Appeared In
Special Issue
WWD Sourcing Horizons issue 03/18/2008

WASHINGTON — A proposed rule change that would force U.S. companies to pay millions of dollars in additional duties on the products they make abroad and import back to the U.S. is aggravating lawmakers and the business community.

This story first appeared in the March 18, 2008 issue of WWD. Subscribe Today.

Sen. Max Baucus (D., Mont.), chairman of the Senate Finance Committee, said last week that he has problems with a proposed rule change by the U.S. Customs & Border Protection agency.

“Without consulting the committee, I have serious concerns about the proposed change to the First Sale Rule,” Baucus said at a committee hearing as senators consider what to incorporate in legislation reauthorizing Customs’ authority.

The First Sale Rule allows a company to determine the value of an imported finished product on the cost of the item at the point of the first sale in the supply chain, such as factory to wholesaler. The proposal would peg the final value to the point of importation, generally meaning the actual wholesale price.

Customs calculates duties based on the value of a product and companies using the existing rule essentially pay lower duties because the value of the product is lower in the beginning of the supply chain process.

Several apparel brands and retailers that shipped $96.1 billion worth of apparel and textiles to the U.S. for the year ended Jan. 31 wrote a letter to Homeland Security Secretary Michael Chertoff in February urging him to withdraw the proposal.

“At the end of the day, Finance and the [House] Ways & Means Committee creates the legislation authorizing Customs,” said Stephen Lamar, executive vice president of the American Apparel & Footwear Association. “If they feel Customs overstepped its bounds, they could create a legislative mechanism that prevents that from happening in the future.”

Customs has set a public comment period on the proposal that ends April 23, at which point it will decide whether to go forward with implementation.

At the hearing, Charlene Stocker, chairwoman of the American Association of Exporters & Importers and senior international services manager at Procter & Gamble Distributing, said implementation of such a change would “cause us to redesign our models of international trade.”

In arguing the case for making such a change to a rule that has been in place for more than 20 years, Customs said in a government filing that it needed to bring the rules into compliance with a recent decision made by the World Customs Organization.

Customs argued that most other World Trade Organization countries determine the value of imported products based on the final price before importation. (The WCO is the only intergovernmental organization focused exclusively on Customs matters. It is a separate entity from the WTO but administers certain technical aspects of the WTO agreements on customs valuation and rules of origin.)

“Many of the companies which are partnering in First Sale have been partners with [Customs] on important efforts like the [Customs Trade Partnership Against Terrorism project] security measures [a public-private supply chain partnership],” said Stocker in her testimony. “In return, [Customs] proposes to revoke one of the few practices that help these companies to maintain their profitability.”

Apparel and textile importers actively participate in voluntary Customs security programs, such as the CTPAT. Under the program, if companies secure their supply chains from tampering, their goods are less likely to undergo inspection upon arrival in the U.S.