In a decision which uncannily echoes the Mead Corporation case, the U.S. Court of International Trade (CIT) recently held that Customs rulings, adopted after "notice and comment" procedures, are entitled to "respect" from courts if they are persuasive, but are not entitled to deference.

In Genesco Inc. v. United States, Slip Op. 00-57 (May 23, 2000), the issue was whether certain imported athletic footwear featured a "foxing-like band", and, in particular, whether the band "substantially encircled" the footwear at issue. Customs asserted that the agency's "40/60 test" for defining "substantial encirclement", as set out in Treasury Decision 92-108, a "notice and comment" ruling, should be given deference by the Court. Acknowledging that the question of judicial deference to "notice and comment" rulings was an "open question", Senior Judge James L. Watson concluded that, while such rulings were not entitled to judicial deference, they were entitled to some judicial "respect" as the opinion of an expert agency, in accordance with the Supreme Court's 1944 holding in Skidmore v. Swift & Co. Holding that the "40/60" rule seemed well-considered, and was not contrary to any established legal concept of "substantial encirclement", the Court concluded that its application to the merchandise at bar was reasonable, and ruled in favor of the government.

Copies of the Genesco decision are available from our offices [GTR #00-207].

HMTs: CAFC, SUPREME
COURT DECLINE TO
RE-CONSIDER ISSUES

Taxpayers who have challenged the constitutionality of the Harbor Maintenance Tax (HMT) have received both bad and good news, as the result of recent court refusals to reconsider earlier HMT decisions.

Recently, the U.S. Supreme Court declined to hear an appeal in the case of Carnival Cruise Lines v. United States, which challenged the constitutionality of the HMT as related to the transportation of passengers by water. In Carnival, cruise ship operators argued that the various parts of the HMT statute were not "severable", and since the Supreme Court had declared the HMT unconstitutional as applied to exported goods, the statute was also unconstitutional as to passenger carriage. The Federal Circuit held that the HMT's various parts were severable, and ruled against the operators. The Supreme Court has now decided to leave the CAFC's decision intact.

The Supreme Court's refusal to consider Carnival is likely a harbinger of bad news for certain importers, who are awaiting this autumn's CAFC consideration of the case of Amoco Oil Co. v. United States, which is challenging the HMT on waterborne imports, again on "severability grounds.

Two recent actions by the U.S. Court of Appeals for the Federal Circuit (CAFC) yielded a "split decision" for exporters.

First, the good news. The Federal Circuit has declined the government's request for rehearing of Swisher International Corp. v. United States, in which the Court held that exporters could invoke the CIT's "protest" jurisdiction, to challenge as unconstitutional the export HMT. The Swisher decision could pave the way for exporters to recover all HMTs paid since the tax was enacted in 1987. The government has until late August to determine whether it will seek Supreme Court review of the Swisher decision.

Now, the bad news. The CAFC has denied exporters' request for rehearing in International Business Machines Corp. v. United States, in which the court held that exporters are not entitled to be paid interest on their HMT recoveries. The CAFC held that statutory provisions providing for payment of interest on tax refund judgments were inapplicable to the HMT. Exporters are expected to ask the Supreme Court to review the decision, and will also ask the Court of International Trade to consider establishing another "test case" vehicle for the interest issue.

SUB-SAHARAN
AFRICA/CARIBBEAN
TRADE BILL SIGNED

President Clinton recently signed into law the Trade and Development Act of 2000, which provides extended trade benefits for textile and apparel products made in Caribbean and Sub-Saharan African nations.

With respect to goods produced in the Caribbean, the new bill provides that textile goods (which are not eligible articles under the Caribbean Basin Initiative (CBI) may nonetheless enter the U.S. duty-free if they are produced in CBI countries in a way that satisfies preference rules of origin substantially similar to those under the North American Free Trade Agreement (NAFTA).

The bill also provides expanded benefits for a wide range of textile goods produced in Sub-Saharan African countries, and expands GSP benefits for these countries. The U.S. International Trade Commission (ITC) has initiated a fact-finding investigation into the probable economic impact of designating various African-origin goods as GSP eligible.

An analysis of the new bill is available from our offices [GTR #00-208].

SSA/CARIBBEAN BILL
CHANGES TEXTILE
ORIGIN RULES

In addition to implementing the Sub-Saharan Africa and Caribbean benefit programs, the Trade and Development Act of 2000 also implements amendments to the United States' textile rules of origin, currently codified at Section 334 of the Uruguay Round Agreements Act (URAA). The new changes are designed to implement an agreement between the U.S. and the European Union which lead to a withdrawal of the EU's World Trade Organization (WTO) complaint against the rules.

Section 405 of the Trade and Development Act restores the pre- URAA rule of origin for most fabrics (except wool fabrics). Under this rule, fabric which is subjected to both dyeing and printing, plus two additional finishing operations in a given country, can be deemed to originate in that country, for quota, tariff and marking purposes. The new law also changes rules of origin for some, but not all, home textiles, textile accessories, and non-apparel textile articles. Under the URAA, these articles have generally had their origin determined according to their country where their constituent fabric was formed in the "greige" state. Under the new rule, however, some of these products will be deemed to originate in the country where their constituent fabrics are both dyed and printed and subjected to subsidiary operations. However, the new origin rules for made-up textile articles do not apply to any products which are in chief weight of wool or of cotton, or which contain 16% or more cotton by weight.

The new legislation even further confuses the United States' already strange system of origin rules for textile products. A memorandum discussion the new rules are available from our offices [GTR #00-209].

CUSTOMS CHANGES
POLICY ON MARKING
OF U.S. TEXTILES
EXPORTED/RETURNED

The U.S. Customs Service has announced a change to its longstanding policy regarding country of origin marking requirements for U.S.-origin textile articles and components which are exported for processing and returned to the U.S. For several years, Customs held that any U.S. textile articles exported for processing and returned were required to be marked as a product of the foreign country where the processing took place. Under its new policy, however, Customs will only require U.S. origin textile articles, exported for processing and returned, to be marked as a "foreign" article if the operations performed abroad effect a change in origin under the textile rules set out in Section 334 of the Uruguay Round Agreements Act (URAA) and implementing regulations.

The fact that articles may not be required to be marked as foreign does not mean that the articles can be marked "Made in USA". The rules of the Federal Trade Commission (FTC) must be considered in order to determine how the goods should be labeled.

Copies of Customs' new policy are available from our offices [GTR # 00-210].

WEEKLY ENTRIES
FOR FTZS APPROVED

Another change wrought by the Trade and Development Act of 2000 is an amendment to the Tariff Act providing that all operators and users of Foreign Trade Zones (FTZs) be given the option to withdraw goods from FTZs for domestic consumption pursuant to weekly Customs entry procedures. Historically, weekly entry procedures were only available to companies engaged in manufacturing operations in FTZs. A U.S. Customs pilot program to allow weekly entry for all FTZ users was a great success, but Customs curtailed it for fear that it could result in diminished collections of Merchandise Processing Fees (MPFs) which are "capped" at a per- entry maximum of $485.

The new legislation provides that weekly entry is to be permitted, and that weekly entries are to be subject to the $485 per entry maximum MPF "cap". Customs is expected to publish regulations setting forth conditions for participation in the weekly entry procedure.

HMT DOES NOT APPLY
TO BONDED SUPPLIES
CIT RULES

The Harbor Maintenance Tax (HMT) does not apply to goods withdrawn from bonded storage to be loaded as supplies on vessels and aircraft engaged in international traffic, according to a new U.S. Court of International Trade (CIT) decision.

In Citgo Petroleum Corp. v. United States, Slip Op. 00-55 (May 2000) the Court noted that, pursuant to Section 309 of the Tariff Act of 1930 [19 U.S.C. Section 1309], goods may be stored in a bonded facility and withdrawn for use as supplies on vessels or aircraft engaged in international trade, without of the payment of any duties, fees or internal revenue taxes. Finding that the HMT was an "internal revenue tax", the CIT held that Section 309 made it inapplicable to these bonded withdrawals.

The Citgo Petroleum case is likely to be a major victory for oil companies which use bonded facilities to store imported ship bunkers and aircraft fuel, although other vessel and aircraft supplies are equally benefitted by the decision. Copies of the decision are available from our offices [GTR #00-211].

U.S., VIETNAM REACH
TRADE PACT

The U.S. and Vietnam have reached a historic bilateral trade agreement, which could pave the way for granting Normal Trade Relations (NTR) status, and Column 1 duty rates, for goods imported into the U.S. from Vietnam. The pact requires Congressional approval, and will be controversial in many sectors.

Information regarding the pact is available from our offices. [GTR # 00-212].

DUTY DRAWBACK:
PAYMENTS DOWN,
AUDITS UP

U.S. Customs duty drawback payments declined sharply in 1999, according to information recently made available by the U.S. Customs Service. Customs officials, speaking at a trade seminar in New York, indicated that drawback payments for FY 1999 were just $428 million, the first time in recent memory that drawback payments had slipped below the $500 million mark. For the first 7 months of FY 2000, drawback payments were only about $228 million.

Customs attributes the drawback claims and payments to a number of "environmental" factors, including import duty reductions and eliminations under NAFTA, the Uruguay Round and the Information Technology Agreement, as well as the elimination of certain types of drawback for goods exported to Canada after January 1, 1996.

At the same time, Customs is increasing the number of audits being performed on drawback claimants, including on-site audits, "desk top audits" and field verifications. The audits are being performed in order to satisfy Customs' internal requirements as well as Congressional Budget Office (CBO) oversight initiatives. In addition, Customs is making assessments of various claimants, as the new Customs Drawback Penalty statute becomes effective.

CONGRESS APPROVES
SECTION 301
"CAROUSEL" LEGISLATION

Congress has enacted the controversial "carousel' provision for the assessment of retaliatory tariffs under Section 301 of the Trade Act. The legislation directs the U.S. Trade Representative (USTR) to review U.S. "retaliation lists" on a semiannual basis, and to alternate the products which are targeted for such retaliation. Historically, USTR has identified a list of potential retaliation candidates, in cases where it has determined that U.S. trading partners have violated international obligations, and, after considering public comments, pared the list down to a "final" retaliation list. The "carousel" legislation allows USTR to "rotate" on a semi-annual basis, the list of products subject to retaliatory tariffs, quotas and the like.

U.S. trading partners, particularly the European Union, have criticized the "carousel" retaliation law as violating U.S. obligations under WTO agreements.

For additional information concerning matters discussed in the Global Trade Report, or other U.S. Customs and trade law issues, please contact Martin Neville, John Peterson, Maggie Polito, Curtis Knauss, Maria Celis or Mollie Coyne at (212) 635-2730, or George Thompson, Mike Tomenga, Larry Bogard, Jack Detzner or Julia Padierna-Peralta at (202) 861-2959.