Duties to import Chinese-made products to the U.S. could increase

How the scope of the First Sale Rule could change for U.S. importers following a Court of International Trade ruling

The application to customs law of a principle typically used in other branches of U.S. law could have serious consequences for the calculation of duties for those who import Chinese products into the U.S.

It is necessary to wait and see what the U.S. Customs guidance will be for Chinese-sourced imports

On March 1, 2021, the U.S. Court of International Commerce ("CIT") issued a decision raising doubts as to whether U.S. Customs may continue to consider imports from China and other non-market economies as true "first sales" under the First Sale Rule in the context of multi-level transactions in the future.

The court held that the plaintiff, a U.S. importer, could not use the first sale rule to obtain a lower duty on Chinese imported cookware sets. If U.S. Customs relies on this court decision to refuse to allow the use of the first sale rule on imports from China and other non-market economies, many U.S. importers will find themselves paying significantly higher import duties in America than they do now.

The First Sale Rule

This import rule applies to Importers of Record ("IORs") during the import of products into the United States when there is an intermediate transaction before the product is imported into the U.S. market

The First Sale Rule was first articulated in the 1992 Federal Circuit case: Nissho Iwai America Corp against the United States. If certain factors are met, the rule allows the U.S. importer to use, when importing into the U.S., the price paid by the middleman to the manufacturer [lower price than what the importer pays to the intermediary]. The result is lower import duties in America. For the First Sale Rule to apply, the transaction must meet the following requirements:

• the first sales transaction (i.e., the transaction between the manufacturer and the intermediary) must be a bona fide sale, including the transfer of ownership over the goods;
• at the time of the first sale, the goods must be intended for export to the United States;
• the producer and intermediary must not be interrelated or, if they are, must conduct their transaction at arm's length;
• the transaction must be free of non-market distorting influences.

Non-market distorting influences in the case of imports into the U.S.

A new application of an established concept but so far applied only in areas outside customs law

As the Court of International Commerce points out, the last requirement has been largely ignored in previous cases, probably because the test generally has always been applied to imports from market economy countries. In Meyer Corp., however, the manufacturer was located in China, designated as a non-market economy by U.S. law. Therefore, the Court of International Trade held that the presence of distorting non-market influences "is not irrelevant."

Although relying on a country's status as a non-market economy is usually relevant to applying other trade laws, such as laws governing the imposition of antidumping duties, its application is new in U.S. customs law. It thus creates uncertainty about how U.S. Customs will apply this ruling to restrict the use of the First Sale Rule for imports from China [in this case].

The Meyer Corp. decision and its impact on the application of customs law by U.S. Customs

The court ruled that the U.S. importer failed to establish that it could use the value of the transaction between the Chinese manufacturer and its intermediary in Hong Kong to value the cookware when importing it into the United States. The court's analysis was particular and emphasized the plaintiff's failure to produce financial documents that could support his claims that the related companies operated independently and competitively with each other, and that the Chinese government did not influence or assist in the transactions. However, the court also stated that the court had "doubts about the extent to which the 'first sale' test could nonetheless be applied to transactions involving economic operators belonging to non-market economies."

Potential future impact on import activities from China

The judge's decision casts doubt on whether the First Sale Rule applies to goods from non-market economies when importing into the U.S.

The United States currently designates China and Vietnam as non-market economies. Although the court's statement appears to be not an actual ruling but rather what is referred to in the jargon as "dicta" and therefore non-binding, nonetheless, they could prompt U.S. Customs to deny first-sale treatment for imports from China and other non-market economies.

In order to overcome this presumption, individual U.S. importers importing from China would have to establish through appropriate documentation that the first-sale price is immune from non-market distorting influences even if the goods come from a non-market economy. For the time being, however, it is necessary to wait for developments to see whether U.S. Customs will want to apply this new principle of customs law to imports from China.

WARNING: it should be noted that the information in this article in no way constitutes legal opinion or professional advice but only general information of an informative nature.