Commentary: Customs, Importers in a Bind Over Bonds

A surety company that’s a big player in the Customs bond market recently sent a notice reminding customs brokers that an importer with a continuous bond is a higher risk indicator if the agency starts demanding single transaction bonds. The surety, though correct, didn’t go far enough in explaining the overall situation.

A couple of months ago, Customs received information leading it to question whether bedroom furniture arriving from Vietnam and Malaysia was really being made in those countries. Allegations arose that the furniture is actually from China, and, if true, anti-dumping duties of more than 200 percent are owed.

This situation is another example of Customs being caught between competing demands. The companies bringing the anti-dumping case argue that if you just look at the significant drop in quantities from China and the corresponding increases from Vietnam and Malaysia, the only plausible answer is transshipment.

But Customs also faces pressure from the importing community, which expects the agency to release notices when issues are identified but otherwise expects a smooth importing process. The importing community’s question concerns whether the right tools were selected and properly applied once Customs decided there was a potential origin issue with the furniture.

Let’s start with some basics. In this context, origin is determined by where the wood is cut into the size and shape from which the furniture is made. The initial anti-dumping case was brought in 2004, so more than enough time has passed for factories to be set up in other countries and operating at full capacity.

Second, China’s labor costs are about three times those of Vietnam, at least in this industry. So if transshipments were taking place, the wood would have to be cut in China and the furniture made elsewhere. (The costs are even more prohibitive if the finished furniture is shipped from China to a third country for sale to the U.S.)

A large chunk of the cost in making this furniture is tied to the equipment and labor used to cut the wood. It doesn’t make sense to do that in China and then incur the costs of the relatively inexpensive processes associated with making the furniture in Vietnam. Admittedly, the labor cost is different in Malaysia, but the logistics routes and costs also make no sense from China to either country. Further, when the case was originally brought, domestic buyers warned production would shift from China to other countries, as it now has.

Meanwhile, Customs also is getting heat from Congress, which says the agency doesn’t collect enough of the anti-dumping duties assessed.

So, when confronted with these contradictory pressures, what did Customs do? It started demanding single transaction bonds. Is that the right first step? Customs’ thinking presumably was to get additional security in case the goods are really from China, and ask questions later. None of us is naïve enough to think transshipment isn’t occurring to some degree in many industries — there are always cheaters out there — but in this case Customs proceeded without any tangible evidence, just a bunch of complaints.

What should Customs have done instead of immediately going to single transaction bonds? One step should have been to study its own data, determine whether the increases occurred over time or suddenly, and in what quantities and from what factories. Based on those findings, if warranted, Customs next should have sought production records from a handful of importers and then re-evaluated its findings.

Perhaps a better second step would have been for the agency’s Immigration and Customs Enforcement colleagues to visit with in-country authorities, obtain details about production capacities in those countries and maybe visit some of the factories.

What Customs lacks is a well-considered protocol to rely on when serious transshipment allegations are made, along with a shorter protocol to establish when allegations are nothing more than competition complaints. The current haphazard approach is hugely disruptive because it leads to contradictory outcomes triggered by the decisions of the staff at the port of entry.

In some cases, Customs thought the furniture was restricted or prohibited, so it wanted single transaction bonds at three times the product’s value. Once it was clear single transaction bonds were Customs’ first enforcement step, some import specialists rejected 7501s and wouldn’t accept their refilling without a single transaction bond. In other words, because of confusion on Customs’ part, some importers with more than one bond are at risk for a single entry.

Sureties also face unnecessary financial risk because they often don’t identify the single transaction bond requirement as being focused on a given industry until they have significant potential exposure and, at some point, they refuse to write any more bonds for given importers.

U.S. importers also are being squeezed. They must obtain their own single transaction bonds, which often require full collateral, or, if they ship direct, their customers are demanding concessions (reduced prices, long credit terms, etc.) because of the resulting delivery delays and added costs related to production records demands.

If it was only one request (or a handful) per importer, it might not be so bad. But in some cases, Customs is demanding importers provide production records from all their factories and suppliers. While we attorneys are fans of Customs’ efforts to employ us fully, isn’t there a better way?

Susan Kohn Ross is an international trade attorney with Mitchell Silberberg & Knupp in Los Angeles. Contact her at skr@msk.com.
 

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