Judge Wallach Elevated to the Federal Circuit

Judge Evan J. Wallach was two days ago unanimously confirmed by the U.S. Senate to serve as a Circuit Judge at the U.S. Court of Appeals for the Federal Circuit (“CAFC”) in Washington, DC. For the previous sixteen years he presided at the U.S. Court of International Trade (“CIT”) in New York City. Although CIT decisions have been directly appealable to the CAFC since the specialized appellate court was established in 1982, Judge Wallach becomes the first CIT jurist to sit on the CAFC.

His confirmation contributes greatly to the international trade law expertise needed on the CAFC.  Building on the 2011 appointment of Circuit Judge Jimmie V. Reyna, a seasoned trade practitioner, the CAFC now has a stronger technical background to resolve appeals from the CIT. While these cases constitute a minority of the CAFC docket, their resolution is central to the administration of our trade laws.

One significant issue that the CAFC will grapple with is the calculation methodology in antidumping (“AD”) proceedings known as “zeroing.” After years of consistently affirming the use of zeroing, the CAFC this year remanded for the U.S. Department of Commerce (“Commerce”) to explain its statutory basis in Dongbu Steel and JTEKT. The CAFC ruling on the validity of Commerce’s rationale for zeroing in AD administrative reviews will impact the availability of trade relief.

Another area of expected litigation involves the circumstances under which Commerce may apply an adverse facts available (“AFA”) rate to uncooperative respondents in AD proceedings. The CAFC last year issued a pair of opinions reaching opposite conclusions in Gallant Ocean (Thailand) and KYD (both on appeal from Judge Wallach). These rulings create uncertainty as to when an AFA rate can be employed.

The CAFC is also likely to continue to wrestle with the bounds of CIT jurisdiction. In three decisions this year, the CAFC reversed CIT efforts to dismiss and remanded with instructions to reactivate cases: Almond Bros. Lumber; Hartford Fire Insurance; and Home Products International. Although this trio of cases involves different aspects of trade law, the common theme is an enlargement of CIT jurisdiction by the CAFC. For this issue – and, indeed, all trade-related matters – a former CIT judge sitting on the CAFC undoubtedly benefit the orderly administration of our trade laws.

Surge of enforcement and surety-related cases filed at the U.S. Court of International Trade in the first half of 2011

Twelve new enforcement actions were filed at the U.S. Court of International Trade (CIT) in the first six months of 2011. The government is commendably increasing its efforts to investigate and prosecute duty evasion. These cases involve multiple circumvention schemes, such as mislabeling in Kenpo Jeans and Active Frontier Int’l where merchandise was identified as from Indonesia despite allegedly originating in China. Transshipment is featured in Rupari Food Services  that claims Chinese crawfish was repacked in Thailand to evade duties. This one of many new seafood enforcement actions attests to the government taking steps to address the rampant import fraud plaguing the U.S. seafood market.

Softwood lumber is another vital American natural resource industry that is the subject of recent CIT prosecution. Forest Products Northwest details a brazen evasion scheme where lumber was allegedly glued together for import as wood panels to avoid duties. According to the Complaint, the company admitted ripping the panels apart after import and then selling the lumber domestically. The CIT entered default against the only Defendant, leaving the government to collect monies owed. This may prove difficult if the company is insolvent.

These new enforcement actions typically seek uncollected duties from both the company importing the merchandise and its surety. In Country Flavor, Vietnamese fish fillets were misclassified as duty-free “broadhead” fish. Subsequent testing by U.S. Customs and Border Protection (Customs) revealed that the fish was in fact pangasius subject to duties. The CIT entered default against the seafood importer and the case will proceed against the surety. Y & L Enterprise, also a new seafood prosecution, asserts claims against two insurance companies in addition to the crawfish importer.

Sureties are both defendants and plaintiffs at the CIT this year. Hartford Fire Insurance is yet another new prosecution seeking unpaid duties on imported crawfish. Besides being the only Defendant in this enforcement action, Hartford Fire is aggressively suing the United States to recover duties paid under protest on frozen shrimp, garlic, honey, canned mushrooms, pencils, polyethylene bags, and wooden bedroom furniture. In 34 cases it filed so far this year, Hartford Fire claims that its bonds were unenforceable due to facial defects or unauthorized agency practice. These recent cases augment dozens of others brought by Hartford Fire since 2007 challenging its obligations to the U.S. Treasury.

One new surety-related lawsuit, Ocean Duke, challenged the enhanced bonding requirements (EBRs) that Customs applied on shrimp imports subject to antidumping duties between 2005 and 2008. Different plaintiffs successfully invalidated their EBRs in 2009, when Judge Stanceu in Nat’l Fisheries Institute held that those EBRs were arbitrary and contrary to law. Ocean Duke tried having its EBRs cancelled administratively before filing the lawsuit in May that was dismissed as untimely by Judge Barzilay on July 18.

Taken together, these cases highlight the importance of bond requirements to the efficacy of our trade remedy laws. Absent appropriate security, Customs is left with little ability to address fraud such as that alleged in the CIT enforcement actions filed this year. At the same time, sureties and importers may resist efforts to improve bond obligations. CIT litigation to hold sureties accountable for duties owed will undoubtedly continue.

Yet Customs recognizes that action must be taken. In its May 2011 Report to Congress entitled Antidumping and Countervailing Duty Enforcement Actions and Compliance Initiatives: Fiscal Year 2010, Customs laments the CIT’s having struck down EBRs and states the need for “a risk-based bonding policy” setting higher amounts for merchandise frequently imported without applicable duties. Widespread evasion of antidumping duty orders is forcing Customs to revisit the bonding obligations for imports of products subject to antidumping duties. Customs has no choice but to develop bonding requirements that reduce the revenue risk posed by duty evasion.

For these measures to effectively address the problems presented and withstand judicial scrutiny, cooperation between trade-impacted domestic industries and sureties is essential. Domestic industries can help sureties understand and measure the risks of schemes to evade antidumping duty orders. Sureties can, in turn, better price the risk associated with specific importing patterns. This synergy will maximize duty collection at a time when the U.S. Treasury cannot afford the continued revenue loss caused by circumvention.

Safeguards gain traction at the WTO

Yesterday a WTO panel upheld the U.S. “special safeguard” tariffs on Chinese tires.  Many will note that this is the first time a WTO body has upheld a U.S. “safeguard” measure.  After the United States lost a string of safeguard cases at the WTO a decade or so ago, the temporary “safeguard” had largely receded from the trade law toolbox until the Chinese tires case in 2009.

That this measure targeted China – a country whose mercantilist trade policies cause concern throughout the world, and presumably in Geneva as well – no doubt played a role in the outcome.  Still, this case presented an unlikely candidate to be the first safeguard action to pass WTO muster.  The original 2009 petition was filed by the United Steelworkers, without the support of a single U.S. tire producer – in fact, the petition was actively opposed by a sizeable portion of tire companies producing here.  If even U.S. producers didn’t want temporary tariff protection from Chinese imports, one might legitimately wonder how strong the argument for imposing tariffs could possibly be.

China argued to the WTO panel – as it did to the U.S. International Trade Commission – that U.S. producers, not Chinese exporters, were responsible for the surge in Chinese tire imports.  According to China, U.S. producers “were engaged in a long-term strategy that led them to voluntarily close high-cost U.S. plants . . . and shift production in the United States towards the higher-end segments of the market” (para. 7.266).  Indeed, the panel noted China’s argument that “U.S. producers are ‘global companies with global sourcing strategies,’ and that their ‘operations in China have enhanced their profitability’” (para. 7.267).  In other words, China’s case against the tariffs was that U.S. producers not only weren’t injured by Chinese imports, they actually benefitted from shifting high-cost U.S. production facilities to low-cost China.  That might explain why no U.S. producer would publicly support the union’s request for duties on Chinese tires.  In any event, the ITC majority didn’t think the evidence, on close examination, supported China’s story, and the WTO panel concluded that, on balance, the ITC analysis was a fair reading of the record.

But even if China’s theory were completely true, the ITC and the WTO would have been right to reject this argument.  The trade laws (antidumping, countervailing duty, and safeguard) provide an opportunity for relief when the ITC finds that imports are causing or threatening injury to the “domestic industry.”  When a global company closes a U.S. factory and moves production – and jobs – to China or another low-cost, low-wage, low-regulation environment, that is injury to the domestic industry, and in appropriate cases the trade laws are meant to provide access to a remedy for that injury.  Whether corporations based in the United States can earn greater profits by offshoring production to China or anywhere else isn’t supposed to be relevant.

The WTO has recognized this principle before.  Back in the 1990s, the EU and the United States both brought a WTO case against Indonesia’s lavish subsidies for the car company owned by then-dictator Suharto’s son.  The EU and the United States made several claims, one of them that these subsidies caused “serious prejudice” to their respective domestic auto industries.  Europe won, because it proved that European-made cars would have been sold in Indonesia but for the subsidies.  The United States lost, even though we could have shown that General Motors and Ford also lost market share in Indonesia – but neither GM nor Ford would have made those cars in the United States, and their overseas production is not the “U.S. domestic industry” (para. 14.201).  The Tires panel didn’t cite that case – but it could have, and it came to the same basic conclusion:  The trade laws are there to defend U.S. industries, meaning U.S. production and U.S. jobs – not U.S. offshoring corporations.