Investigations under the U.S. antidumping and countervailing duty laws are aimed at determining whether a particular product imported from a given country is being sold at prices lower than the cost of production, or whether the prices are influenced by foreign government subsidization. Where the answer to either question is yes, the U.S. government may impose additional import duties. These duties can be very high – additional tariffs of more than 100 percent have been imposed in several recent cases.

Trade investigations are on the rise. After a lull in the middle of the decade, 20 new investigations have been launched in the last year-and-a-half alone, covering everything from Indian matchbooks to Australian chemicals. The faltering economy will likely drive further cases, in an effort to ensure that U.S. manufacturing interests are not harmed by unfairly priced imports.   

Any company that manufactures goods overseas or imports foreign products should be aware of how trade investigations function, and what their potential effect can be.     

There are a number of rules of thumb, however to help manufacturers and importers ensure that their operations won’t be found to be out of compliance with U.S. trade law, and to lessen the impact on their supply chains if an investigation takes place.

Avoiding an Investigation
Trade investigations are time consuming and costly. Once the U.S. government launches an investigation into an imported product, both manufacturers in the foreign countries subject to the investigation and companies that import or purchase the imported product will be required to respond to multiple questionnaires. Responding to these questionnaires diverts valuable company time and resources from core business operations. Government officials may visit foreign factories to audit the responses, and at the end of it all, additional tariffs may be imposed on the imported products. If a company can avoid an investigation into its manufactured or purchased imports, it should.   

Volume and price are the watchwords of trade investigations. If high volumes of low-priced imports enter the U.S. market over a short period of time, they stand to injure U.S. manufacturing interests by grabbing market share and depressing prices in the United States. The higher the quantity of imports and the lower the prices, the greater the likelihood of an investigation.   

Quickly rising import volumes are the first risk factor for investigations. The U.S. International Trade Commission makes import data for each product in the U.S. Harmonized Tariff Schedule publicly available on its Web site. Volumes can be tracked by country of production on a month-by-month basis. Wherever the volume of a product imported from a certain country increases dramatically within a short period of time, that country’s manufacturers and their U.S. import customers may soon find themselves filling out onerous government questionnaires.

Over the short term, it may not be possible for any given company to greatly decrease the volume of its manufacturing  or imports from a given country. Over the long term, however, manufacturers can diversify  the markets for their goods to include non-U.S. destinations. Importers can similarly attempt to diversify their sources for imported goods, including the addition of U.S.-sourced material.    

Rapidly declining prices are the second risk factor for investigations under the trade laws. Regardless of a company’s ability to affect overall import volumes, monitoring the prices of imports is essential. If a company has manufacturing operations abroad, it may wish to conduct a review to determine whether the prices of it sales into the U.S. market are high enough to withstand review.

Manufacturers should consider whether inputs are purchased at market-determined prices. If inputs are purchased from affiliates, or through government programs, they may be too low to withstand scrutiny. Additionally, using prices for one model of merchandise to subsidize other models, can lower prices below the cost to produce the subsidized models. Non-manufacturing importers may consider making their supplier arrangements contingent on periodic reviews of pricing, in order to lessen the possibility of an investigation.    

Finally, companies should be careful of volumes and prices if they manufacture or source from China, the most common target of investigations. Despite economic liberalization, the Chinese government exercises continuing control over the market. As a result, trade investigations often find that prices of Chinese merchandise are depressed by government subsidies or otherwise do not reflect market levels. The resulting duties tend to be particularly high; most recent investigations generating duties of 100 percent or more involved China.  

Other common targets of investigations are India, Indonesia, Thailand and Taiwan. Cases against Japan and European countries have historically been less common, but there are a few currently underway. Consistent volume and price monitoring can help both manufacturers and purchasers identify the likely targets of investigations, and investigate strategies to reduce exposure to liability.

What To Do If Investigated
Perhaps an investigation is already underway. Investigations are not company-specific; rather, they affect all manufacturers of a specific product in a given country. Consequently, if the government decides to investigate imports of Nicaraguan rocking horses, all companies that make the product there, or that purchase imports of such products, stand to be affected. However, both manufacturers and importers can take concrete steps to lessen the consequences for their supply chains.   

The U.S. government rarely investigates the prices of all the manufacturers in a country, simply because there are too many.  Instead, the government investigates a few of the largest manufacturers, calculates additional tariffs specific to those companies, and then averages the duty rates together to create a rate that will be applied to all of the un-reviewed companies.  

If a company has been careful in monitoring prices, it will likely not be found to have sold at unfair value, or otherwise the additional duties placed on its products will be small in comparison with those placed on other manufacturers. Even if a company has not monitored its prices, it is in the company’s best interests to cooperate fully with the investigation. This cannot be stressed enough. If a company fails to cooperate, the U.S. government may impose a very high duty on its imports simply because of the lack of cooperation – generally much higher than the duty that would have actually been calculated on the basis of your own books and records.   

In fact, the most important thing that a manufacturer can do when an investigation is initiated is to actively request to be reviewed. This will ensure that any duty that result reflect the manufacturer’s own operations and experience. The tariff rates for manufacturers that are not reviewed will be based on the responses of companies that may have significantly different pricing practices. For this reason, U.S. companies that do not manufacture abroad, but that rely heavily on imports from particular manufacturers in a country subject to an investigation, should encourage their suppliers to request review.     

As noted above, the U.S. government generally reviews only the top exporters to the U.S. of an investigated product. But if a company is within the top three exporters of the investigated product, there is a substantial likelihood that it will be chosen to participate in the investigation and be assigned an individual tariff rate.

If a company or supplier’s manufacturing operations in a country subject to investigation are small, the U.S. government may not choose the company for review, as not being representative of pricing practices within the investigated country. Even so, requesting review remains important – it provides the U.S. government with indicia of interest and cooperation, and may entitle a company to be reviewed at a later time, should larger entities withdraw from the proceedings.

Duties Have Been Imposed: Lowering Liabilities
Suppose that all imports of widgets from Taiwan are already subject to additional tariffs. Here are a few dos and don’ts that foreign manufacturers and U.S. importers can take to lower their ongoing tariff liability.   

Monitor prices. A company should vigorously monitor the prices at which it sells the goods it manufactures, or imports manufactured goods, into the U.S., to ensure sales at fair value. After duties are imposed, the U.S. government reviews the duties annually to ensure that they reflect commercial reality. Even if duties already apply to a certain product, a company may request a review of its sales or imports during an annual review.

If the company carefully monitors its selling or import prices, it should be able to achieve lower and lower tariff rates. However, if a company’s selling or import prices are found to be fair – at or above the cost of production – for three consecutive annual reviews, the U.S. government will no longer require any duties on that company’s products, even if other companies remain subject to additional duties.   

Don’t trans-ship. If there is a trade order in effect against products from a certain country, a company cannot avoid the duties simply by shipping those products through a third country before importing them into the U.S.. Minor alterations in a third country  also do not exempt a product from duties.    

Consider different suppliers or different markets. If the duties on products from a certain country are particularly high, it may make sense to move manufacturing or sourcing operations elsewhere. Should a company take this route, it is vital to monitor prices, lest the new manufacturing or supply base become the subject of a new investigation. A company may also consider selling goods manufactured at a facility in a country subject to trade law tariffs to third country markets, while supplying the U.S. market through increased U.S. manufacturing. Similarly, importers may be able to switch suppliers to source from a company in the United States or a fairly-priced third-country supplier.   

Don’t rent a tariff. In certain cases, foreign manufacturers have attempted to skirt the duties assigned to their companies by “renting” a lower tariff rate from another manufacturer.   

In this scheme, manufacturers with high duty rates buy blank invoices from manufacturers with a lower rate, and impersonate the company with the lower duty in sales transactions. The U.S. government has found such behavior constitutes fraud, and the result is higher duties for everyone involved.   

Don’t commit customs fraud. Falsifying the classification or country of origin of imported merchandise in order to claim that it is not subject to duties is customs fraud, and it could cost a company the value of its imports, criminal and civil fines, and even jail time for the company officials involved. The U.S. Bureau of Customs and Border Protection considers trade law enforcement one of its top priorities, and is accordingly aggressive in prosecuting those who avoid duties through fraud.

Do No Harm
Trade investigations occur when low-priced imports flood the U.S. market, disrupting the market and causing harm to U.S. manufacturing interests. The best way to avoid an investigation is to “do no harm.” Any company involved in manufacturing goods abroad for the U.S. market, or importing such merchandise into the United States, should monitor its volumes and prices.   

There’s no law against being competitively priced, or delivering a superior product that grabs market share. But the law doesn’t permit your organization’s competitive advantage to come from foreign subsidies or unsustainable, predatory pricing. As a result, every manufacturer should know its costs, know its suppliers, and work hard to keep its supply-chain duty-free.