Originally published by the Journal of Commerce in June 2012.

One of the surety companies, which is a major player in the Customs bond market, recently sent a general notice reminding customs brokers that when an importer has a continuous bond, it is an increased risk indicator if CBP starts demanding single transaction bonds. While the surety is correct, it did not go far enough in explaining the overall situation.

A couple of months ago, CBP received information leading it to question whether bedroom furniture arriving from Vietnam and Malaysia is really made in those countries. The allegation is the furniture is actually from China and if so, significant antidumping duty (200%+) is owed. This situation is another example of CBP caught between competing demands. On the one hand, the companies that brought the antidumping case are saying if you just look at the significant drop in quantities coming from China and the corresponding sizable increases from Vietnam and Malaysia, the only plausible answer is transshipment. Domestic industry is a stakeholder with CBP, as are the Dept. of Commerce and the International Trade Commission which administer these antidumping cases. So, some form of response by CBP is to be expected. Also applying pressure to CBP is the importing community which expects notice from the agency when issues are identified and otherwise expects a smooth importing process. The question from the importing community is once CBP decided there was an origin issue with the furniture, were the right tools selected and properly applied?

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 antidumping case was brought in 2004, some 8 years ago. So, more than enough time has passed for factories to be set up in other countries and operating at full capacity. Second, the cost of labor in China is about three times that of Vietnam, at least in this industry. So, if transshipment was 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 actually shipped from China to a third country for sale to the U.S.] A large portion of the cost in making this furniture is tied to the equipment and labor used to cut the wood. It does not make economic sense to do that in China and then incur the costs of the relatively inexpensive (by comparison) 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 that production would shift away from China to other countries, as it now has.

Another party pushing CBP is Congress which complains the agency doesn’t collect enough of the antidumping duties assessed. So, when confronted with these contradictory pressures, what did CBP do – it starts demanding single transaction bonds. Is that the right first step? Presumably CBP’s thinking was get some additional security in case the goods are really from China, and ask questions later. None of us is naïve enough to think transshipment is not going on to some degree in many industries, there are always cheaters out there, but CBP proceeded here without any tangible evidence, just a bunch of complaints.

What should CBP have done? Well, instead of immediately going to single transaction bonds, CBP could have started by doing two things. The initial step should have been to study its own data, determine whether the increases occurred over time or all of a sudden, and in what quantities and from what factories. Based on those findings, if warranted, the next step might be seeking production records from a handful of importers and then reevaluating its findings. Perhaps a better second step was to have CBP’s ICE colleagues visit with in-country authorities, obtain details about production capacities in those countries and maybe even visit some of the factories. What CBP lacks is a well considered protocol to rely on each time there are serious transshipment allegations made, along with a shorter protocol to establish when those allegations are nothing more than competition complaints. The haphazard approach currently being employed is hugely disruptive. First, it leads to contradictory outcomes triggered by the decisions of the staff at the Port of Entry where the goods happen to arrive. For example, in some cases, CBP thought the furniture was restricted or prohibited and so wanted single transaction bonds at three times value. Once it was clear single transaction bonds were the first enforcement step by CBP, some Import Specialists untimely rejected 7501s and would not accept their refilling without a single transaction bond. In other words, because of confusion on CBP’s part, there are importers with more than one bond at risk for a single entry!

Additionally, sureties are being put at unnecessary financial risk as they often do not 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.

American importers are also getting squeezed. Either they must obtain their own single transactions bonds which often require full collateral, or, if they ship direct, their customers are demanding concessions (reduced prices, long credit terms, etc.) due to the resulting delivery delays and added costs resulting from production records demands. Another consideration – if it was only one request (or a handful) per importer, it might not be so bad. However, in some cases, CBP is demanding importers provide production records from all their factories/suppliers! While we attorneys are always fans of the lawyer full employment efforts of CBP, isn’t there a better way?