On May 17, 2018, the Department of Commerce (Commerce) handed a big win to U.S. producers of flat-rolled steel products, finding that products cold-rolled or coated in Vietnam using Chinese substrate are subject to existing antidumping and countervailing duty orders on Chinese hot-rolled and cold-rolled steel flat products.
Some initial commentary in the trade press has suggested that Commerce’s ruling implicates country-of-origin determinations for steel goods, and may change the way U.S. Customs & Border Protection (CBP) assesses the origin of steel products for general import purposes. Commerce’s decision, however cannot effect a change in CBP’s treatment of origin. So, why the confusion? It all goes back to the fact that while Commerce and CBP both consider the effect of third-country processing on how importers should declare their merchandise, the two agencies analyze third-country processing differently, and for different reasons.
In assessing whether third-country processing operations constitute circumvention of existing trade remedy orders, Commerce considers a number of factors, placing significant emphasis on the relative value of the third-country processing. Separately, Commerce may also make country-of-origin determinations for the purpose of establishing what products may be subject to particular antidumping or countervailing duty investigation, again placing a significant emphasis on value. Commerce often refers to the test employed in such initial investigations as the “substantial transformation test.”
Confusingly, this is the same name that CBP and the courts use for the test that they apply in assessing origin for customs entry purposes. CBP’s test, however, is not the same as Commerce’s. Unlike Commerce, CBP traditionally de-emphasizes the value added by processing operations, instead focusing on questions such as whether pre-processed inputs have any commercial use beyond being processed into the final end product, and whether the processing results in changes to the chemical or mechanical properties of the inputs.
The two agencies apply different tests because their separate determinations are animated by different statutes and different policies. While Commerce is chiefly concerned with offsetting the effects of unfair competitive practices, CBP is primarily concerned with the revenue-raising functions of standard import tariffs. For added complexity, CBP may analyze the origin of products exported from countries with which the United States maintains free trade agreements pursuant to separate origin/marking tests laid out in those agreements. The results of these agreement-specific analyses are not always identical to the results of CBP’s traditional version of the substantial transformation test.
We can see all of these issues at play with respect to flat-rolled steel products. Applying their traditional version of the substantial transformation test, CBP and the courts have long held that the galvanization of flat-rolled steel products changes the origin of the product. Thus, if cold-rolled steel is manufactured in Germany, but then galvanized in Norway, the resulting product is a good of Norway for customs entry declaration purposes. However, under NAFTA, the same operation performed on German cold-rolled steel in Canada would not result in a product eligible for duty-free entry; further, the product would not be eligible to be marked as a good of Canada. Finally, applying the logic of Commerce’s new finding, if the United States had an antidumping duty order on German cold-rolled steel, galvanizing the product in Norway prior to importation would not necessarily absolve importers of antidumping duty liability.
So, what does this mean for importers of steel that was further processed in Vietnam using Chinese inputs? While the products may remain Vietnamese from a CBP origin-declaration perspective, Commerce’s draft Federal Register notice establishes that the goods are nonetheless subject to AD/CVD duties, just as if they were being exported directly from China. Importers must therefore declare entries of such goods as “Type 03” entries, i.e., subject to trade remedy duties. For exports of corrosion-resistant steel flat products, the duties required at entry will be equal to 238.48%. For exports of cold-rolled steel flat products, the duties required at entry will be equal to 456.20%. The duties will apply not only to incoming entries, but to as-yet-unliquidated entries made on or after November 16, 2016. This may require importers to file post-summary corrections or to make other appropriate arrangements with CBP to deposit duties.
According to Commerce, importers of goods processed in Vietnam using non-Chinese substrates will not have to declare or pay trade remedy duties. However, they must support any declaration of their goods as not subject to such duties through certifications prepared and signed by both the exporter and the importer. Like the duty requirements, the certification requirements apply not only to prospective entries, but affect past, unliquidated entries made on or after November 16, 2016.
After publication of Commerce’s results in the Federal Register, it is possible that we will see additional technical guidance from CBP, in the form of instructions issued through the agency’s Cargo Systems Messaging Service. In the meantime, however, importers of flat-rolled products processed in Vietnam from Chinese substrates should prepare to declare their goods and deposit duties pursuant to Commerce’s announced instructions.