Typically, trade compliance rulings (trade court rulings or rulings issued by CBP – Customs and Border Protection) cause trade compliance professionals to consider the implications in terms of whether the decision increases or decreases costs for companies. In light of the election of President Trump and his focus on trying to bring jobs back to the US through trade policy, it is interesting to consider recent actions by the Courts and CBP and evaluate whether they support or oppose Trump’s stated goals. It is also worth pondering whether Executive Branch pressure has the ability to influence these types of Customs decisions.
On August 9, 2017, the Court of International Trade (CIT) issued a long awaited ruling to settle the issue of whether an example of “tariff engineering” practiced by Ford was allowable. The stakes were high due to the difference between a 2.5% and 25% duty rate paid on the vehicles in question depending on how the court ruled (see Slip Op. 17-102).
The so called “chicken tax” is a 25% tax on trucks and is the result of a trade war with Europe that occurred in the 1960’s. If you have the time, there is an interesting podcast produced by NPR’s Planet Money Episode 632 on the history of chicken tax.
Ford’s strategy to avoid the 25% duty on its Transit Connect, described as a “light commercial vehicle”, was to import the vehicle with a low budget rear bench seat, and immediately after importation remove the backseat and finish out the vehicle for commercial purposes.
Without getting into the legal minutiae of how to properly classify imported goods and assigning the proper duty rate; you only have to understand how the different types of products are described in the tariff schedule. The choices are “Motor cars and other motor vehicles principally designed for the transport of persons…” (2.5% duty rate) vs. “Motor vehicles for the transport of goods…” (25% duty rate). There is a lot more that can go into determining which of the classifications is correct, but you can see why installing the temporary back seat is a strategy.
Ford won the case as the Court decided that Ford did not act in a deceptive manner or commit a fraud, and was practicing a legitimate tariff engineering scheme and therefore eligible for the 2.5% duty rate.
It has been no secret that the Trump administration considers the automotive sector to be important in his plans to bring manufacturing jobs back to the United States. One of the objectives in the current NAFTA re-negotiations is to increase the percentage of North American or US components in order to qualify a good for duty free entry. According to U.S. Trade Representative Robert Lighthizer, “Rules of origin, particularly on autos and auto parts, must require higher NAFTA content and substantial U.S. content.”
Ford has been making the Transit in Kansas City since 2014. While the prospect of having to pay a 25% duty probably played a role in that decision, the CIT’s ruling now provides more options if Ford decides it is more cost effective to import the vans from a lower cost country such as Turkey. The Ford case, therefore, is an example where a trade ruling does not support the President’s stated goals.
On a related topic, another objective of the Trump administration is to enforce the various “Buy American” regulations that are part of the US Government procurement process. In President Trump’s executive order on Buy American and Hire American, the stated policy is to “… maximize, consistent with law, through terms and conditions of Federal financial assistance awards and Federal procurements, the use of goods, products, and materials produced in the United States.”
CBP plays a role in the Buy American regulations by having the responsibility of issuing country of origin determinations to see if a waiver can be granted to certain Buy American provisions for products sold to the United States Government (see 19 CFR 177.21).
On August 22, 2017 CBP issued an origin ruling, HQ H284523, to determine whether tablet computers manufactured in Vietnam could be considered having United States origin by virtue of having software installed in the US that purportedly transforms the devices from tablets into “medical devices.”
The tablets are intended to be used by the Veterans Administration and given to patients to take home in order to attach other peripheral devices that capture vitals such as blood pressure and blood glucose levels. The medical data can then be transmitted to the VA.
The crux of the matter is whether the tablets are “substantially transformed” from a tablet computer to a medical device through the installation of the proprietary software that disables the default functionality of the Android operating system and restricts the tablet to its healthcare related functions.
In the ruling CBP cites a series of court cases and CBP rulings going back to 1982 that describe what kind of programming applied to a device does and does not substantially transform an article into a US product. On one end of the spectrum there is the example of programming EPROMS (electrically erasable programmable read-only memory) to form distinct electronic connections (a substantial transformation), to the example of formatting blank diskettes (not a substantial transformation).
CBP ruled that the tablets are not substantially transformed. Of particular relevance to CBP was ruling, HQ H258960, issued in May of 2016 where transceivers that were “blanks” and non-functional were substantially transformed when US developed proprietary software was installed in the US making them functional, vs. other transceivers that were already programmed with generic software, which was replaced with the proprietary software in the US. The second scenario was not a substantial transformation.
The origin ruling, therefore, is an example where a Customs related decision does support one of the President’s stated goals pertaining to global trade and US job creation (assuming there are any US tablet manufacturers).
To what extent can the current administration have an impact on these kinds of Customs related decisions? In theory, it would be difficult to sway decisions such as the Ford case since the judiciary is a separate branch of government, and the job of the CIT or an appeals court is to objectively interpret the law and apply precedent in their decision making. With regard to CBP, however, it is not a stretch to imagine the Administration putting pressure on another piece of the Executive Branch to rule in a certain direction. Would CBP be able to withstand the pressure and objectively apply precedent like the Courts? It is something worth keeping an eye on and watching for any discernible changes.