US Takes a Wrong Turn on Auto Exports

One of the most interesting aspects of practicing international trade law is you never know what issues you’ll confront, particularly those that are really off-the-wall.

By way of illustration, it became public in April that the U.S. government is conducting a criminal investigation into companies — not automakers — that purchase vehicles from local dealers and export them. One of the more bizarre statements in the public pronouncement about the first prosecution was from the assistant U.S. attorney handling the case, who said it’s illegal to export new vehicles from the U.S. 

There is, of course, no such ban. The only relevant provision in the law involves a long-standing vetting procedure designed to prevent stolen cars from being exported. That process, called the 72-hour rule, mandates that certain documents must be presented in advance of loading when a used car is exported.

Equally bizarre is the allegation that whether the cars are declared as new or used in the U.S. has a bearing on how they are declared when imported into the country of destination. Admittedly, many of these vehicles end up in Asia and many of those Asian countries have high tariffs and other significant trade barriers to the importation of new cars.

You’d hope and expect that government attorneys would do their homework before making statements. Here, they clearly did not. They simply tried to leap a chasm with faulty logic and are getting away with it because most journalists and readers don’t know the questions to ask to debunk their fable.

If the prosecutors had done their homework, they’d know the buyer, not the seller, dictates how a product is declared at the time of entry. Further, the U.S. Census Bureau has jealously guarded the confidentiality of the data it collects through the Automated Export System, so even if a car were declared incorrectly at time of export, that data isn’t shared with the importing country. 

Therefore, even if you assume for purposes of discussion that these vehicles don’t qualify as used cars as defined in the law, how does that translate into how they are declared when imported? When the cars, like any other products, get to China, Vietnam or anywhere else, it’s the buyer who dictates to his customs broker to declare them as used — presumably thereby evading the high tariffs. Does anyone doubt cheating takes place? No! But if it’s happening, how is the American seller at fault?

At this point, our automaker colleagues will tell you their companies have a vested interest in protecting their brands, and legitimately so. At the same time, U.S. car dealers face a dilemma. Their agreements with the automakers generally include a provision whereby the dealer agrees not to sell cars for export. Breach of that agreement can lead to penalties, surcharges, loss of vehicle allotment and other financial penalties from the automaker.

Nonetheless, you have to ask what a dealer’s to do when it wants to make sales? Suppose the model or line isn’t selling. Suppose there are other reasons for excess inventory, such as a lousy economy. Should the dealer sit on that inventory or, like many of the dealers selling for export, should they be allowed to sell to whomever will buy from them?

Some dealers selling European cars, at least in some parts of the country, apparently are demanding that anyone who purchases a vehicle from them must agree in writing that the car is intended for use in the U.S. and not for export. The government’s basic argument is the buyers purchasing the cars are defrauding the manufacturers or dealers by concealing their intent to export. From what we know about the facts and circumstances, we have serious doubts that anyone is in the dark, but a resolution of the government’s allegations is best left to a court of law. 

In the meantime, as we have learned more about these cases, the question we keep coming back to is this: Why is the federal government involved in what is a civil dispute between automakers and dealers? Both sides, after all, have the resources to fight it out, so let them! By taking the tack they have, federal prosecutors have sided with automakers at the expense of the dealers and their buyers.

Who ends up hurt? The taxpayers! When dealers don’t make sales, their owners lose revenue, salespeople lose commissions, and the government at many levels loses tax revenue. How does any of that make sense?

Oh, and by the way, isn’t it grand that our own federal government is taking even more steps to ship additional jobs overseas by preventing American dealers from selling to foreign markets? Great way to help the economic recovery!

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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