Four years ago I wrote an article for The Metropolitan Corporate Counsel on United States-Canadian trade relations, reporting that with the notable exception of the seemingly never ending softwood lumber dispute, U.S. northern border trade was relatively free of serious controversy. Has anything changed?
Import volume: In 2004, Canada was the world's leading exporter of merchandise to the United States. While U.S. imports from Canada increased by 22 percent from 2004 through 2007 ($255 billion to $312 billion), Canada no longer is #1. In 2007, China finally surpassed Canada as the leading source of imported goods (from $196 billion in 2004 to $323 billion in 2007).
Trade deficit: The U.S. trade deficit with Canada was $99.4 billion in 2007 (compared to $92 billion in 2004), not as large as the deficit with China ($262 billion in 2007 compared to $163 billion in 2004), but still significant - 11 percent of our $896 billion deficit for last year (compared to a $732 billion deficit in 2004).
Petroleum product imports : The U.S. imported $78 billion of oil (and related products) from Canada in 2007, a 62 percent increase from $48 billion in 2004, double the imports from Venezuela ($34 billion), Mexico ($33 billion), Saudi Arabia ($32 billion) and Nigeria ($32 billion), four better known, "controversial" sources of supply. In the first six months of 2008, petroleum product imports from Canada soared to $57 billion, $8 billion more than in all of 2004.
Non-oil imports: The US$ value of non-oil imports from Canada has remained relatively constant - $206 billion in 2004; $222 billion in 2005; $230 billion in 2006; $234 billion in 2007 - and declined in the first six months of 2008 ($117.8 billion compared to $118.1 billion in January - June 2007). Motor vehicles (including parts) are by far the most significant category of imports from Canada ($60 billion in 2007), followed by machinery ($22 billion), plastic products ($11 billion), electronics ($10 billion), and lumber and other wood products ($10 billion).
Softwood Lumber: In September 2006, the United States and Canada settled the most recent round of the decades-old softwood lumber dispute, signing a new Softwood Lumber Agreement ("SLA 2006"), effective for at least seven years. Under SLA 2006: (1) outstanding Antidumping Duty ("ADD") and Countervailing Duty ("CVD") Orders on subject lumber were revoked and new cases cannot be initiated until 12 months after SLA 2006 terminates; (2) $4 billion of outstanding ADD/CVD cash deposits were refunded to U.S. importers, with the remaining $1 billion distributed to lumber interests in the United States; and (3) Canada agreed to assess a 15 percent tax on lumber exports to the U.S. if lumber prices dropped below $355, per thousand board feet.
The relatively calm state of U.S. - Canada customs/trade relations is further evidenced by the fact that the United States has no outstanding CVD Orders on Canadian products and merely one outstanding ADD Order (iron construction castings) and one current ADD investigation (citric acid and citrate salts). In contrast, 62 of 182 outstanding ADD/CVD Orders in effect on January 1, 2008 involved Chinese products, with approximately 20 additional investigations on Chinese exports in progress. Similarly, in 2007 Canada ranked 31st among our trading partners in total customs duty collected by the United States, as its $99 million in payments (0.03 percent of customs value) paled in comparison to the $9.87 billion in duty the U.S. collected on Chinese imports (3.1 percent of customs value).
In short, Canadian imports into the U.S. remain steady (except for the oil surge, albeit Canadian oil flows to the U.S. without controversy), the softwood lumber controversy has been settled (at least, for the short term), other product-specific trade disputes are virtually nonexistent, and duty payments are comparatively low. Does this status report mean that attorneys specializing in U.S. - Canadian trade/customs issues should start looking for other work? Our clients may want to think so, and we have no reason to believe that a storm is on the horizon - eliminating or substantially modifying NAFTA has a nice ring in some states during a Presidential election but it is safe to predict (if anything in politics really can be safe) that NAFTA will not be subject to significant changes regardless of the outcome of the election. Yet, complacency is a trap for the unwary and recent legislation coupled with Customs prioritization of revenue collection and enforcement reveal that failure to follow outstanding rules and regulations and to keep abreast of new reporting requirements could have serious consequences.
Softwood lumber reporting (Softwood Lumber Act of 2008). Effective September 2008, importers of softwood lumber products from Canada are required to provide Customs, upon entry, with three new pieces of information: (1) export price used to obtain a permit, (2) estimated export charges, and (3) declaration that the export price was calculated to conform to SLA 2008 and that the export charge was calculated in a manner consistent with the SLA. Maximum penalties for "knowingly" violating these new reporting requirements are $10,000 for each violation (in addition to other penalties authorized by U.S. law.)
Plant product reporting (Farm Bill 2008 amendment to Lacey Act): Effective December 2008, importers of any "plant or plant product" (which potentially includes numerous plants, all trees, and virtually all forms of manufactured and processed wood and plant products, e.g., ornaments, paper stationary, wreaths, displays, toys, boxes, furniture and possibly even wood-based textiles, apparel and footwear, etc.) must provide Customs with information as to (1) the scientific name (i.e., genus and species) of any plant or scientific name of the plant from which a product is derived that is contained within the shipment; (2) the plant species country of origin (i.e., the country where the plant was harvested, cut, logged, or removed); (3) a description of the value of the importation and quantity (including the unit of measure) of the plant/plant product. Not surprisingly, U.S. importers are doing everything they can to convince Customs to reduce the burden of complying with these new reporting requirements. The law provides that failure to comply with Customs rules (whatever the agency ultimately decides to do) can result in penalties of up to $10,000 per violation, criminal prosecution and/or suspension/revocation of permits.
Pre-shipment reporting (SAFE Ports Act of 2006): Customs currently is rewriting proposed regulations, which when enacted will require transmittal of additional information to Customs at least 24 hours before cargo is laden aboard an ocean vessel bound for the United States. The required information consists of names of the manufacturer, seller, buyer, consolidator, and party receiving goods; import of record and consignee numbers; container stuffing location; country of origin; and six-digit HTS classification.
First sale reporting (Farm Bill 2008): Effective September 20, 2008, importers of merchandise whose value is determined based on a price in a sale occurring prior to the introduction of merchandise into the United States (normally, a price other than the price paid by the U.S. importer) are required to advise Customs of this fact by entering an "F" next to the declared value on the entry summary, CF 7501. This Congressionally mandated reporting requirement was enacted after Customs agreed to table its controversial proposal to eliminate "first sale" appraisements (i.e., dutiable value based on a manufacturer's sales price to a middleman, rather than the middleman's sales price to the U.S. importer).
NAFTA CO requirements: Customs has consistently taken the position that NAFTA free entry will be denied unless an importer has in its possession a NAFTA Certificate of Origin ("CO") at the time NAFTA is claimed (i.e., upon entry), with the limited exception of those cases in which an importer files a retroactive claim for NAFTA status within one year from date of entry, by conforming to Section 181.31-.32, Customs Regulations. Customs has construed NAFTA CO possession and retroactive reporting requirements very strictly, and recent attempts by importers to reverse Customs practice have been rejected by the Court of Appeals for the Federal Circuit on procedural grounds. Xerox Corp. v. United States , 423 F.3d 1356 (Fed. Cir. 2005); Corrpro Cos. v. United States , 433 F.3d 1360 (Fed. Cir. 2006) (reversing a favorable decision on the merits by the Court of International Trade).
NAFTA reporting and recordkeeping: Recognizing that after the IRS, Customs is the largest revenue generator for the U.S. Government ($30 billion), Customs has renewed its efforts to confirm that importers claiming free entry under a wide variety of special programs (including NAFTA), in fact, qualify for this preferred tariff status. Obtaining a signed NAFTA CO, and even preparing a CO, are relatively simple tasks. Passing a NAFTA verification or Customs audit - and actually confirming to Customs' satisfaction that goods qualify for NAFTA - requires that a company know the precise basis of its claim and maintain the documentation needed to support a claim for the full five year recordkeeping period in which Customs has the authority to review entries. Support for NAFTA claims often requires that NAFTA importers obtain documentation not only from their primary vendors but that these vendors obtain supporting documentation from their suppliers (with whom the importer has no direct contact). The fact that Customs is accepting NAFTA claims upon entry does not mean that the claim will survive an audit five years later, and the fact that a company had in place an effective NAFTA compliance program throughout the 1990s and passed a NAFTA verification with flying colors does not mean that Customs will not come back again tomorrow. Many revenue and enforcement issues were placed on hold after 9/11/01, but Customs' recent recognition that its goals include collecting revenue and ensuring "that penalties are effective in deterring noncompliance," requires that NAFTA importers once again focus on maintaining proper documentation to support their claims.
ADD/CVD Transshipments . One of Customs' primary trade issues is enforcing ADD/CVD Orders and collecting ADD/CVD. While ADD/CVD Orders/ investigations have not focused on Canadian products, the possibility that goods subject to ADD/CVD may be entering the U.S. through Canada (without paying ADD/CVD) has become a cause of concern. ADD/CVD liability is based on country of manufacture, not country of shipment to the United States. Goods do not lose their status as "subject merchandise" merely because they may have been warehoused in Canada, or repackaged in Canada, or subjected to minor processing in Canada, prior to entering the U.S. Companies with distribution/ warehousing centers in Canada for goods made in China need to be especially careful as to ADD/CVD requirements, in light of U.S. policy of limiting company-specific rates to specified manufacturer/exporter combinations, and applying prohibitive China-wide rates to exporters not specifically named as qualifying for a company-specific rate (e.g., a Canadian exporter to the United States of Chinese-made merchandise subject to ADD/CVD).
In sum, our trade relations with Canada may be strong, steady and non-controversial today and the outlook for the future may be bright, but as Customs and Trade lawyers often say - and as our clients all too often forget - an ounce of prevention
Ned H. Marshak is Of Counsel in the firm of Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt LLP, a firm concentrating primarily in customs and international trade matters.