Leibowitz on Trade: Circumvention on the Rise

Since tariffs and quotas generally apply to goods of a certain description (a product and a country of origin) and not to the company that makes them or sells them, the nature of the product and the country where it is made can be economically important. If an importer or a customer does not expect duties or quotas to apply to certain goods, they will be surprised (and perhaps much poorer) if goods are hit with additional duties or quotas retroactively without notice.

The most common circumvention investigations happen in antidumping and countervailing duty cases. Frequently, domestic petitioners suspect that foreign producers or exporters are changing the form of goods in countries that are not subject to these duties or making them into downstream products that are too advanced in form to be subject to duties (such as changing steel into auto parts).

Circumvention can also apply to trade restrictions in other statutes, such as those noted above. Importers need to keep current on these developments.

Circumvention issues increased in frequency and importance during the Trump administration. Beginning before the 2016 election, U.S. producers of cold rolled and corrosion resistant (galvanized steel and similar products) filed a petition to investigate alleged Chinese “circumvention” of antidumping and countervailing duty orders. The domestic producers alleged that Chinese hot rolled and cold rolled sheet was being exported to Vietnam and processed into cold rolled sheet or corrosion-resistant sheet. That processed material was then shipped to the United States as originating in Vietnam and not China, thus escaping antidumping and countervailing duties on Chinese product. Commerce preliminarily found circumvention in 2017 and applied antidumping and countervailing duties to some shipments of corrosion-resistant and cold rolled steel sheet from Vietnam.

Since that circumvention case, many other antidumping and countervailing duty circumvention investigations were initiated by Commerce. In almost every one, Commerce found circumvention.

In Section 232 cases, circumvention is dealt with differently. Section 232 tariffs cover imports from most countries; therefore, shipping partially completed steel to a third country usually does not affect whether an imported product pays Section 232 tariffs. But if a product is transformed in a third country that is not subject to Section 232 (for example, Canada, Mexico or Australia) the imported product can escape Section 232. Early in 2020, the Trump administration declared certain steel and aluminum “derivative products” to be covered by the earlier steel and aluminum 232 import adjustments. The impetus was that these products (nails and auto parts among them) were “circumventing” the Section 232 tariffs. Later in 2020, Commerce initiated another Section 232 investigation into electrical transformer components. This followed a major lobbying effort by AK Steel, a unit of Cleveland-Cliffs, seeking protection for AK’s domestic production of grain-oriented electrical steel.

The safeguards statute provides authority to the president to address “circumvention” of measures adopted to limit imports. President Clinton invoked this authority in 1999 in a case involving imports of wheat gluten, finding that certain blends incorporating wheat gluten had the potential to circumvent the remedies.

Circumvention as a concept has its complications. First, it applies trade restrictions beyond their original scope, potentially injuring U.S. consumers, downstream purchasers or manufacturers, U.S. importers, ports and transportation providers. Second, it upsets establish trading relationships and hurts our trading partners who may take action in the WTO against the United States. For these and other reasons, the law requires compliance with certain procedures—notice, an opportunity to be heard and judicial review. But U.S. law applies these provisions explicitly only to antidumping and countervailing duty circumvention investigations.

Because of the procedural protections, the courts (principally the Court of International Trade and the Court of Appeals for the Federal Circuit, which handles international trade cases) have been busy with challenges to presidential and Commerce Department actions to expand the scope of trade restrictions based on a circumvention theory. Commerce often pushes the envelope in these cases.

One recent case illustrates the point. Commerce investigated circumvention of orders on aluminum extrusions from China, an order that has been in place since 2011. Commerce found, as it usually does, that imports of certain aluminum extrusions were circumventing the orders. When the circumvention investigation was started in March 2016, only one company in China was named in the notice of initiation, but Commerce announced that it could expand the investigation to include other Chinese producers. When Commerce made its preliminary determination of circumvention in November 2016, it found circumvention by all Chinese exporters.

This raised the issue of whether imports between March and November of 2016 of the covered aluminum extrusions should be included in the circumvention finding. Commerce thought that they should (again the norm for Commerce circumvention determinations). Commerce instructed U.S. Customs and Border Protection (CBP) to suspend liquidation and require deposit of estimated antidumping and countervailing duties on all entries from the date of initiation of the circumvention inquiry (March 2016) rather than the date of the preliminary circumvention determination (November 2016).

Obviously, exporters and their customers that were not the one company mentioned in the initiation notice were surprised by their inclusion in the instructions, which required the payment of cash deposits for entries before the determination. One of them sued. The Court of International Trade ordered Commerce to change their instructions to CBP to exclude entries before the November date of the preliminary determination. The domestic petitioners appealed to the Federal Circuit Court of Appeals.

The court of appeals affirmed the decision of the Court of International Trade. Both courts held that, because the notice of initiation did not specifically name Chinese producers and exporters other than the one company, other Chinese companies were not notified. This meant that Commerce could not impose new duties on entries until the exporters and U.S. importers were notified, which was in November 2016.

For U.S. importers and downstream customers, circumvention findings are at best an expensive nuisance and at worst ruinous. When circumvention findings are applied retroactively, as they usually are, U.S. importers may be required to post enormous cash deposits of estimated duties on products they already sold. Going back to the customer to recover duty deposits may be impossible.

The only defense—don’t import products subject to trade remedies or, if that is not possible, keep very closely informed about any circumvention issues that may affect you.

The unfairness of circumvention to U.S. importers and manufacturers is obvious—but U.S. domestic producers potentially may lose their protection if minor changes to products strip away the protection afforded by trade remedy laws.

A typical argument by domestic producers asserts that U.S. importers’ concerns are not worthy of attention because they buy “tainted” products. Foreign companies always charge too little and U.S. customers always go for the cheapest product. In other words, they make trade into a morality play, and not only about circumvention. Companies with global supply chains deal with a dizzying array of issues that threaten to turn globalization into a moral choice—worker rights, forced labor, environmental controls, conflict minerals. The list is long.

Reality is rarely as simple as all that, but sometimes politics can be.

The surge in circumvention cases we saw during the Trump administration may be here to stay.

Lewis Leibowitz

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