Key Aspects of Commerce Plan to Tighten Duty Enforcement

In this article for Law360, Kirkland attorneys Mario Mancuso, Sanjay Mullick and Carrie Schroll discuss a proposed rule recently issued by the U.S. Department of Commerce to increase its administration and enforcement of U.S. anti-dumping and countervailing duty laws. The authors say the rule could have serious ramifications for importers and those considering investing in companies involved in or with exposure to imports.

On Aug. 13, the U.S. Department of Commerce issued a proposed rule to increase its administration and enforcement of U.S. anti-dumping and countervailing duty, or AD/CVD, laws.

Unlike other tariffs that are directly tied to the trade war (e.g., Section 232 of the Trade Expansion Act, Section 301 of the Trade Act), these trade remedy actions represent a long-standing Commerce Department practice, which will outlast the outcome of the November election.

The proposed changes could have serious ramifications for importers, as these duties are often punitive in nature and can be applied retroactively.

For those considering investing in companies involved in or with exposure to imports, or examining their supply chains in light of COVID-19 and trade tensions with China, implementation of these changes could trigger significant new costs that adversely impact value chains, warranting proactive risk assessment.

AD/CVD Laws

The Commerce Department is required to impose anti-dumping duties when it determines that foreign merchandise is being sold into the U.S, at less than fair value as compared to prices in the home market. It is generally required to impose countervailing duties when it finds that the manufacture, production or export of foreign merchandise imported into the U.S. is being subsidized by a government or public entity.

If as a result of these practices the corresponding U.S. industry is being materially injured, or threatened with material injury, then AD/CVD orders are imposed, increasing the costs of importation. As stated by the Commerce Department, the intent of the AD/CVD laws is "to protect U.S. companies, workers, farmers, and ranchers from the injurious effects of unfairly traded imports."

The Proposed Rule

The proposed rule concerns several aspects of AD/CVD laws, such as what products get captured by the duties; the Commerce Department's scrutiny of potential evasion of duties; treatment of companies that request their own duty rates; representations the Commerce Department requires from importers; and coordination the Commerce Department conducts with other agencies.

Below are details on these key aspects, and parties have until Sept. 14 to submit comments.

Scope Inquiries

AD/CVD duties are imposed on all imported products identified on or interpreted to be within the scope of the underlying AD/CVD order. Parties can make scope inquiries with the Commerce Department when there are questions about whether a particular product is covered.

The rule proposes to eliminate informal scope rulings, which can take as little as 30-45 days, and instead issue only formal ones, which can take up to 180-300 days. Parties uncertain about the status of their products will either have to wait upward of a year to find out, or proceed to make imports and risk that additional duties will be owed.

This is particularly important, as the Commerce Department also clarified that scope rulings apply to all unliquidated entries of merchandise. Unliquidated entries are imports for which U.S. Customs and Border Protection still has not processed the paperwork finalizing the final duties owed, which itself can take almost a year after the actual importation.

Therefore, if a party imports products believing they are not within the scope of an AD/CVD order, but the Commerce Department issues a scope ruling to another party determining that they are, the first party can still be liable for AD/CVD payments for its merchandise even after the fact.

Given how significant AD/CVD can be (e.g., 200% rates), unexpected duty payments could seriously impact a company's bottom line. Prospective investors in a company with significant imports should closely assess whether imports may fall within an AD/CVD order and whether any pending scope inquiries could impact the supply chain. Otherwise, large and unanticipated duties could arise after a deal closes and alter the value proposition.

Circumvention Inquiries

Even once AD/CVD orders are in place and their terms understood, there regularly are allegations that parties seek to circumvent them.

The rule proposes a designated procedure for the Commerce Department to self-initiate inquiries of circumvention of AD/CVD orders and review those inquiries received from third parties, "to aggressively pursue parties that seek to skirt them." In particular, the Commerce Department's authority to self-initiate circumvention inquiries suggests it may seek to use this tool to more aggressively address loopholes and bad actors.

Of note, the Commerce Department can issue countrywide circumvention determinations, concluding that one party's circumvention is indicative of a pattern of behavior in a particular country, and that all parties in that country will be subject to AD/CVD that had previously been circumvented. The Commerce Department could use this authority to broadly target suppliers in countries of concern, e.g., China, which could significantly disrupt supply chains and increase AD/CVD payments for existing imports.

New Shipper Reviews

Since AD/CVD orders are imposed based on an investigation that occurred in a particular year, at times companies will later argue they should receive their own duty rates because they did not make shipments during the time period the original rates were established.

The rule seeks to raise the bar for such new shipper reviews, as the Commerce Department indicated its goal was to reduce the number of such reviews and address what it believes are abuses of the system.

Under the rule, an exporter or producer will need to demonstrate a bona fide sale into the U.S., which includes providing a certification from an unaffiliated U.S. customer agreeing to provide the Commerce Department with any requested information about its purchase of the merchandise. However, it may be challenging for new shippers to convince a prospective customer to provide such a certification, as it exposes them to inquiries from the Commerce Department.

As the Commerce Department scrutinizes new shippers more carefully and limits those who can request and successfully obtain a separate rate, this could make it more difficult to overcome the applicability of higher overall AD/CVD rates.

Entry Certification

Though AD/CVD duties nominally are imposed on foreign companies and at times foreign countries, the U.S. importer is the party that actually has to pay them. Generally, import documents will identify the product, its tariff classification, and the applicable duties.

The rule would permit the Commerce Department to impose a requirement, as part of a particular AD/CVD proceeding, that importers and other interested parties also provide a certification as to whether AD/CVD apply to imported merchandise.

If a party fails to certify or provides false information in a certification, the Commerce Department can direct CBP to collect from the importer cash deposits for the AD/CVD at the applicable rate.

As part of acquisition due diligence, it will be important to review compliance with potential certification requirements, even if import documents do not readily identify that AD/CVD applies. Otherwise, a mere foot fault on submitting certifications could lead to major costs for which an importer did not budget, disrupting profit projections and value propositions.

Coordination With Customs and Border Protection

The rule puts in place procedures by which the Commerce Department is to review and action referrals from CBP that certain imports may be covered merchandise, i.e., subject to AD/CVD duties. These include the Commerce Department making a covered merchandise determination, as well as using the information it receives to form the basis of its own scope or circumvention inquiry.

Since CBP administers imports on a day-to-day basis and itself receives referrals from parties and from other government agencies, this reflects greater interagency coordination, ratcheting up AD/CVD enforcement.

Takeaways

• The rule signals the Commerce Department is serious about collecting import duties and is looking to make it tougher for parties to avoid their application.
• Supply chain diligence takes on heightened importance to identify risks of future large AD/CVD payments that can apply both retroactively to historical imports and prospectively to import activity going forward.
• Those investing in or acquiring companies who engage in import activity could face uncertainty as to the accuracy of profit projections if the Commerce Department cracks down on AD/CVD enforcement and closes loopholes on which suppliers and importers may have historically relied.
• Companies with exposure to sourcing from China will likely continue to see supply chain disruptions from enforcement of AD/CVD laws regardless of the outcome of the November election.
  
  

Mario Mancuso is a partner at Kirkland & Ellis LLP, leader of the firm's international trade and national security practice, and former undersecretary of commerce for industry and security. 

Sanjay Mullick is a partner at Kirkland.

Carrie Schroll is an associate at the firm.