“FIRST SALE” APPRAISEMENT AND NON-MARKET ECONOMIES: KEEP CALM AND CALL A CUSTOMS LAWYER

The United States Court of International Trade this week turned a few heads (and probably stopped a few hearts) with a decision suggesting that the Nissho-Iwai “first sale” rule of transaction value appraisement should not apply to goods from China or other non-market economy countries (NMEs), or goods which contain materials from those countries. More broadly, the decision called into question whether “transaction value” was a viable basis for appraising any goods imported from China or other NMEs.

        In Meyer Corp. U.S. v. United States, Slip Op. 21-26 (March 1, 2021), the court considered the appraised value of cookware made in China, and cookware made in Thailand with Chinese inputs. The importer claimed that the goods should be appraised on the basis of “transaction value” using the “first sale” price from Chinese and Thai manufacturers to a related middleman, rather than the price at which the middleman resold the goods to the importer. Under the “first sale” rule of transaction value appraisement established in Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992), where there are two or more sales of goods “for exportation to the United States,” the goods may be appraised using transaction value on the basis of the first such sale which is made at “arm’s length”.  Typically, in determining whether a sale is at arms’ length, Customs looks at the behavior of private entities – the buyer and the seller.

  Neither the Courts nor Customs have ever suggested the “first sale” rule cannot be applied to NME goods, but the Meyer court did, adding a fourth factor to the test at the beginning of  the trial court’s 120-page opinion:

The Nissho Iwai “first sale” rule requires (1) bona fide sales that are (2) clearly destined for the United States, (3) transacted at arm’s length and (4) absent any sort of non-market influences.

The highlighted portion is new, set out by the trial judge. The “non-market influences” of which the court speaks are presumably those resulting from the non-market nature of the Chinese economy, such as dumping or subsidies (or possibly even forced labor). However, such “distortions” are surely not limited to non-market economy countries.

The Meyer decision has set off tremors throughout the trade community, since in recent years thousands of United States importers have established “first sale” pricing programs to cushion the impact of Section 301 retaliatory tariffs imposed on Chinese goods – or entered “first sale” programs operated by the major American retailers they sell to.  

  Although ruling for the government rested on various evidentiary findings, the CIT, at the conclusion of its opinion, doubled down on the notion that a fourth element applied to the Nissho-Iwai test, namely, the absence of non-market economy influences:

… more broadly, as a result of its consideration of the issues presented here, this court has doubts over the extent to which, if any, the “first sale” test of Nissho-Iwai was intended to be applied to transactions involving non-market economy participants or input. In that regard, the Court of Appeals for the Federal Circuit could provide clarification.

Perhaps more ominously, the Court also noted its doubts that an accurate ascertainment of the “true” value or “price paid or payable” for goods is possible unless distortive non-market economy factors are addressed. And since Customs’ decisions enjoy a presumption of correctness, the burden of addressing those factors rests on the importer.

Taking a Step Back

You’re an importer. You’re using the “first sale” rule for goods from China (or maybe Vietnam). How worried should you be?

Sit down. Relax and consider seeking legal advice. The Meyer decision is so unusual that Customs will need to think twice (at least) before “weaponizing” it to deny “first sale” treatment to Chinese goods.

In essence, the Court seems to have done the one thing the Ghostbusters were urged never to do: it “crossed the streams”. The Court imported into the Customs valuation law concepts that simply are not relevant to it. And as filmgoers know, crossing the streams often leads to a sticky mess.

United States Customs and trade laws are derived from various World Trade Organization (WTO) agreements which tell signatories how to address various areas of trade.

The WTO Customs Valuation Code, on which the United States’ Customs valuation statute is based, sets out rules for placing a value on goods for purposes of applying a country’s ordinary, statutory duty rates. These duties are imposed for the purpose of raising revenue, not for the purpose of correcting trade distortions. The Valuation Code, and Section 402 of the Tariff Act, are simply not concerned with trade distortions. They only care about pricing distortions caused by the relationship between a buyer and seller in a transaction value context. If a “price paid or payable” of $40 is found acceptable by the Customs authorities, that is the basis of Customs appraisement. It does not matter whether the seller, for example, received an energy subsidy which resulted in a lower price than might otherwise have been the case. That would not be a basis for a Customs authority to reject a related (or unrelated) party price.

It’s also important to note that, while income tax authorities generally have the power to adjust a related party price upward or downward, Customs authorities do not have this power. If they do not approve of a related party price, they can only reject it, and turn to another basis of Customs appraisement. And if “market distortions” were relevant to Customs value, importers would presumably be required to report them to Customs. As discussed below, none of the alternative bases of Customs appraisement are intended to, or capable of, dealing with “trade distortions”.

When trade distortions exist, the WTO Antidumping Code and WTO Subsidies Code come into play. Countries can resort to antidumping and countervailing duty laws to address them. These laws do not affect statutory tariff rates, but rather impose special, additional, non-statutory tariffs for the purpose of offsetting the injurious effect of any identified trade distortion. Furthermore, these remedies cannot be  invoked to address every possible trade distortion. They may only be used when distorting trade practices exist and are quantified, and those practices are found to have caused injury to an industry in the country of importation. These types of trade distortions are not addressed using the WTO Valuation Code, and that Code has no mechanisms for identifying, quantifying or dealing with any such distortions which might exist. Customs applies the valuation statute every day to thousands of entries of goods which might be affected by “trade distortions”; the valuation laws simply don’t care. And they don’t contain a method to address them, or adjust for them. And the imposition of a non-statutory antidumping or countervailing duty does not affect the dutiable value of goods.

Why the Customs Valuation Statute Can’t Address “Trade Distortions”

As noted above, except in very limited, and statutorily identified circumstances (e.g. an addition for an assist or a royalty) Customs authorities who find a related party “transaction value” unacceptable cannot adjust that value; they can only reject it, and look to another statutory basis of appraisement. But those other bases of appraisement can’t address trade distortions, either.

The first alternate basis of appraisement is the “transaction value of identical or similar merchandise” [19 U.S.C. §1401a(c)] in a sale to an unrelated purchaser. Assuming such sales exist (they rarely do), a widget produced in China and sold to an unrelated purchaser arguably would have enjoyed the same subsidy as a widget sold to a related purchaser. This basis of appraisement allows adjustments for differences in the merchandise and in levels of trade, but not for “trade distortions”.

Next in the hierarchy is “deductive value” [19 U.S.C. §1401a(d)], which is a “price minus” basis of appraisement. It begins with the price at which a good is generally sold to an unrelated purchaser in the United States, and then deducts certain non-dutiable costs, such as US selling expenses, international transportation costs and Customs duties. But if a “trade distortion” resulted in a price to the unrelated customer that is lower than it might otherwise have been, it might very well be reflected in the price to the unrelated customer. The allowable deductions won’t adjust for it.

The next alternate basis of appraisement is “computed value” [19 U.S.C. §1401a(e)], which is based on the foreign producer’s costs for materials, fabrication, plus an addition for general expenses and profit. The courts have stressed a preference for using the foreign producer’s actual costs. If a producer’s actual cost of, say, electricity, benefits from a subsidy, the computed value law provides no way to adjust for it.

In invoking “trade distortions”, the Meyer court imposes on the Customs valuation law a task that law was never intended to perform.  Also, if a “trade distortion” affects a “first sale” for exportation, who is to say it does not affect the “second sale” to the US importer as well? There is an entire body of trade law on the question of whether a subsidy or other trade distortion conferred on a manufacturer or seller “passes through” to subsequent purchaser. There is nothing about this in the Customs valuation law, and no way to deal with a “pass-through”. Rejecting a “first sale” appraisement under Nissho-Iwai doesn’t necessarily eliminate a distortion from any other basis of appraisement.

Indeed, the Meyer court’s reasoning would appear to make it impossible to use transaction value to appraise any Chinese or NME good – and any goods made in other countries (such as Thailand) with NME imports – on the basis of transaction value. Surely, that is not the Court’s intent.   

Stay Calm and Call Your Customs Lawyer

Ghostbusters warned us not to “cross the streams”. Another popular movie of that time warned us not to “bring a knife to a gunfight”. Another way of saying “the right tool for the job”.

The CIT, in the Meyer decision, seems to have ignored this hoary yet sage advice.  It seeks to put the valuation statute to work for a task that statute was never meant to do.

While Customs, for its part, might want to “weaponize” the decision, to deny the use of “first sale” or “transaction value” in NME transaction, but they should think twice (or thrice) before moving down that path.  Moving NME transactions to “deductive value” or any other basis of appraisement would multiply the agency’s workload substantially – and do not a thing to address the “distortions” which so concern the Meyer court.

It will be interesting to see if the Meyer rationale on the applicability of “first sale” or “transaction value” holds up on rehearing or appeal. There are many reasons to believe it will not.

Please feel free to contact any Neville Peterson professional if you have questions concerning this topic.