Originally published by the Journal of Commerce in September 2019

As we continue to be engulfed by the ever changing landscape of the China 301 tariffs, a bit of fresh air – meaning other topics – were actually discussed as a recent trade event. The Foreign Trade Association hosted a program in Los Angeles at which the Port Director spoke. Her comments were followed by a panel discussion at which the speakers were the Special Agent in Charge for Homeland Security Investigations (“HIS”), the Director of the Customs and Border Protection (“CBP”) Electronics Center For Excellence and Expertise, and another trade lawyer. Yours truly had the pleasure of moderating.  What made the situation even more informative was none of the speakers came to make speeches. Rather, the format was a list of pre-set questions.

What came out were some key points for international traders to keep in mind in addition to the 301 tariffs.  First, the di minimis or Section 321 entries are really limited to $800 in value and one per entity per day. This means one must make sure to not look like you are structuring shipments – meaning you cannot divide them up so the individual values are $800 or less so as to avoid formal entry.

Another point that was repeated is the need to screen business partners and know with whom you are dealing.  This is a mantra of the C-TPAT program and the concept of trusted traders, so nothing new there.

Given the current enforcement environment, a point was made that seemed obvious and surprising – do not loan out your bond. In other words, do not allow others to use your bond.  What makes this point remarkable is CBP has for some time been carefully looking at shipments out of China, and this pre-dates the current efforts by the Trump Administration. For the last 3+ years, CBP has been challenging the right of companies stated as the importer to be the importer of record, mostly foreign entities but often U.S. based companies. CBP has approached this as a right to make entry issue, and so not subject to the detention process or timeline.  Rather, CBP rejects the entry, demands a laundry list of documents establishing who ordered the goods, who is paying for them, and so on. It then generally takes several weeks to get a decision and typically, in the end, CBP demands the U.S. buyer make entry, not the originally designated purchaser.  It does not take long to sort out what triggered the inquiry was the original value declared on the first entry was seen as too low.  What this also points out is the amount of game playing being conducted by foreign importers. The goods are sold  on a DDP term of sale, but by depressing the price, the overall amount of duty paid is reduced, thereby lowering the overall cost. As the cost of labor in China has gone up, the incidence of these attempts has become more widespread.

A new tool that CBP has begun to implement is to audit the customs broker, and use documents collected in the course of that audit to then initiate audits of the DDP/foreign importers.  Very often, the first step by CBP is to reach out to the foreign importer and demand a copy of each power of attorney that importer has issued to its customs brokers, with the caveat, the importer may not ask the broker for a copy of the power of attorney it received!

A dead giveaway in this context is those shipments which are marked as subject to a DDP term of sale, but when the invoice is produced, it states on it the freight and duty are not included. Obviously, if the freight and duty are not included in the invoice price, the shipment was not sold on a DDP term of sale. As such, the foreign seller does not qualify as the importer of record.  If that is the case, then the U.S. buyer is the importer and duty should be paid on the FOB value of the goods at which the U.S. buyer purchased those goods.

Interestingly, the prudent brokers are asking the foreign sellers to confirm the accuracy of the invoice values presented.  More often than not, the foreign seller is smart enough to not tip his hand to the customs broker. How those foreign sellers/importers will handle CBP’s demand for proof of payment in any subsequent inquiry remains to be seen. Not surprisingly, many of the owners simply close one company and open another.  For that reason, the bonding companies have become much stricter in what they are willing to underwrite for foreign importers of record.

In addition to the focus on value, another point made at the FTA program was that CBP’s priority trade issues continue to be where CBP and HSI put their efforts: Agriculture and Quota, Antidumping and Countervailing Duty, Import Safety, Intellectual Property Rights, Revenue, Textiles and Wearing Apparel and Trade Agreements.  Not to be lost in the shuffle is transshipment and the Enforce and Protect Act, and forced labor, including North Korea.

One equally remarkable point is despite being given several opportunities to do so, neither the HSI nor the CBP speaker directed comments to the making of traditional trade fraud cases, i.e., those related to classification or value. Certainly the news has made clear that evasion for the purpose of avoiding, for example, antidumping duty will result in criminal convictions and civil fines. However, what this session again made clear is the challenges and limited resources both agencies face when it comes to bringing trade fraud cases. In the face of this fact, both agencies have had to get creative in catching violators and so we see CBP asserting right to make entry as a means to deal with those challenges.

Effective on January 1, 2019, SB 1402 requires beneficial cargo owners to be jointly and severally liable if their port trucking company has unpaid wage or worker’s compensation debts. Adding to the cost of doing business in California, now we have AB 5, which is expected to totally upend the relationship between port truckers and their drivers. As is common knowledge, those drivers are generally paid as independent contractors. AB 5 has been signed into law. Its effect is that port truckers will either have to treat their drivers as employees or adopt a different business model. In the background lurks a legal challenge and, with it, the possibility the Federal Aviation Administration Authorization Act could preempt California law. This is because the Act gives the federal government and not the states regulatory authority over interstate trucking.

Also in the legal arena comes the August decision in U.S. v Cano, 2019 WL 38500607 (April 10, 2019). In this decision, the Ninth Circuit has reinforced the basic rules about search and seizure when it comes electronic devices. A manual search in the context of a border search of an electronic device is permitted because border searches are an exception to the Fourth Amendment right against unreasonable search and seizure.  However, the ability of the government to conduct such a search ends when that search becomes “too intrusive”.  The court went on to confirm that a manual search is permitted under the border search exception, but a forensic search is not.  One can easily understand the border search exception is designed to allow government officials to determine if someone is admissible (and this is understandable even in the face of recent news regarding foreign students returning to school  who are barred entry into the U.S.; this leaves us to debate how far the results allow that official to go in exercising his or her discretion, but that is an altogether different topic). Such a manual search is also understandable in the context of identifying and seizing contraband, but no further. If there is a reasonable suspicion to conduct a forensic search, the Ninth Circuit underscored the basic rule of law – if you want that evidence, go get a search warrant!  Travelers are warned to keep in mind, this is the rule in the Ninth Circuit only. Other federal circuits have not reached the same result.

And finally, because 301 tariffs are consuming us all, there are two quick points to add on this topic. First, China has filed its complaint about the 301 tariffs against the U.S. at the World Trade Organization – https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds587_e.htm. Also, as U.S. companies purchase goods from foreign suppliers, prudence dictates a careful study be done as to the origin of those goods.  Just because the supplier tells you the goods are not made in China does not mean those goods are not Chinese origin.  Upon importation, origin is determined under U.S. law and each country defines origin differently. The simplest illustration to show how complex the analysis can become is the U.S. does not recognize simple assembly (5 or fewer steps) or dilution to change origin. As such, the time has come for international traders to ask many more and very probing questions before agreeing to any deal, especially in the face of the 301 tariffs. Make sure you have the right trade advisers around you and rely on their talents early and often. Yes, there is a cost associated with doing so, but it will consistently be less than the cost of the huge problems you will face if things go wrong! In other words, this is money well spent!