This Document Contains Chapters 10 to 14 Chapter 10 Laws Governing Access to Foreign Markets CASES IN THIS CHAPTER Thailand—Restrictions on Importation of Cigarettes United States - Measures Affecting the Production and Sale of Clove Cigarettes EC Measures Concerning Meat and Meat Products (Hormones) United States--Sections 301-310 of the Trade Act of 1974 TEACHING SUMMARY While businesses certainly value access to foreign markets as a method to increase sales and their consumer base, there are a number of laws and regulations limiting such access. These trade and export laws, including provisions in GATT’s Uruguay Round, seek to protect the health, safety, and sometimes economic interests of importing countries, and they also attempt to treat exporting countries fairly. These laws address product standards (i.e., technical barriers to trade), suppliers (such as procurement standards), intellectual property, and dispute resolution. Additional Background: Disguised Discrimination. Schieffelin & Co. v. United States, 424 F.2d 1396 (C.C.P.A. 1970). International traders may be confronted with regulations that appear to be neutral on their face but in fact affect imported products adversely. This disguised discrimination occurs in many forms. The most common form takes place through the application of technical regulations and product standards. While appearing to be neutral, these standards favor domestic products or industries. This form of discrimination is more difficult to attack under international trade rules, because there is usually a plausible explanation for the standards, such as health, environmental, safety, or standardization reasons. Internal taxation rules that are facially neutral can also favor domestic products over imports. In Schiefflin, the U.S. taxed distilled spirits at $10.50 per “proof gallon” or “wine gallon.” A proof gallon is a gallon of 100 proof spirits (50% alcohol by volume) whereas a wine gallon is a gallon of below 100 proof spirits. The tax was due where the spirits were withdrawn from bond, either a bonded warehouse or a customs bond. U.S. distillers could withdraw the spirits from bond in bulk (and pay $10.50 per proof gallon), prior to dilution below 100 proof and bottling. Since U.S. producers typically sold spirits at 85 proof (42.5% alcohol), the effective tax rate on the wine gallon basis was 85% of $10.50 = $8.93 per wine gallon. The Irish and British exports, however, exported their product in bottles, usually 86 proof, and were assessed $10.50 per gallon. They complained that the differential tax violated the rule of national treatment because these virtually identical products were taxed at different effective rates, i.e., $8.93 and $10.50. Ultimately, the court found the difference between the taxed commodities: one is underproof, the other overproof. Just because the spirits both “end up in the hands of consumers bottled and underproof,” did not mean that they were “like situations.” Therefore, it was this difference, rather than discrimination, that caused the divergent tax rates. Ask students to read the case and compare the FCN Treaties discussed. • How would the U.S. practice violate either treaty? • If you were an Irish importer, how would you respond to the above reasoning? • Could you make a better argument under GATT Article III? CASE QUESTIONS AND ANSWERS Thailand—Restrictions on Importation of Cigarettes 1. What reasons did Thailand give for restricting imports of cigarettes? What GATT provision did Thailand rely on to restrict cigarette imports? Answer: Thailand’s justification was twofold: First, it believed that U.S. cigarettes contained additives, making them more harmful than cigarettes produced by other manufacturers. Second, they reasoned that if more imports were allowed, more people would begin smoking, thus harming the health of more citizens. Consequently, the government sought to invoke GATT Article XX(b) to “protect human health.” 2. The panel states that GATT permits countries to give priority to human health over trade liberalization only under certain conditions. What are those conditions? Answer: Article XX(b) requires that the measure be “necessary.” A measure is necessary only if there are no alternative measures consistent with the GATT, or less inconsistent with it, which a country could reasonably be expected to employ to achieve its health policy objectives. 3. How was the doctrine of “least restrictive trade” used in this case? Answer: The doctrine of “least restrictive trade” as applied in this case found that Thailand’s licensing system was more onerous than necessary to achieve the health goals for which they were imposed. 4. What alternative means could Thailand have used to achieve its objectives that would not have singled out imported cigarettes for discriminatory treatment? Answer: Thailand could have used less discriminatory means to achieve its goals, such as limits or bans on advertising, bans on smoking in public places, public information and education programs and utilization of government monopolies to regulate the overall supply of cigarettes, their prices, and retail availability. United States - Measures Affecting the Production and Sale of Clove Cigarettes 1. Did the U.S. prohibition on clove cigarettes prohibit the import of Indonesian cigarettes on its face, or did it merely prohibit a flavor of cigarette that happens to be produced primarily in Indonesia? Was this de facto or de jure discrimination in this case? How did this affect the Appellate Body’s decision? Answer: It is de facto discrimination. Intent to reduce smoking by minors but it did not address menthol flavored cigarettes which were primarily produced in U.S. Court looked to see if the regulation on flavored cigarettes made a legitimate distinction between menthol and clove cigarettes and it found it did not. 2. The report (not reproduced here) noted the similarities between Article 2.1 of the TBT Agreement, under which this dispute was decided, and Article III.4 of GATT 1994. Review Article III.4 of GATT 1994 in the last chapter and explain the differences between the two articles. The TBT Agreement applies to “technical regulations” but GATT 1994 applies to a broader range of discriminatory measures. Explain. Answer: There are several provisions of the GATT agreements implicated by this case. For example, Indonesia may contend that the U.S. law violates Article III as discriminating against a like product. Specifically, imported clove cigarettes are prohibited, but menthol cigarettes, which are primarily produced in the United States, remain legal. . Article XX may also be implicated as although the ban may protect human health and safety, it may also arbitrarily and unjustifiably discriminate or be deemed to be a disguised restriction on international trade. The Technical Barriers Agreement may also be at issue. Article II obligates the United States to ensure that its technical regulations are not more trade-restrictive than necessary and also requires the United States to review scientific information prior to adopting regulations. Finally, the SPS agreement is implicated to the extent that the United States failed to satisfy its obligations prior to the adoption of the law. Possible issues include whether the ban is overly restrictive of trade, constitutes realistic risk assessment based on scientific principles and evidence and constitutes unjustifiable discrimination. 3. What were the options left to the U.S. after this report? What action did the United States take in response to the report? Answer: It could ban both menthol and clove cigarettes or face $15 million in sanctions on U.S. exports to Indonesia. See Author for U.S. response to q 3 b 4. How well to you think the report balances trade liberalization with a country’s need to protect public health? How well suited do you think a WTO panel is to determining matters of public health? Answer: Calls for student opinion. EC Measures Concerning Meat and Meat Products (Hormones) 1. What was the role of the panel in settling this dispute under the SPS Agreement? Did it make its own determination and draw its own scientific conclusions about the effect of beef hormones on human health, or did it give total deference to the conclusions of the EU scientists? Answer: The answer to this question depends on one’s view of the use of growth hormones. Supporters of the EU ban would contend that the panel did indeed disregard the opinions of EU scientists. Conversely, those opposing the ban would note that the panel relied on established standards, guidelines and recommendations and prudent risk assessment measures. 2. What factors were taken into account to determine whether a sanitary measure violates the SPS Agreement? Answer: In this case, the panel determined whether there were "international standards, guidelines, or recommendations" with respect to the measure in dispute. The panel found that the Codex Alimentarius Commission, an advisory body to the World Health Organization, had published internationally adopted standards for four of the five hormones in question. Comparing the EU's regulation to the International Standard, the panel found the more stringent standards were "not based on existing international standards." For those measures for which a standard does not exist, a member must ensure that its sanitary measures are based on an assessment of risk. This means an assessment of data and factual studies. Further, the measures must be applied only to the extent necessary to protect life or health and should not be more trade restrictive than necessary. 3. It is an interesting irony in this case, that today many scientists, environmentalists, and consumer groups in the United States are calling for a similar domestic ban on beef growth hormones. How do you feel about the use of hormones in beef cattle? Answer: This question calls for student opinion. United States—Sections 301-310 of the Trade Act of 1974 1. What did the panel mean by “unilateralism”? Answer: When one member of an international trade treaty or dispute resolution procedure imposes rules or, more often, issues determinations independent of the ruling of the body of which it is a part. 2. If a trade dispute arises, what is the proper procedure under WTO rules for settling that dispute? Answer: States are to utilize the WTO’s Dispute Settlement Understanding. The panel noted that the United States was permitted to use the Trade Act only as long as that use was consistent with the WTO dispute settlement procedures. ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. Answer: The WTO Appellate Body agreed with some of the panel’s recommendations and disagreed with others. It found that a COOL objective of providing information to consumers about the country of origin of meat was a legitimate objective. The COOL requirement imposed by the U.S. was a technical regulation under the TBT. While the panel determined the COOL did not fulfill its objective of providing meaningful COO information to the consumer, the Appellate Body found it did provide some valuable information despite having onerous recordkeeping requirements and leading to costly steps to segregate meat by the country of origin. 2. Answer: The WTO SPS Agreement is also noted in the Hormones case. These are standards, or rather rules directing countries to base their sanitary measures on other international standards as opposed to a list of standards themselves. Thus, the validity of any EU-country standard is judged against an existing international standard, where one exists. Where outside standards of some sort do not exist, the country must base their measures on an assessment of risk, contemporary scientific principles, and take actions only that are necessary to protect from the risk. This permits a number of counties to take a number of valid approaches, while ensuring that measures are not too restrictive. 3. Answer: China did violate GATS Article XVI:2 (a)that prohibits a country from limiting the number of service suppliers in service sectors where it has made commitments because it gave a monopoly to a local processor and imposed an arbitrary requirement on processors. It did not, however, violate the principle of non-discrimination The dispute was resolved by China agreeing to change its laws by July 31, 2013. 4. Answer: In the car industry, “voluntary” quotas were provided for U.S. car companies (Ford, Chrysler, and GM), and the quotas helped the U.S. firms. However, U.S. consumers generally paid higher than average prices for vehicles without realizing any improvements in price, design, or quality. Japanese firms moved plants to the U.S. to avoid the quotas and they realized greater sales both because of their quality and their competitive prices. Recently, U.S. firms have improved their quality while being competitive on pricing. With most auto firms manufacturing closer to customers in places like China, India, Mexico and Brazil it is now very difficult to determine the country of origin of many cars. 5. Answer: The USTR is here responding to a petition by Country Music Television (CMT) because policies and practices of Canada have resulted in denial of cable access of CMT programming in Canada. The USTR agrees in this “Initiation of Section 302 Investigation” to conduct an investigation and seek consultations with Canada about this matter. As of the filing of this notice in the Federal Register, no trade sanctions are being discussed, but after investigation and consultation, the USTR threatens $500 million in punitive tariffs. If the matter is covered by U.S. obligations under GATT, the USTR should take the dispute to the WTO. Congress, in ratifying the Uruguay Round of GATT and the WTO dispute settlement arrangements, has expressed an intent to use those arrangements rather than the procedural mechanics set forth in section 302(a) of the Trade Act of 1974, on which CMT relies as the basis for its petition. 6. Answer: The regulations violate the non-discrimination provisions of GATT. Canada may set up such boards having authority to import and export goods. Article XVII, however, requires that state enterprises not discriminate against the purchase of foreign goods or treat them differently from domestic goods. Furthermore, it is unlikely that these could be maintained as health regulations unless there were some additive that was identified as harmful to the public. 7. Answer: This question calls for independent research. Students may find these documents at the website of the U.S. Trade Representative (http://www.ustr.gov). Managerial Implications I. Answer: This question requires students to demonstrate an understanding of section 301 of the Trade Act (which permits the U.S. to retaliate against other countries), and the difference between discretionary and mandatory use of this authority. Additionally, students might wish to address this in terms of the recent changes regarding Japan’s requested entry into the WTO. II. Answer: Students should distinguish between regulations that may, in some way, relate to health/safety or neutral standards and those that cannot be justified for any legitimate reason that likely exist only to block foreign imports. ETHICAL CONSIDERATIONS This ethical consideration calls for independent research. A complete history of EC-Approval and Marketing of Biotech Products, Dispute Number DS291 can be found at the WTO’s website located at http://www.wto.org. This history includes the results of the case before the Dispute Settlement Body and the Appellate Body and efforts relating to implementation of the respective opinions. The two EU laws regarding genetically modified plants (Directive on the Deliberate Release into the Environment of Genetically Modified Organisms 2001/18 and Regulation on Genetically Modified Food and Feed 1829/2003) may be found on the EU’s website (http://europa.eu). A summary is also contained on the GMO Compass Website (http://www.gmo-compass.org). The European Court of Justice issued 89 separate opinions relating to the topic of genetically modified organisms between 1997 and 2007. These opinions may be accessed at the ECJ’s website at http://curia.europa.eu. Chapter 11 Regulation Import Competition and Unfair Trade CASES IN THIS CHAPTER Argentina—Safeguard Measures on Imports of Footwear Heavyweight Motorcycles, & Engines & Power-Train Subassemblies Pesquera Mares Australes Ltda. v. United States (Chilean Salmon) Bulk Aspirin from the People’s Republic of China United States—Countervailing Measures Concerning Certain Products from the European Communities (European Steel) TEACHING SUMMARY As the previous chapter shows, the principles of non-discrimination, MFN, and quota elimination seek to liberalize trade throughout the globe. Nevertheless, sometimes trade, be it deemed fair or unfair, may have negative effects on an importing country’s market. For example, producers in one country that sell excess products in a foreign country at below market level prices may face duties to counteract their dumping. Some government subsidies of products sold in export markets may be unfair to foreign producers whose injuries can lead to countervailing duties. Thus, where trade materially injures a domestic market, the rules of GATT allow countries to protect their domestic markets through narrowly tailored safeguards, escape clauses, and antidumping duties. Additional Background: Material Injury Test. Under GATT (Art. VI, par. 6), before antidumping or countervailing duties may be imposed, the importing nation must determine that: (1) the dumped or subsidized imports caused a material injury (or threatened a material injury) to the domestic industry producing the like product or that (2) the imports have materially retarded the development of the domestic industry. While the injury test long existed under U.S. antidumping law, it had not existed under countervailing duty law. It has since been added. Although injury is considered in various contexts, the investigation of injury does not proceed along the same lines in every context. Injury investigation in a dumping or countervailing duty case is simpler than the injury analysis in an escape clause proceeding. The former does not require that various causes of injury be compared to see which is the most important. Instead, it simply asks whether the unfairly traded imports cause or threaten a material injury or retard the industry. In other words, concurrent causes do not foreclose the remedy of countermeasures. This assessment is made using one of two tests. Under the bifurcated version of the injury test, one need only determine the relevant domestic industry, assess it for material injury, and, if injury is seen, determine the cause. By contrast, the unitary approach first identifies the harm caused by unfair imports and then decides whether that harm is material. The ITC has traditionally followed the unitary approach. Question for Discussion: All things being equal, which approach to injury analysis is more likely to favor the complaining domestic industry? CASE QUESTIONS AND ANSWERS Argentina—Safeguard Measures on Imports of Footwear 1. What is the role of a WTO panel in reviewing the safeguard investigations conducted by a national administrative agency? Answer: The WTO looks to see if the decision is consistent with the WTO Antidumping Agreement, if it misinterpreted any of its provisions and if it properly followed all administrative procedures in an unbiased and objective manner. It cannot reconsider findings of fact but only looks to see if the WTO law was correctly applied. 2. What kind of “increased quantities” of imports must be found by the investigating authority in order to impose safeguard measures? Answer: The increased quantities must be sudden enough, sharp enough and significant enough, both quantitatively and qualitatively, to cause or threaten to cause serious injury. 3. Locate the Agreement on Safeguards and read Article 2.Why did Argentina’s exemption for footwear imported from MERCOSUR countries violate the WTO Agreements? Answer : Argentina did not evaluate two of the factors listed in Article 2, namely capacity utilization and productivity for the affected industry. Other factors to be evaluated include: the share of the domestic market taken by increased imports, changes in the level of sales, production, profits and losses and employment. Heavyweight Motorcycles, & Engines & Power-Train Subassemblies 1. In the early 1980s, Honda entered the U.S. motorcycle market with the slogan “You meet the nicest people on a Honda.” During the next two decades, the Japanese company not only made motorcycling acceptable and fun but it also introduced motorcycles known for quality, dependability, and easy starting. By 1982, Japanese motorcycles had reached their peak sales in the United States. In the meantime, Harley Davidson was plagued with quality and image problems. Do you think this should have been considered in the ITC’s recommendations or considered by President Reagan? Answer: This question calls for student opinion. 2. Assume that a domestic firm is not competitive in price and quality with foreign firms, but that it is protected from competition by high tariffs. What are the effects of the protection on the firm in the short term? How might it affect the firm’s competitiveness in the long term? Answer: The firm may very well survive and thrive in the short term. However, the long term effects may prove to be negative as the firm becomes dependent on government protection and fails to take adequate measures to innovate and improve its competitive position without government assistance. 3. President Reagan later rejected recommendations to place quotas on footwear because of estimates it would have cost American consumers $3 billion in increased tariffs, and because there was no indication it would have helped American manufacturers return to competitiveness. How important do you think cost is to a president’s decision? Answer: Where the cost of protection (e.g. to U.S. consumers) would be too great and where a remedy would be ineffective in helping the industry compete. 4. Although the administrative process is handled through a bipartisan, independent commission (the ITC), why is the process still very political? Answer: This question calls for student opinion. However, it bears to note that independent commissions such as the ITC are subject to oversight and budgetary constraints. Decisions that are unpopular with members of Congress may result in additional scrutiny and potential loss of government funding. Additionally, these decisions have real effects upon people and their livelihoods, thus adding an additional source of potential controversy. 5 What do you think would be the role of the President’s economic advisors in an unfair imports case? Answer: The economic advisors would need to look at the employment level in the affected industry and that industry’s importance in the U.S. economy. The advisors would also need to give consideration to how the raise in price of imports would affect consumers as well as whether the domestic competitors would gain market share and create jobs or instead just raise their prices. Pesquera Mares Australes Ltda. v. United States (Chilean Salmon) 1. What is the purpose of comparing the price of salmon sold in the United States to that sold in Japan? Answer: The issue was whether Pesquera had violated U.S. antidumping provisions in the exportation of salmon into the U.S. market. In making its investigation, the ITA (U.S. Department of Commerce/International Trade Association) was required to find a “like product” to which to compare Japanese salmon. It selected Chilean salmon which was arguably a “like product” in Japan to determine the fair value of the Japanese salmon. 2. Why did Mares Australes not want the ITA to compare the price of salmon sold in the United States to the price of the “super premium” salmon it sold in Japan? Answer: Mares Australes protested that the Chilean salmon and Japanese salmon were not “like products” because the ITA used both premium and super-premium products in its comparison. 3. Explain the problem confronting the ITA in determining “foreign like product.” How did the court define that term? Answer: The problem is that there were differing grades of salmon sold in different locations, thus complicating the determination of what is a like product. The ITA concluded that the Chilean and Japanese salmon had “identical physical characteristics” and thus were “like products,” even though the Japanese salmon included both premium and super-premium grades and the Chilean salmon was only premium grade. The ITA included the price of the super-premium Japanese salmon in its analysis of the fair value of the Chilean salmon and found that Pesquera had “dumped” the salmon in the U.S. market. As a result, higher antidumping duties were imposed upon Mares Australes. The Court of Appeals for the Federal Circuit affirmed the ITA decision. Bulk Aspirin from the People’s Republic of China 1. What are the special problems of determining the dumping margin of goods exported from an NME country to a market economy country? Answer: Many of these countries still rely on political and economic systems heavily controlled by national governments. These controls interfere with market forces and thus complicate issues relating to the determination of the dumping margin. Examples include raw materials allocations, wage controls, quotas for production output and exportation and price controls. These factors make it difficult to determine “normal value” for purposes of determining the dumping margin. 2. What is the difference between de jure and de facto control by the government over Jilin and Shandong? Did either exist? Answer: De jure control means the firm was regulated by Chinese law, while de facto control means the firm was controlled by practice or reality. The ITA found the Chinese aspirin firms were not under Chinese de jure or de facto control. 3. Why was the ITA using a surrogate country, India, to determine normal value? Answer: The ITA looked at other nations as benchmarks in economic development and concluded that India was comparable to China in its factors of production and normal value. 4. What are the function of U.S. antidumping duty laws? Explain. Answer: Dumping is often intended to drive competitors out of business so that the dumping firm later will be able to raise their prices to monopoly laws. Antidumping duties are intended to level the playing field for domestic producers, and ultimately consumers who benefit from fair competition. Firms in industries affected by foreign dumping are able to seek remedies that may allow them to stay in business and remain competitive. 5. While many U.S. jobs were unfortunately at stake in the proceedings, do you not see irony in the fact that U.S. laws were used to protect a French multinational (Rhodia) from low-cost dumping by a Chinese company, all while maintaining higher aspirin prices for American consumers? Answer: Rhodia was the sole firm in the U.S. producing aspirin so even though it was part of a French multinational firm, it was employing people in the U.S. and seeking to compete with the Chinese firms. Once it went out of business, the U.S. government and U.S. aspirin consumers had little or no influence over the prices set for aspirin by the Chinese firms. United States—Countervailing Measures Concerning Certain Products from the European Communities (European Steel) 1. What is “privatization” and how might it affect a subsidies case? Answer: Privatization refers to the transition of state-owned enterprises into private ownership. It may affect a subsidies case if it can be demonstrated that financial contributions made to companies while they were government-owned have passed through to the newly-created entities who are thus receiving an improper benefit. 2. Why did the ITA conclude that the EC steel mills were the “same legal person”? Answer: Prior to privatization, EC governments had pumped significant resources into their government-owned steel mills to revitalize the steel industries in their respective countries. Since the late 1980’s, ownership of the mills in question was sold to private investors at, according to the EC, “arms length” transactions. The ITA concluded however that the newly privatized European steel mills were the “same legal person” as the previous government-controlled steel mills since the new shareholders received all the benefits of previous government ownership, e.g., modern equipment and newly trained personnel. As a result, the ITA imposed countervailing duties on the EC steel imports. 3. What factors should be considered in determining whether the European mills were still benefitting from earlier subsidies? Answer: Factors cited by the ITA included receipt of the benefit of modern equipment, trained workers and other assets paid for by the government when the company was government-owned. An important factor in this determination is whether the newly privatized entity paid fair market value for these assets in an arm’s length transaction with the government. Answers to Questions and Case Problems 1. Answer: Antidumping duties can only be applied when there is a threat to cause or actual material injury to a domestic industry producing like products. The intent or absence of intent to cause such injury is not a factor. Unless there is a causal relationship between the dumped product and the resulting threat or injury, no antidumping duties could be imposed. 2. Answer: The export price would be $40 as that is the price when the product is first sol to an unrelated buyer. Adjustments in the price are made to compare to a like product sold in the U.S. Perhaps the shoes are of different quality with different materials. Are they used for the same purposes and of equal commercial value—one brand or certain features may be more attractive to consumers than others even though they are similarly made. Allowances and adjustments for shipping and packaging costs, warehouse expenses, insurance, advertising expenses also affect the export price. 3. Answer: No. The remedy for dumping is the use of antidumping duties. GATT does not permit the barring of imports by its members for violation of trade laws. 4. Answer: Agricultural subsidies are used to protect vital land resources but also for political purposes that farmers, farm machinery manufacturers and food distributors argue as being in the national interest. The economic impact of such subsidies is to raise the price of such products and to skew the allocation of farmland among and the world’s nations as some crops in some countries are protected by subsidies while similar crops elsewhere, that could be competitive, are not protected. Countries in different regions protect their own farmers and their own crops and yet find unfair the subsidies offered by nations in other regions. The current U.S. farm bill is still subject to debate mostly related to the providing of food stamps and other subsidies for the needy. Any change in U.S. farm policy will have some ( perhaps minor and short-term) affect on trade relations with other countries that produce competing products. 5. Answer: This question calls for student opinion based on chapter readings. 6. Answer This question calls for student opinions and conclusions based upon outside research. 7. Answer: International trade law distinguishes fair from unfair practices, and this difference is reflected in Titles II and III and the 1974 Trade Act. The lines, nonetheless, blur. Generally, unfair trade distorts free market principles and includes dumping or government subsidies (with the remedies of antidumping duties and countervailing duties, respectively). GATT recognizes every nation's need to act in the interest of its own firms * realistic jurisprudence * and sanctions protectionist legislation (import relief) against imports that may not even be being traded unfairly. This remedy involves, primarily, the use of the escape clause. This was written into GATT at the request of the U.S. so that it could always respond to internal political forces when necessary. 8. Answer: The International Trade Commission considers requests for relief under the GATT Escape clause and section 201 of the Trade Act of 1974 (as amended by the Omnibus Trade and Competitiveness Act of 1988). The ITC will consider whether there are increased imports that are a substantial cause of serious injury or threat of serious injury to a domestic industry producing a like product. The ITC makes a recommendation to the president on the basis of its investigation. The ITC looks for: (a) Idle production, (b) Unprofitable operation, (c) Unemployment, (d) Growing inventory, (e) Decline in sales, and (f) Increase in imports or share of market by imports. The ITA will act on complaints where “dumping” is alleged. For a dumping petition to be successful, the ITA must determine that a class or kind of foreign merchandise is being (or is likely to be) sold in the U.S. at less than fair value (LTFV). The ITA is required to compare the foreign market value (FMV) of the imported products with the United States price (USP). The antidumping duty will be imposed on the amount by which the FMV exceeds the USP. 9. Answer: Yes, the ITA was correct in calculating the dumping margin and the U.S. Court of Appeals for the Federal Circuit affirmed the ITA decision. The Antidumping Act provides that if foreign merchandise is sold or is likely to be sold in the United States at less than its fair value to the material injury of a United States industry, then an additional antidumping duty shall be imposed. The amount of the duty shall equal the amount by which the foreign market value exceeds the United States price for the merchandise. The act gives great deference to the U.S. Secretary of Commerce in administering the antidumping law and calculating the U.S. price, which is computed by one of two methods: purchase price or exporter's sales price. The antidumping law attempts to construct value on the basis of arm's length transactions, which presumably take place at different points in the chain of commerce depending on whether the goods traveled through a related importer or through an independent, unrelated importer. Thus, different methods of computation of U.S. price are required depending on the relationship of the importer to the foreign producer. In the instant case, the ITA determined that the United States prices of portable electric typewriters from Japan, produced by Brother and Silver, are less than the foreign market values of such or similar typewriters. United States price was based on purchase price or exporter's sale price, as appropriate for any particular sale. Foreign market value was computed on the basis of home market sales by Brother and Silver of similar models for all of the entries subject to the antidumping duty. 10. Answer: Yes. The ITC was wrong on both counts. The court held that the ITC should have looked at whether articles, the imported wines that compete with a like product, must also compete with each other. It noted that the imported products were like products and thus should have been considered together, regardless of where they came from. It also noted that in a preliminary decision, it is the possibility of injury not the proof of the injury that must be found. The proof of injury is determined at the final determination, not at the preliminary stage. There must only be reasonable indication of such injury at this stage. American Grape Growers Alliance v. U.S. 771 F. Supp. 363 (CIT 1991). MANAGERIAL IMPLICATIONS Students should consider a menu of the remedies, including the escape clause, antidumping duties, countervailing duties and Section 301. Success under the escape clause might be difficult because of the problems in showing that the increased imports of OTs were the substantial cause of serious injury. Proving sales at less than fair value might be easier. The $1.15 price is the price of the Japanese-made OTs sold to Japanese firms. If the Japanese competitors are selling the OTs for $1.15 in Japan and $0.95 ex factory to U.S. firms, it is fairly apparent that there is a $0.20 dumping margin (assuming no other adjustment needs to be made). To be competitive, the U.S. firm would have to reduce its current selling price of $1.20 by $0.25. Barriers to the export of OTs should be addressed under Section 301, but it might be necessary for the OT industry in the U.S. to exert some pressure on the administration to positively respond to its petition. Given the past use of Section 301, the OT industry in this case may prevail. Given the rise in competition in Asia and Brazil, and the increasing import regulations you are encountering in exporting your product into other countries, you may need to consider establishing a manufacturing presence in one or more of the countries where foreign customers may be interested in your product. As protection of your intellectual property is and should remain important to your firm’s success, your scrutiny of possible sites demands careful consideration. ETHICAL CONSIDERATIONS The paper converting firm is confronted with a difficult decision with respect to the dumped Chinese paperboard. The firm will have to determine if the paper products are being dumped in to the United States, specifically, whether they are being sold in the United States for less than the price charged for the same or comparable goods in China. The exporter may have several objectives in this case. It may be dumping paper products in order to gain market entry, dispose of excess supply and inventory, avoid warehousing costs, respond to competitors’ lower prices and costs or for predatory motives to drive competitors out of business. Dumping in this case may be good or harmful depending from the standpoint of different stakeholders. Dumped paper products as input may be beneficial for shareholders of the paper converter to the extent it increases profitable operations by lowering the cost of production. Increased profitability may also be beneficial for the paper converter’s employees as such profits may be passed along to them in the form of higher wages or increases in the share price assuming employees may also hold an ownership stake in the company. Conversely, it could be harmful to corporate reputation and ultimately shareholders and employees should the company be linked to the Chinese paper supplier in a subsequent dumping investigation. The consequences for members of the supply chain are equally mixed. Although lower production costs may be reflected in lower prices, which would be for the benefit of the ultimate consumers of the paper converter’s products, the company’s suppliers of raw materials would be required to compete with a firm engaged in an illegal practice or suffer the financial consequences. Members of the community may benefit or suffer injury to the extent they belong to any of the above-referenced stakeholder groups. Finally, the ethical duty to the government to obey the law would be violated by purchasing dumped product in contravention of U.S. antidumping statutes. Chapter 12 Imports, Customs and Tariff Law CASES IN THIS CHAPTER Carl Zeiss, Inc. v. United States Better Home Plastics Corp. v. United States Ferrostaal Metals Corp. v. United States Nissan Motor Mfg. Corp., USA v. United States. United States v. Golden Ship Trading Co. United States v. Mead Corp. TEACHING SUMMARY When goods cross international borders, they must go through a customs process. Typically, this involves three stages of identifying or classifying the good and its country of origin, valuing the goods, and imposing/collecting a tariff or tax. Many aspects of this process are harmonized among WTO members through the use of the Custom Valuations Code or GATT Agreement on Implementation of Article VII. Classification involves both what the good is as it enters the country (this will be determined by reference to domestic codes) and from where the good originated. Country of origin, however, is distinct from the country in which the good most recently resided. Value can be determined by a number of methods, but the most common method is to use transactions, i.e., the actual price paid for the good. Where this cannot be determined or cannot be fairly determined, such as in instances where the seller and buyer are related, one may look to the transaction value of identical goods, the transaction value of similar goods, the deductive value, the computed value, or the derived value. Once the classification, value and country of origin are known, a tariff can be calculated. Tariffs may be based on the value of the item (such as charging 10% of its value) or charged on a per piece (weight) basis. CASE QUESTIONS AND ANSWERS Carl Zeiss, Inc. v. United States 1. Describe the two-step process for classifying an article. Answer: The two steps involve first determining the proper meaning of the applicable tariff provision(s). This is a question of law. The second step, a question of fact, seeks to determine the correct heading for the subject merchandise. 2. Why is “compound microscope” an eo nomine term, and what does the court mean when it says, “that includes all forms of the named article?” Answer: The merchandise classification fits the classification that names the product regardless of its use. All compound microscopes can fit within that classification, regardless of how they are used. 3. Which of the two headings is more specific, and why? Answer: The compound optical microscopes suggests two qualities-compound and optical-- so it is more specific that medical instruments used in surgeries as they may have only one feature. Better Home Plastics Corp. v. United States 1. What are the two main components of this “set”? If they had been sold separately, how would each have been classified? Answer: The two elements of the set were the textile decorative curtain and the plastic liner. If they were sold separately, the textile curtain would have been classified under Subheading 6303.92.0000 at 12.8% ad valorem and the plastic liner at Subheading 3924.90.1010 at 3.36% ad valorem. 2. What is the “essential character” test, and how was it applied here? Answer: It is the part of an item that provides something important or even indispensable to it. The inner lining here protects the outer fabric item and also stops water from escaping from the shower. These are crucial reasons why one buys such a shower curtain. 3. At the end of the opinion, the court clarifies that the opinion is limited to shower curtains at the “low end of the market.” Why might that have made a difference? Answer: The essential character of a very high end shower curtain may in fact be the design of the outer part. This would be similar to a form over function—a person cares more about how the curtain looks than how it performs. Ferrostaal Metals Corp. v. United States 1. Why is the process of galvanizing steel important to the court’s decision? Answer: It is fundamental to the court’s determination of whether there has been a substantial transformation of the steel from the time it left Japan to the time it left New Zealand. 2. Consider the process of hot-dip galvanizing described here. Would you agree that the operations performed on the steel in New Zealand created a product with a new name, character, or use? Why or why not? Answer: Yes. The grains of steel are recrystallized, there is a chemical change, the galivinized surface has an identifiable atomic pattern and the steel will now last 10 times as long as it would if ungalvinized. 3. Of the three factors generally referred to – name, character, use – which seems to be the most or least important? Answer: The name change is clearly the least important as the court states in its opinion. Character seems to be the most important as the court spends considerable time discussing the galvanizing process that occurred in New Zealand. 4. What other factors does the court consider in addition to a change in the name, character, and use of the product? Answer: The value of the original product has been advanced considerably. The tariff classification has changed. The court looked to the totality of the evidence. Nissan Motor Mfg. Corp., USA v. United States 1. What purposes do FTZs serve? Why did Congress establish them? Answer: They facilitate the use of U.S. ports and to encourage re-exports of foreign products that have been brought into the U.S. to be assembled, packaged, labeled, exhibited, refined, or manufactured here. Congress established them for these purposes as well as the flexibility that they provide to importers. 2. What were the advantages to Nissan by assembling automobiles in an FTZ? How many can you list? Answer: This question calls for student opinion and further research. Obviously one advantage was that Nissan could test its equipment in the FTZ and scrap defective equipment without having to ship the equipment to a plant and later discover that it was defective and needed to be replaced. 3. Why could Nissan not bring manufacturing equipment into its zone duty-free? Do you think this case applies to office chairs or personal computers?, notwithstanding the free trade subzone, could duties be imposed? Answer: Because the zone agreement permitted only certain uses of the equipment brought into the zone. That did not include installation, use, or operation of the equipment, which is what Nissan was doing here. As for office chairs and computers, it would depend on the zone agreement and use of the items in the zone. 4. Assume that you import merchandise subject to annual quotas. You have a shipment arriving, but the quota has filled. How might an FTZ help you? Answer: You may store the goods in the zone duty-free for later entry into the United States when room becomes available again pursuant to the quota. 5. What FTZs are located in your state or region? Answer: This question calls for further student research. United States v. Golden Ship Trading Co. 1. What was Wu’s motivation in stating that the shirts were made in the Dominican Republic? Answer: To avoid the textile visa that would have applied to shirts made in China. 2. What is the burden of proof? Must the United States prove that Wu was negligent or must Wu prove that she was not? Answer: The U.S. need only prove that the statements regarding origin were false. Wu must prove that she was not negligent. 3. Can the importer (Wu) rely on the statements of the third party (here, the shirt exporter) to avoid responsibility? Answer: No. As the importer who submits the customs documentation, the importer posses a duty to verify (at least to a reasonable degree) the information provided to her by the third party, rather than merely “blindly” accepting these assertions. Had Wu verified the information of the entry documents or asked Hui about the origin of the shirts, she would have been able to ascertain information regarding their origin. United States v. Mead Corp. 1. When a court reviews a classification ruling, is the court free to disregard the position of Customs and consider all the evidence anew? Must the court give complete deference to Customs’ rulings? What does the court say is the correct standard of review? Answer: Courts must give considerable weight to Custom’s judgments. This considerable weight is dependent on the degree of the agency’s care in administration, its consistency, formality and expertise, and persuasiveness of its position. 2. What was the legal rationale the Supreme Court used in holding for Mead? Answer: The court used two cases as a legal rubric to decide the Mead case. Under Chevron, U.S.A., Inc. v. National Resources Defense Council, the court held that Congress did not intend a customs ruling to carry the force of law. However, relying on Skidmore v. Swift, the court set forth the principle that a customs ruling is “eligible to claim respect,” depending on its analysis and persuasiveness. The case was remanded back to the Court of Appeals with instructions to give a limited degree of deference to the customs ruling. The Appeals Court upheld its previous decision for Mead. Unfortunately, the Supreme Court did not set a bright red line for future cases. 3. What about the product – day planners – that gave rise to the appeal? Do you think that a loose leaf “day planner” is a “bound diary”? Could you locate these in the tariff schedules and determine the current rate of duty? Answer: This question calls for student opinion and further research. ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. Answer: They are composite goods because they can fit under both classifications. The court said the lower court must determine the essential characteristic of the product. It is marketed, priced, purchased and placed among items that are not just backpacks but that feature hands free drinking. When an article as features that are substantially in excess of the common articles (here backpacks) it can no longer fit within that single classification and is something else for tariff purposes. CamelBak Products, LLC v. U.S., 649 F.3d 1361 (Fed.Cir. 2011). 2. Answer: There are several ways to look at the Inner Secrets products. By common name (an eo nomine description), boxer shorts are underwear, though usually not for women; by the article’s physical description, it is potentially underwear for women (but not for men, since the fly is sewn into thirds); there is not much information about the article’s described use, except that the name “No Excuses” suggests that the articles could be used as “daring” outerwear by women, with “no excuses” asked for by those wearing them. If the intent of the importer is to market these articles as outerwear, their classification is correct. See Inner Secrets v. United States, 1995 WL 227372 (Court of International Trade, 1995). 3. Answer: The Court of International Trade classified the Sports Graphics goods under 772.15 articles chiefly used for preparing, serving or storing food or beverages. The Court of Appeals affirmed. The chief use of the “Chill” coolers had a critical bearing on its classification. The U.S. argued that the cooler should be classified under 706.62 for luggage under the rule of ejusdem generis. In terms of classification, ejusdem generis requires that the imported merchandise possess the essential characteristics or purpose that unite the articles enumerated eo nomine in order to be classified under the general terms. In this case, the court focused on whether food or beverages were involved, which brought them to the chief use provisions of 772.15 (“Articles chiefly used for preparing, serving, or storing food or beverages.”). Under the General Interpretive Rules, if a tariff classification is controlled by chief use (other than actual use) it is to be determined by the use that exceeds all other uses, if any. In this case, the Court of International Trade held that the chief use of the merchandise was to maintain food and beverages at desired temperatures over a period of time – a storage function. (The court also found that the rule of relative specificity did not apply because the merchandise was not classifiable under both provisions.) 4. Answer: The calamari cannot be labeled as “Product of U.S.A.” as they do not undergo a substantial transformation as a result of the tenderizing process. Although the processed calamari may have an improved texture and enhanced appearance, it is still raw frozen squid. The finished product remains essentially the same as the imported product. Students may consult Customs Ruling N107816, In re Ruggiero Seafood, Inc., June 9, 2010. 5. Answer: Students should apply the Federal Trade Commission’s labeling rules. A seller may not claim that a product is “Made in U.S.A.” unless all or virtually all of the materials, processing or component parts originated in the United States and their final assembly or processing took place there. In this case, despite its dilution in the United States, 35 percent of the final product was produced in Denmark. Further research will need to be conducted in order to determine whether the manufacturer may use a qualified claim. 6. Answer: Students should apply the substantial transformation rule set forth in Ferrostaal Metals Corp. v. United States to answer this question. Particular attention could be devoted to the value added by the assembly process in China, any alterations in mechanical properties as a result of the assembly process and whether the Harmonized Tariff Schedule classifies these products differently. Discussion may also focus on the doctrine of entireties given the fact that the saw blade entered and exited China as basically the same product albeit assembled in China. 7. Answer: This question requires independent student research on the Internet. 8. Answer: This question requires independent student research on the Internet. 9. Answer: This question requires independent student research on the Internet. MANAGERIAL IMPLICATIONS This managerial question allows students to see how tariff and customs issues can impact a firm’s strategy for the design, manufacture, pricing and marketing of a new product. It encourages students to take a broad, strategic, view of importing, gives a realistic experience in using customs and tariff law during the early stages of product development, and allows them to participate in the planning process. The question is designed to focus students on the material in this chapter, and skirts other issues that normally would be important. It is not unusual for a manufacturer or importer to be faced with having to design or engineer a product so that its wholesale or retail price falls within a certain range, based on customer demand or other market conditions. Admittedly there are many cost factors that are not given here, such as the costs of materials, labor, indirect costs, transportation, etc., that would influence the cost of the tents. But that was ruled out so the student can focus on the issues in this chapter. Students should consult the HTSUS in Exhibit 12.1 as a beginning point, or suggest that they locate the latest version of the HTSUS on the ITC website. 1. Answer: The tariff rate is determined by the fiber (synthetic, cotton, or other), the principal use (backpacking or other), the size, weight and other design features of the tents, their value, and their country of origin. 2. Answer: The tent should be “specially designed” and suitable for backpacking, as opposed to ordinary “camping.” Dictionary definitions of “backpacking” generally require that one travel or hike carrying belongings in a knapsack or backpack. A tent that is too heavy to carry on one’s back while hiking will probably not qualify as a backpacking tent. Other features besides weight should be considered, particularly the size of the tent when ready for use, and when folded or compressed for carrying, and whether it is packaged with a carry bag that can fit into or on a backpack. 3. Answer: It should be made from nylon, polyester, or any other synthetic (man-made) fiber. 4. Answer: CROSS is found online at http://rulings.cbp.gov/. Search for “backpacking tent.” Consider sorting by most recent date first, and note the relevancy ranking. Here we are able to read through prior Customs rulings that, while not binding on our entry, give us guidance in planning our import. Clearly, the firm is advised to obtain a binding ruling for this product. After reading a few rulings students should understand what type of information, samples, etc., should be included in their ruling request. 5. Answer: Key design requirements for backpacking tents are found in many of the online rulings. We can read several of them to be certain we have covered all bases. Notice that the rulings cite T.D. 86-163 for requirements for backpacking tents. Consider that in our case, Z-Mart is requesting a price quote on a tent that “must sleep three or four people and leave enough head-room to dress.” On careful reading of these the student will discover specific requirements for tents designed for “three or four persons.” These are: Have a floor space of 65 square feet or less, and weigh 12 pounds or less, including tent bag and all accessories necessary to pitch the tent, and have a carry size of 30 inches or less in length and 10 inches or less in diameter. The above guidelines from T.D. 86-163 are not rigidly applied to exclude a tent when the difference is slight when considered with the tent’s over-all specifications Because Z-Mart will take either a heavier 3-season or lighter 4-season tent, and because slight variations are allowed, our firm should be able meet these design requirements. 6. Answer: Given that the firm is apparently happy with its Chinese supplier, and if the tent all classified within 6306.22.1000, no duties are expected. However, if Customs believes that the tents are not backpacking tents, and if the tent were to fall into 6306.22.90, then the 8.8% tariff, combined with transportation costs from China, may become prohibitive, according to facts of our question. To avoid the higher rate, the Column 1 “Special” rate (duty free) applies to Bahrain, Canada, Chile, Columbia, Israel, Jordan, Korea, Morocco, Mexico, Oman, Dominican Republic-Central American FTA countries, Panama, Peru, and Singapore. Duties would be 3% from Australia. Of these, moving production to the western hemisphere makes the most sense. In Chapter 1 we noted that international freight rates are often calculated on the basis of weight and volume and the higher rate charged. Students might recognize that these tents are both heavy and bulky and therefore expensive to ship. Shipping time to the U.S. market is always a consideration. Therefore our firm’s best alternative sources of supply may be in Mexico, DR-Central America, or Panama. The tents are not eligible for the GSP or CBI preference. Students should recognize that country of origin rules will still apply, and they should be warned that if the tents are merely assembled in a preference country (such as Mexico, DR, or Panama) from fabric woven in China, that the tents will not enter the U.S. under the preferential rate unless they meet the country of origin test for that particular free trade agreement. Some students will likely ask, “Why not assemble the tents in the United States at our own plant?” This is a great area for discussion, although it extends well beyond the focus of this chapter. Instructors can allow this discussion to go as far and wide as time and their interests permit. However, in the context of our material here, if the main component of the tent (textiles) continues to be imported from China, then duties will have to be recalculated on that basis. That does, however, raise some interesting marking questions. A survey of the textile rules indicates that items in heading 6306, tents, assembled in the U.S. from fabric woven in China, will still have to be marked “Made in China” or perhaps “Fabric made in China with assembly and further processing in the United States.” However, if the fabric for the tent walls, roof, or floors was woven in different countries and assembled in the U.S., then under the multi-country rules the country of origin of the tents is the “last country in which an important assembly or manufacturing operation took place” – and the tents may be labeled as “Made in the United States” – giving the Z-Mart tent a marketing advantage. See, 19 USC § 3592, 19 CFR Part 102, 68 FR 8711, and Textile & Apparel Rules of Origin: An Informed Compliance Publication, U.S. CBP, 2004 Rev. In any event, students should understand the need for an advance ruling. 7. Answer: Students should follow the GRI and first compare heading 6306 to heading 8708. Relying on the rule of specificity, the provision for tents is more specific than a provision for parts and accessories. We can confirm the application of this rule by looking at prior Custom’s rulings in the CROSS system and searching for “truck tents.” The truck tent will be classified under 6306.22.9030 at 8.8% ad valorem. ETHICAL CONSIDERATIONS This ethical consideration calls for personal opinion and requires independent student research on the Internet. For additional materials supporting fair trade, students may consult the Fair Trade Coalition (http://www.fairtradefederation.org) and Global Exchange (http://www.globalexchange.org). For criticism of fair trade, students may consult the Adam Smith Institute (http://www.adamsmith.org) and the Cato Institute (http://www.cato.org). TEACHING SUGGESTION / COOPERATIVE LEARNING ACTIVITY: CUSTOMS PROBLEM Instructors interested in taking students through the process of customs, classification, valuation, imposition of tariffs, and the impact of free trade zones/areas/unions, may wish to use the following assignment. The hypothetical includes the cross-border movement and manufacture of goods and also implicates customs unions. RULES. Students abide by the following rules: (a) Synthetic materials “packaged” as blocks are dutiable as “raw materials,” at the rate of 5%. (b) Items that do not fall under (a), including any metal, wooden, or other material is dutiable as “materials -- other,” at the rate of $2 per package or $1 per lb. (c) Classification is based on the U.S. Customs Protocol or the mock protocol. Instructors may require students to use the U.S. Customs protocol (available on-line: http://www.customs.gov OR http://www.access.gpo.gov ) or construct a mock one of their own. The mock protocol would include a variety of customs classifications and subheadings, thus requiring students to assess the appropriate classifications for their goods. (d) All customs unions, free trade zones, and free trade areas studied are in effect. HYPOTHETICAL. Dieter, in Germany, manufactures Lili Dolls, 11 ½ inch fashion dolls. He purchases five 10-ton blocks of industrial plastic, at the price of $1,000 per block, from France and 50 blocks of Saran (used for making doll hair) from Qatar. Although the price of the Dieter’s Saran is unknown, over the past two weeks Germany has imported Saran at the price of $100 per block and exported it at the price of $50 per block. The average price of Saran throughout Europe, however, is $25 per block. Next, Gary in Guam purchases 500 sheets of metal from Canada ($10 per sheet). Gary sends these to Eduardo in El Salvador where they are buffed and cleaned. Ed then sends the buffed sheets to China in Costa Rica where they are made into the top and bottom halves of doll molds. The molds are then sent to Becky in Belize. Becky adds a hinge to pairs of mold tops and bottoms so that they close (like a book). Becky sends 100 molds to Gary in Guam at the price of $1 per mold. Gary then sends the molds to Dieter in Germany where the plastic is poured into the molds, producing doll bodies. Meanwhile, underage workers in Dieter’s factory transform the Saran into strands of long blond Lili doll hair. Dieter then sends 100,100 Lili kits (which include a doll body, strands of hair, and doll arms that must be attached to the body) to France. There, the dolls are put together, blue eyes are painted on, and a bathing suit is added. 100,000 dolls are then sent to Ciprian in Romania to be boxed. ASSIGNMENT. Address each of the transactions (note country of origin, duty to be paid, value wherever value can be computed, and classification, where available). Use the above-stated rules and your customs protocol. Chapter 13 The Regulation of Exports CASES IN THIS CHAPTER United States v. Mandel United States v. Chmilewski Briggs & Stratton Corp. v. Baldridge United States v. Zhi Yong Guo Freedom to Travel Campaign v. Newcomb TEACHING SUMMARY Just as countries control the import of goods, they also control the export of goods from their country. Whereas the former primarily focuses on the protection of a domestic industry (and sometimes the health, safety, or morals of citizens), the latter typically focuses on preventing the certain technologies and items (such as weapons) from falling into foreign hands. There are national security issues with many such controls. Keeping a competitive edge in new technology, even if not typically usable by foreign militaries or anti-U.S. terrorists, also constitutes a reason for imposing selected controls. Sometimes too a country also seeks to protect scarce or important resources as Russian minerals or Japanese rice. CASE QUESTIONS AND ANSWERS United States v. Mandel 1. What were the reasons for control in this case? Answer: There were national security reasons for placing the equipment on the controlled list. 2. What might have been the broader implications, beyond this case, if the court had allowed the defendant access to the Secretary’s records? Could it have an impact on national security? Answer: The court would have to also consider the input from other agencies. As the Secretary also had to consult with allies, the court might have to review those negotiations and perhaps alter the reliance of foreign governments on decisions made by U.S. agencies. 3. If different judges had different opinions as to what goods may or may not be exported without a license, what would be the result? Answer: It would lead to uncertainty as to whether products are or are not on the list and lessen collaboration by U.S. allies. United States v. Chmilewski 1. Imagine that you have a foreign customer who balks at your price, but then suggests that you send two invoices—one for them to submit to their customs authorities for far less than the agreed price of the goods, and a second for them to actually pay. How should you reply? Answer: You know that doing so violates the foreign law and as the U.S. customs also makes use of those invoices, and relies on them, it also violates U.S. law. Tell them No! 2. You apply for, and receive, an export license for a shipment to a foreign customer. After shipment, the customer places a new order for the same merchandise. May you use the license number and information from the first shipment and enter it on EEI for the second shipment? Why or why not? Answer: An EEI is required for each shipment. There are options for obtaining a license for multiple shipments to the same customer, but prior approval is required prior to, not after the first shipment. Briggs & Stratton Corp. v. Baldridge 1. What is the purpose of the antiboycott regulations? Answer: To ensure that U.S. companies do not assist the Arab states' boycott of Israel. 2. On what basis did the company challenge the act and regulations? Answer: It asserted that they violate the First, Fifth, and Ninth Amendments of the Constitution. 3. How should a company respond to a questionnaire like the one Briggs received here? What action should it take? Answer: It can report the inquiry to the U.S. government and decline to participate in the boycott. United States v. Zhi Yong Guo 1. From the limited facts presented here, do you think a reasonable juror could conclude that the defendant knew his conduct was illegal? Why or why not? Answer: First, the statute was not vague but rather specific. A exporter needs to check a control is to see what items are subject to controls, the reasons for the control and then cross-check to see if the controls apply to the country where he is trying to export it to. The statute is not vague and its requirements are not onerous. Second, he hid the cameras indicating he knew or probably knew he could not legally take them to China from the U.S. 2. In addition to penalties faced during the sentencing in this case, what administrative or civil penalties did the defendant face? Answer: He could face a denial order that prohibits him from exporting from the U.S. for a set period of years as well as fines for violating various export provision laws not directly covered by the criminal case. Freedom to Travel Campaign v. Newcomb 1. What was the purpose underlying the ban on travel to Cuba? Answer: To deprive the Castro regime of hard currency. 2. What was the legal standard for determining whether the U.S. government can restrict international travel? Answer: The court held that the government need only advance a rational or reasonable explanation for the international travel ban to be deemed constitutional. 3. Why was the prohibition on travel not “void for vagueness”? Answer: New regulations adopted by the U.S. Treasury Department clearly defined educational activities within the exemption to include those conducted at international meetings or conferences and those associated with undergraduate or graduate studies. 4. Consider the five cases in the chapter. Can you draw any general conclusions about the relationship between the individual and government with regard to the regulation of imports, exports, international travel, and even international commerce? Answer: This question calls for student opinion. ANSWERS TO CASE PROBLEMS 1. Answer: The International Emergency Economic Powers Act (IEEPA) clearly covers transactions in foreign exchange, transfers of credits and payments, the importation or exportation of currency or securities, and any transactions involving designated individuals or their property. Lindh defended the charges of conspiracy to murder and aiding the enemy by stating that the TWEA and IEEPA laws only apply to commercial or economic impact. Lindh stated he received no financial gain for his activities. The court disagreed with Lindh because the language of the acts did not limit the activities The court interpreted IEEPA broadly to include activities beyond commercial or economic conduct. As such, terms such as “transaction,” “dealing,” “use” and “property” are not limited to commercial transactions but could also cover the rendering of combatant services even if made without compensation. IEEPA evinces a clear congressional intent to grant broad powers to the president in times of a declared national emergency. 2. Answer: According to the Export Administration Act as renewed through annual presidential determination, good and technology do have nationality as their exportation and re-exportation are strictly controlled. The principle of international law at issue in this question is extraterritoriality. Extraterritoriality refers to efforts by a state to apply its laws to occurrences within the jurisdiction of another state. Arguments favoring the extraterritorial application of export control laws include the pursuit of internationally agreed policies, the protection of national security, vital state secrets and military technology, the preservation of economic security, concerns regarding short supply of materials and foreign policy objectives. A particularly strong argument against the extraterritorial application of export control laws is the intrusiveness of such laws upon the national sovereignty of states within which enforcement of foreign law is sought. 3. Answer: This question calls for an opinion. 4. Answer: When technology is shown to (read by) or discussed by (heard by) a foreign national, it becomes a deemed export. A deemed export requires a license. The U.S. government deemed Bernstein’s program an export of U.S.-technical data or fearing national security/computer security ramifications. The U.S. regulates the export of technical data, i.e., technical information about a process that is not available to the general public. Recently, however, the U.S. has allowed the sale of encryption software. This suggests that such information may, indeed, be publicly available (and, therefore, does not meet both requirements of “technical data”). Also, if Bernstein posts the information, he could argue that the information no longer falls within the definition as it now is available to the general public. With regard to national security concerns, where domestic security issues are significant, the government may prohibit the communication of that material. In such instances, it is appropriate for the government to control the export of such information through an export licensure scheme. Bernstein, of course, will argue that he was not exporting information -- certainly not to a forbidden country -- but merely posting it (and, thus, exercising his First Amendment rights). 5. Answer: The U.S. government deemed Bernstein’s program an export of U.S.-technical data or fearing national security/computer security ramifications. The U.S. regulates the export of technical data, i.e., technical information about a process that is not available to the general public. Recently, however, the U.S. has allowed the sale of encryption software. This suggests that such information may, indeed, be publicly available (and, therefore, does not meet both requirements of “technical data”). Also, if Bernstein posts the information, he could argue that the information no longer falls within the definition as it now is available to the general public. With regard to national security concerns, where domestic security issues are significant, the government may prohibit the communication of that material. In such instances, it is appropriate for the government to control the export of such information through an export licensure scheme. Bernstein, of course, will argue that he was not exporting information -- certainly not to a forbidden country -- but merely posting it (and, thus, exercising his First Amendment rights). These comments might suggest that the company is self-imposing a de facto boycott. 6. Answer: These comments might suggest that the company is self-imposing a de facto boycott. 7. Answer: Yes, an electric cattle prod, because it also has other possible uses (law enforcement and crowd control) and is an item that required a license. See Settlement Agreement Between Waters Instruments Inc. and The Bureau of Export Administration found on the Dept. of Commerce Web site. 8. Answer: The Bureau of Industry and Security of the U.S. Department of Commerce defines an export as any item sent from the United States to a foreign destination regardless of how it is sent. Thus, shipments by the U.S. Mail or through courier services may be deemed exports. 9. Answer: Legislation to rewrite and reauthorize the Export Administration Act as set forth in the Export Administration Act of 2007 (S. 2000) had not been adopted by the U.S. Congress at the time of the preparation of the instructors’ manual. The export controls imposed by the Export Administration Act continue to be imposed pursuant to yearly presidential determinations published in the Federal Register. MANAGERIAL IMPLICATIONS The technical information sought to be disclosed may require an export license pursuant to the concept of deemed exported. Deemed exported is the communication or other transfer of technology, technical data, software, encryption technology, computer source code or any other controlled information to a foreign national. As such, the exporter must carefully adhere to the steps regarding the export licensing determination. Subsequent sanctions preventing the issuance of license may be non-actionable assuming they conform to the Export Administration Regulations or were lawfully adopted pursuant to IEEPA. This fact pattern presents a very similar situation to that presented in the Dresser Industries case discussed on page 360. In that case, President Reagan utilized U.S. export control laws to order all American-owned companies and subsidiaries worldwide from exporting goods or technology for use in the Soviet natural gas pipeline project. The ban included U.S. origin goods and technology as well as those based on U.S. patents and technology. States negatively affected by the export ban retaliated by prohibiting their companies from complying with the order. Dresser France, S.A. was faced with the possibility of sanctions under U.S. law or the risk of nationalization by the French government. Ultimately, the Reagan administration’s attempt to assert extraterritorial jurisdiction of U.S. export controls failed, and the prohibitions were eventually rescinded. ETHICAL CONSIDERATIONS 1. One needs to be aware of the Antiboycott regulations, which include an obligation to report inquiries to the U.S. government. If you have reason to know about diversion of any controlled item, you must report this to the government. 2. Students should take into account a variety of considerations. Businesses constantly lobby for changes in the law, so the mere fact of lobbying is not necessarily contrary to the public interest. The primary risk is one of public perception: will your company look (and be) essentially self-serving, sacrificing the public interest for private gain? Many companies seem willing to ask for just such sacrifices. In the international context, the playing field is somewhat different, since U.S. controls alone (even very effective ones) will not guarantee that dual use items and other military application technologies will not proliferate to unreliable regimes and terrorists. The recurring ethical problem is that many companies claim that no regulations are justified since non-U.S. companies will rush into the market breach created by U.S. controls, and that since someone else will do it, “It might as well be a U.S. company.” Perhaps Enzyme, Inc. could lobby for and support stronger international efforts to control the issuance of export licenses for biological and chemical agents with potential military uses. Chapter 14 North American Free Trade Law CASES IN THIS CHAPTER In the Matter of Cross Border Trucking Metalclad Corporation v. The United Mexican States Samsonite Corp. v. United States TEACHING SUMMARY NAFTA is a tri-lateral agreement among the United States, Canada, and Mexico. In part, it resembles an element of the European Union, i.e., a free trade area where goods of the member countries can flow freely and without tariffs among them, with certain dispute resolution mechanisms. NAFTA, however, is not nearly as all-encompassing as the EU, but it is also not as old. Under NAFTA, only certain goods move without tariffs, though others are being phased in. The signatories are also still negotiating requirements to allow individual firms, such as trucking companies, particularly those from Mexico, to cross borders. CASE QUESTIONS AND ANSWERS In the Matter of Cross Border Trucking 1. What were the panel’s holdings with respect to the various restrictions on the free operation of the Mexican trucking industry in the United States? Answer: The panel held that the alleged inadequacies of Mexican safety regulations with respect to the trucking industry were not sufficient to support the U.S. denial of applications of Mexican firms to operate in the United States. That said, the United States could hold Mexican trucks and drivers to the same safety standards applicable to U.S. trucks. Some different procedures are permitted with respect to Mexican trucks as long as they are in good faith and no more restrictive of free trade than necessary. The U.S. restrictions on investment were invalid as they are not related to safety considerations. 2. As noted in the comment to this case, was the opposition to the operation of Mexican trucking companies in the United States based primarily on safety or economic considerations? Answer: This question calls for student opinion. 3. Does the example of the trucking dispute prove that despite NAFTA’s free trade provisions, there are some areas where trade will never be free or without restrictions? Why or why not? Answer: This question calls for student opinion. Metalclad Corporation v. The United Mexican States 1. What was the panel’s decision with respect to the restrictions placed on Metalclad’s operations by Guadalcazar? Answer: According to the Tribunal, Mexico did not have a transparent and predictable framework with orderly procedures as required by NAFTA upon which Metalclad could rely to make its business planning and investment decisions. As a result, the Tribunal held that Metalclad was not treated equitably or fairly. Additionally, the Mexican government’s actions constituted an expropriation, or taking, of property. As a result, Metalclad was entitled to money damages equivalent to the fair market value of the property (and interest). 2. The Metalclad decision and similar cases have been criticized as placing the rights of foreign investors ahead of the rights of local communities with respect to fundamental concerns such as environmental protection. Is this criticism valid? How would you resolve the fundamental conflict between protection of local community interests and investor’s rights? Should the community pay for actions that interfere with the expectations of foreign investors? Why or why not? Answer: This question calls for student opinion. Samsonite Corp. v. United States 1. What was the court’s holding with respect to the application of Section 9802 to Samsonite’s steel strips? Answer: Application of Section 9802 is appropriate where: (1) the imports were assembled in the foreign plant from U.S.-made components, (2) which had been exported “ready for assembly” (without need for further fabrication), and (3) have not lost their physical identity and have not increased in value or condition except by being assembled and except “by operations incidental to the assembly process.” In this case, the strips were not used as exported. Rather, they were bent and shaped by a machine into precise rectangles (the frame of the luggage). The process resulted in the creation of a different object from that which had left the U.S. This transformed the strips of steel into the frames for suitcases, fundamentally altering their nature. 2. Samsonite contended that the bending process in Mexico was less significant than the process upheld as mere assembly in the General Instruments Corp. case. Do you agree? Was the court correct in this regard, or is the purported difference one without substance? Answer: This question calls for student opinion. ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. Answer: Students may update the status of U.S. free trade agreements by visiting the “Pending Free Trade Agreements” page of U.S. Trade Representative’s website located at http://www.ustr.gov. 2. Answer: Decision makers often focus on the presence or absence of a “stable climate” for trade and investment. Generally, Carlos Salinas helped to open Mexico to trade and investment, and during the 1980s the PRI led the country away from restrictive foreign investment laws to more open ones. 3. Answer: This question provides an excellent opportunity for students to debate the role of environmental and workers’ rights protections in a free trade agreement. While both side agreements have failed as yet to bring about significant change in labor and environmental standards, they have succeeded in focusing attention on labor and environmental issues and the impact those issues have on trade (and vice versa). The objective is to serve to encourage evolutionary change and progress and to promote the formation of an equal partnership in resolving labor and environmental problems. Two questions for discussion are: (1) whether the agreements should be strengthened and, if so, how, and (2) if agreements should take a different form, what form(s) should they take? Students wishing to read diverging views regarding this area may compare and contrast the “NAFTA Fact Sheets” page of the U.S. Trade Representative’s website located at http://www.ustr.gov with the pages devoted to NAFTA and other U.S. proposed free trade agreements on the Global Trade Watch website located at http://www.citizen.org/trade. 4. Answer: This implements NAFTA’s national treatment clause, which is similar to that of GATT. The labeling regulations are “neutral” on their face; that is, they apply to goods of both Mexican and non-Mexican origin. Indeed, it might be reasonable to require other kinds of information in Spanish (such as the maximum pressure, for obvious safety reasons). Consequently, they would not violate GATT or NAFTA requirements. As applied, however, they tend to discriminate against goods from non-Spanish speaking countries. For “Big Duster” tires, it is entirely possible that the English words “Big Duster” in raised white lettering would be popular precisely because they are not in Spanish (just like “Two Horses Beer” would not have quite the appeal in the U.S. as “Dos Equis,” or “Crown Beer” would not have the same appeal as “Corona”). 5. Answer: Do not address this in terms of trademark infringement (if you were to manufacture “Kentucky bourbon” in Kentucky), but rather in terms of whether a U.S. firm could market “Canadian Whiskey” in the U.S. without violating GATT or NAFTA. Students may have great difficulty finding any GATT or NAFTA provision that directly governs the kind of fraud suggested here. In the case of a U.S. producer marketing “Canadian Whiskey,” the Federal Trade Commission would probably cite the producer for false and deceptive advertising, not to satisfy U.S. NAFTA obligations, but to protect consumers under U.S. statutory law. If a producer in Canada, the U.S., or Mexico makes a false claim as to a product’s country of origin, NAFTA rules might prevent its import. Under U.S. laws (the Tariff Act of 1930 and the Federal Trade Commission Act) imports must be labeled with the country of origin. If a consumer buys Kentucky Bourbon clearly labeled that it is made in Canada, these laws would not apply. 6. Answer: A NAFTA arbitral panel is convened when the two countries cannot settle their trade dispute before the Fair Trade Commission. Binational panels are convened in antidumping and countervailing duty cases, where an order of an administrative agency is being reviewed. This function is (traditionally) a judicial kind of esquire, and it is not surprising that NAFTA recommends that panelists for binational panels be former judges. This is all the more true in appeals from binational panels to the extraordinary challenge committee. 7. Answer: Goods cannot be imported into any country without knowing and properly reporting their country of origin. In a free trade area, country of origin is important because in making concessions to other countries in a free trade agreement, there is an implied non-concession to other countries not participating in that agreement. Thus, with NAFTA, where the U.S. makes concessions to Mexico and Canada, it is not making concessions to Japan. If tariffs are reduced on certain products being traded among the three NAFTA nations, then tariffs are deliberately not reduced on those certain products originating in Japan. If a car, for example, could be largely assembled in Japan (95%) and some simple “finishing” tasks be done in Mexico, the favorable tariff treatment of that auto based on its Mexican “origin” would make a mockery of the agreement’s real intent. 8. Answer: This question provides an excellent opportunity for students to debate the role of ethics, law, and culture when working abroad. The key in the discussion is the definition of what is “socially responsible.” For example, what American managers may consider “bribes,” Mexican managers may consider the cost of doing business. The social responsibility expectations of American firms in Mexico should not be the same as the expectations of the same company doing business in the United States. However, to the extent that Mexican law requires some “social” responsibility and compliance with environmental, worker health and safety, then the managers must comply. MANAGERIAL IMPLICATIONS 1. Answer: Students should focus on the effect of the change from category 6307.90 to 9404.90 and what the item actually is that Down Pillow seeks to import. Although the category change will have some effect later, once the shell is filled, when the shells cross the border, be it from Canada or China, they are still 6307.90 shells (with an origin of China). Therefore, they will be subject to the quota. If, however, the shells are filled in Canada and then transported into the U.S., there will have been a substantial transformation; the category will change to 9404.90, and thus the tariff will change. Indeed, as the good will have been created or undergone a substantial transformation within NAFTA, a different tariff may apply. Although the goods will contain non-North American parts (the shell), under Annex 401 (the tariff-shift rule), the change in classification will render the completed good a tariff-free NAFTA good. They will also escape any quotas and will be labeled as having been “made” in Canada. The question regarding the goose down raises other issues of origin, as NAFTA applies only to goods originating within NAFTA. Management may also wish to consult the NAFTA Web sites. 2. Answer: Companies should always be looking to optimize profits. When the cost of European materials rose, Down Pillow owed its shareholders a fiduciary duty to continue to return a dividend to the shareholders. The decision to purchase materials from China, economically speaking, was a wise investment. Of course, it would be interesting to see how the Chinese actually produce the down filling, e.g., how are the geese are treated, what process is used to deplume the geese. In terms of contract law, it is foreseeable that given the dynamic nature of the global economy, companies should incorporate force majeure provisions that would give the company a defense to performance (commercially impracticable or illegality) when laws, import tariffs, or customs change. In terms of strategy, Down Pillow should have “diversified” its sources for unfilled shells from a variety of different areas of the world, including Central and South America. Supplemental Case: General Motors Corporation v. United States, 976 F.2d 716 (Fed.Cir. 1992). In General Motors, the Court of Appeals reversed the Court of International Trade and held that automotive topcoat painting operations performed on sheet metal component parts shipped to foreign countries for assembly into automobiles were not “operations incidental to assembly” within the meaning of Section 807 (now 9802). As the opinion described: The Ramos Arizpe assembly process is described as consisting of five operation groups: body shop, paint shop, chassis line, trim shop, and final process. In the first group, body shop, major component subassemblies are fitted together and spot welded to create the body of the automobile. In the second group, paint shop, the body is cleaned and sprayed with a protective zinc phosphate compound, submerged in an electro deposition primer tank, baked, sanded, treated with a sealant, and then baked again. This is followed by an application of surface primer. At this point, topcoat (finish) paint is applied and the body is oven cured. Finally the body is waxed and sent along to the trim shop. In the trim shop, certain internal components are installed and water testing is performed. Next, in chassis, while the radiator, grille, and gas tank are attached to the body, the engine, transmission, and frame are independently sub-assembled on a separate conveyor. The body and frame are then joined, and the bumpers, radiator, and tires are installed. The last operation is final process wherein manual detail work, sundry inspections, wheel alignment, and final drive tests are performed. The finished vehicle is then reshipped to the United States for sale. Upon the re-entry of the vehicles at issue here into the United States, GM sought a tariff allowance for the value of the sheet metal components manufactured in the United States, in accordance with item 807.00, TSUS . . . (which provides for an allowance for “operations incidental to the assembly process such as cleaning, lubricating, and painting”). GM urged that the issue could be resolved by relying on the plain language of the statute and that item 807.00 expressly enumerates painting as an acceptable operation incidental to assembly. The court, however, disagreed. It, instead, found that the statute's reference to “painting” was simply an exemplar of an operation that is potentially “incidental to the assembly process,” not a definitive statement that all painting operations, no matter how extensive, are allowed under item 807.00(c). To determine whether a minor operation is incidental to the assembly process, one should consider: (1) whether [i] the cost of the operation relative to the cost of the affected components and [ii] the time required by the operation relative to the time required for assembly of the whole article were such that the operation may be considered “minor”; (2) whether the operations in question were necessary to the assembly process; and (3) whether the operations were so related to assembly that they were logically performed during assembly. As applied here, the court concluded that the capital investment in machinery and equipment in the paint shop is more than five times that in the body shop where significant assembly operations are performed, demonstrating that the paint shop operations are not within the scope of item 807.00(c). ETHICAL CONSIDERATIONS This question calls for student opinion. Students may apply several different ethical theories in reaching their conclusions. For example, a moral relativist might contend that the maquila industry is appropriate given Mexico’s status as a developing economy and the level of skill of a significant portion of its workforce. However, a moral relativist could also argue that, although perhaps appropriate at the present time, the maquila industry is not a viable long-term strategy for economic prosperity. Utilizing a utilitarian point of view, students may conclude that the maquila industry is ethical given that it results in the greatest overall good for the community by providing economic growth for Mexico and jobs for Mexican workers. However, a utilitarian approach may also conclude that the maquila industry will not result in the greatest overall good for the greatest number in the long term, especially with respect to environmental protection and labor rights. By contrast, divine command theory may find the maquila industry objectionable to the extent that it encourages the exploitation or mistreatment of labor contrary to human dignity. Maquiladoras may also be subject to condemnation pursuant to the categorical imperative as no one would wish for the practices within the industry to become universal laws with respect to the treatment of laborers engaged in manufacturing. The industry is subject to further condemnation to the extent that it treats workers as a means to an end. Finally, the lack of fairness and equalitsy in the maquila industry may subject it to criticism pursuant to contractarianism. Exploitation of labor, to the extent it occurs in the industry, may also be deemed to violate the duties and responsibilities placed upon employers with respect to low skilled workforces in developing economies. Solution Manual for International Business Law and Its Environment Richard Schaffer, Filiberto Agusti, Lucien J. Dhooge 9781285427041
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