Circumvention: What Is the Idea?

Frequently, loaded words are designed to create just such an impression.  When you hear words like the “People’s Democratic Republic of Korea,” it implies freedom, democracy and the rule of law.  Be careful of the impressions words create.  The North Koreans might be trying to sell you something that is not what it seems.

“Circumvention” under the antidumping and countervailing duty (AD/CVD) laws refers to a finding that the Department of Commerce makes that an imported product should be covered within a case even though it does not strictly fit within the scope of the order.  In a recent case, Commerce has been asked to rule that cold rolled and corrosion resistant steel produced in Vietnam from Chinese hot rolled substrate should be considered Chinese because the substrate was made there.  The domestic petitioners claim that Vietnam does not have its own hot rolling mills, so Vietnamese producers use Chinese hot rolled material to process into cold rolled or corrosion resistant material and ship it to the United States.  This is an outlet for Chinese steel that the petitioners want to stop.  Whether this is a lawful result is very doubtful. 

First, let us define a couple of basic terms.  “Merchandise” is subject to AD/CVD orders if it is described in an order and it is “from” a particular country (in this case, China).  A product is “from” a country if it is wholly produced in that country or was last substantially transformed in that country from components or raw materials from other countries.

Second, we need to define “circumvention.”  We have a statute that was first enacted in 1984 to do that for us. The statute, section 781 of the Tariff Act of 1930 (as amended) defines “circumvention” as one of three alleged transgressions (we will discuss the accuracy of that allegation below), namely (1) processing in the United States to make a product from parts that, as parts were not within the scope of an AD/CVD order; (2) processing in a third country to make a product; and (3) “later-developed” merchandise that did not exist at the time the order was issued.  The Vietnam circumvention case falls in the second category—but all three categories require that the processing of the product to “circumvent” the AD/CVD order is “minor or insignificant.”   

Third, we need to explore whether the concept of “minor or insignificant” is related in any way to the concept of “substantial transformation.”  If the two concepts are logically related, then it must be true that “substantial transformation” must be more significant than “minor or insignificant” processing.  Thus, if cold rolled or corrosion resistant steel exported from Vietnam is substantially transformed in that country, it is very likely that the processing is not “minor or insignificant.”  If the processing is more than “minor or insignificant,” then there can be no circumvention within the meaning of Section 781 of the Tariff Act.   

Many of the parties to the Vietnam circumvention case have already made this argument.  Just this past week, the Trade Minister of Vietnam made it too.  Can the petitioners possibly win this argument?

The U.S. Department of Commerce, the initial decision-maker in these cases, sometimes makes determinations that seem illogical and often are overturned in the Court of International Trade or ruled to violate World Trade Organization agreements.  So it is possible that Commerce could rule in favor of the petitioners; but it seems that logical relationship between “substantial transformation” and “minor or insignificant” will be tough to overcome.  If they do find circumvention, US importers will find invoices for substantial duty deposits from U.S. Customs and Border Protection for entries of Vietnamese steels back to November 7 of last year.  

To appreciate why all this matters, it is important to consider why antidumping and countervailing duty law looks like it does.  When the GATT was written in the aftermath of World War II, antidumping and countervailing duty laws were already on the books.  They imposed very high duties, sometimes, that could dwarf the regular duties that countries imposed routinely.  To make AD/CVD duties coexist with tariff reductions through negotiation, which was the essential purpose of the GATT, there had to be clear rules about when and upon what products they could be imposed.  AD/CVD duties can only be imposed on products that have been investigated and found to be priced below “normal value” (for dumping) or to have been subsidized by a foreign government (for countervailing duties). Further, the imports of these products must have “injured” the domestic producer of competing products.

To expand an order to cover products that have been substantially transformed in a country that has not been investigated seems to violate the basic purpose of all the rules negotiated since 1947.  

Yet this is what the petitioners appear to want.  Given the new administration and its hostility to rules for international trade that protect public and private interests, one can imagine that importers and traders would be worried about getting that big bill for duty deposits from Customs.  

SMU Note: Lewis Leibowitz will be a panelist on trade at our 7th SMU Steel Summit Conference in Atlanta, Georgia on August 28-30, 2017. He will be available during our conference to answer questions from our attendees on a wide range of subjects.

Lewis Leibowitz
The Law Offices of Lewis E Leibowitz
202-776-1142
lewis.leibowitz@lellawoffice.com