978-1285427041 Chapter 12

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CHAPTER 12

IMPORTS, CUSTOMS, AND TARIFF LAW

CASES IN THIS CHAPTER

Carl Zeiss, Inc. v. United States

Better Home Plastics Corp. v. United States

Ferrostaal Metals Corp. v. United States

Nissan Motor Mfg. Corp., USA v. United States.

United States v. Golden Ship Trading Co.

United States v. Mead Corp.

TEACHING SUMMARY

When goods cross international borders, they must go through a customs process. Typically,

this involves three stages of identifying or classifying the good and its country of origin, valuing

the goods, and imposing/collecting a tariff or tax. Many aspects of this process are harmonized

among WTO members through the use of the Custom Valuations Code or GATT Agreement on

Implementation of Article VII.

Classification involves both what the good is as it enters the country (this will be determined by

reference to domestic codes) and from where the good originated. Country of origin, however, is

distinct from the country in which the good most recently resided. Value can be determined by a

number of methods, but the most common method is to use transactions, i.e., the actual price

paid for the good. Where this cannot be determined or cannot be fairly determined, such as in

instances where the seller and buyer are related, one may look to the transaction value of

identical goods, the transaction value of similar goods, the deductive value, the computed value,

or the derived value. Once the classification, value and country of origin are known, a tariff can

be calculated. Tariffs may be based on the value of the item (such as charging 10% of its value)

or charged on a per piece (weight) basis.

1. Describe the two-step process for classifying an article.

2. Why is “compound microscope” an eo nomine term, and what does the court mean

when it says, “that includes all forms of the named article?”

3. Which of the two headings is more specific, and why?

Answer: The compound optical microscopes suggests two qualities-compound and

optical– so it is more specific that medical instruments used in surgeries as they may

have only one feature.

Better Home Plastics Corp. v. United States

1. What are the two main components of this “set”? If they had been sold separately, how

would each have been classified?

3924.90.1010 at 3.36% ad valorem.

2. What is the “essential character” test, and how was it applied here?

1. Why is the process of galvanizing steel important to the court’s decision?

2. Consider the process of hot-dip galvanizing described here. Would you agree that the

operations performed on the steel in New Zealand created a product with a new name,

character, or use? Why or why not?

3. Of the three factors generally referred to – name, character, use – which seems to be the

most or least important?

4. What other factors does the court consider in addition to a change in the name, character,

and use of the product?

1. What purposes do FTZs serve? Why did Congress establish them?

2. What were the advantages to Nissan by assembling automobiles in an FTZ? How many

can you list?

3. Why could Nissan not bring manufacturing equipment into its zone duty-free? Do you think

this case applies to office chairs or personal computers?, notwithstanding the free trade

subzone, could duties be imposed?

4. Assume that you import merchandise subject to annual quotas. You have a shipment

arriving, but the quota has filled. How might an FTZ help you?

4. What FTZs are located in your state or region?

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Chapter 12: Imports, Customs, and Tariff Law

United States v. Golden Ship Trading Co.

1. What was Wu’s motivation in stating that the shirts were made in the Dominican

Republic?

2. What is the burden of proof? Must the United States prove that Wu was negligent or

must Wu prove that she was not?

3. Can the importer (Wu) rely on the statements of the third party (here, the shirt exporter)

to avoid responsibility?

United States v. Mead Corp.

1. When a court reviews a classification ruling, is the court free to disregard the position of

Customs and consider all the evidence anew? Must the court give complete deference

to Customs’ rulings? What does the court say is the correct standard of review?

2. What was the legal rationale the Supreme Court used in holding for Mead?

3. What about the product – day planners – that gave rise to the appeal? Do you think that

a loose leaf “day planner” is a “bound diary”? Could you locate these in the tariff

schedules and determine the current rate of duty?

Chapter 12: Imports, Customs, and Tariff Law

ANSWERS TO QUESTIONS AND CASE PROBLEMS

1. Answer : They are composite goods because they can fit under both classifications. The

court said the lower court must determine the essential characteristic of the product. It is

2. Answer: There are several ways to look at the Inner Secrets products. By common name

(an eo nomine description), boxer shorts are underwear, though usually not for women; by the

article’s physical description, it is potentially underwear for women (but not for men, since the fly is

3. Answer: The Court of International Trade classified the Sports Graphics goods under

772.15 articles chiefly used for preparing, serving or storing food or beverages. The Court of

Appeals affirmed. The chief use of the “Chill” coolers had a critical bearing on its classification.

The U.S. argued that the cooler should be classified under 706.62 for luggage under the rule of

4. Answer: The calamari cannot be labeled as “Product of U.S.A.” as they do not undergo a

substantial transformation as a result of the tenderizing process. Although the processed

5. Answer: Students should apply the Federal Trade Commission’s labeling rules. A seller

may not claim that a product is “Made in U.S.A.” unless all or virtually all of the materials,

Chapter 12: Imports, Customs, and Tariff Law

6. Answer: Students should apply the substantial transformation rule set forth in Ferrostaal

Metals Corp. v. United States to answer this question. Particular attention could be devoted to

7. Answer: This question requires independent student research on the Internet.

8. Answer: This question requires independent student research on the Internet.

9. Answer: This question requires independent student research on the Internet.

MANAGERIAL IMPLICATIONS

This managerial question allows students to see how tariff and customs issues can impact a

firm’s strategy for the design, manufacture, pricing and marketing of a new product. It

encourages students to take a broad, strategic, view of importing, gives a realistic experience in

using customs and tariff law during the early stages of product development, and allows them to

participate in the planning process. The question is designed to focus students on the material

in this chapter, and skirts other issues that normally would be important.

It is not unusual for a manufacturer or importer to be faced with having to design or engineer a

product so that its wholesale or retail price falls within a certain range, based on customer

demand or other market conditions. Admittedly there are many cost factors that are not given

here, such as the costs of materials, labor, indirect costs, transportation, etc., that would

influence the cost of the tents. But that was ruled out so the student can focus on the issues in

this chapter. Students should consult the HTSUS in Exhibit 12.1 as a beginning point, or

suggest that they locate the latest version of the HTSUS on the ITC website.

1. Answer. The tariff rate is determined by the fiber (synthetic, cotton, or other), the principal use

2. Answer: The tent should be “specially designed” and suitable for backpacking, as opposed to

4. Answer: CROSS is found online at http://rulings.cbp.gov/. Search for “backpacking tent.”

Chapter 12: Imports, Customs, and Tariff Law

reading a few rulings students should understand what type of information, samples, etc.,

should be included in their ruling request.

5. Answer: Key design requirements for backpacking tents are found in many of the online

Have a floor space of 65 square feet or less, and weigh 12 pounds or less, including tent

bag and all accessories necessary to pitch the tent, and have a carry size of 30 inches

or less in length and 10 inches or less in diameter. The above guidelines from T.D. 86-

163 are not rigidly applied to exclude a tent when the difference is slight when

considered with the tent’s over-all specifications

Because Z-Mart will take either a heavier 3-season or lighter 4-season tent, and because slight

variations are allowed, our firm should be able meet these design requirements.

6. Answer: Given that the firm is apparently happy with its Chinese supplier, and if the tent all

classified within 6306.22.1000, no duties are expected. However, if Customs believes that the

tents are not backpacking tents, and if the tent were to fall into 6306.22.90, then the 8.8% tariff,

combined with transportation costs from China, may become prohibitive, according to facts of

Some students will likely ask, “Why not assemble the tents in the United States at our own

plant?” This is a great area for discussion, although it extends well beyond the focus of this

chapter. Instructors can allow this discussion to go as far and wide as time and their interests

permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

use.

Chapter 12: Imports, Customs, and Tariff Law

68 FR 8711, and Textile & Apparel Rules of Origin: An Informed Compliance Publication, U.S.

CBP, 2004 Rev. In any event, students should understand the need for an advance ruling.

7. Answer: Students should follow the GRI and first compare heading 6306 to heading 8708.

________________________________________________________________________

ETHICAL CONSIDERATIONS___________________________________________________

This ethical consideration calls for personal opinion and requires independent student research

on the Internet. For additional materials supporting fair trade, students may consult the Fair

Trade Coalition (http://www.fairtradefederation.org) and Global Exchange

(http://www.globalexchange.org). For criticism of fair trade, students may consult the Adam

Smith Institute (http://www.adamsmith.org) and the Cato Institute (http://www.cato.org).

TEACHING SUGGESTION / COOPERATIVE LEARNING ACTIVITY: CUSTOMS PROBLEM

Instructors interested in taking students through the process of customs, classification,

valuation, imposition of tariffs, and the impact of free trade zones/areas/unions, may wish to use

the following assignment. The hypothetical includes the cross-border movement and

manufacture of goods and also implicates customs unions.

RULES. Students abide by the following rules:

(a) Synthetic materials “packaged” as blocks are dutiable as “raw materials,” at the

rate of 5%.

(b) Items that do not fall under (a), including any metal, wooden, or other material is

dutiable as “materials — other,” at the rate of $2 per package or $1 per lb.

Instructors may require students to use the U.S. Customs protocol (available on-

line: http://www.customs.gov OR http://www.access.gpo.gov ) or construct a

mock one of their own. The mock protocol would include a variety of customs

classifications and subheadings, thus requiring students to assess the

appropriate classifications for their goods.

(d) All customs unions, free trade zones, and free trade areas studied are in effect.

HYPOTHETICAL. Dieter, in Germany, manufactures Lili Dolls, 11 ½ inch fashion dolls. He

purchases five 10-ton blocks of industrial plastic, at the price of $1,000 per block, from France

and 50 blocks of Saran (used for making doll hair) from Qatar. Although the price of the Dieter’s

Saran is unknown, over the past two weeks Germany has imported Saran at the price of $100

per block and exported it at the price of $50 per block. The average price of Saran throughout

Europe, however, is $25 per block.

Next, Gary in Guam purchases 500 sheets of metal from Canada ($10 per sheet). Gary sends

these to Eduardo in El Salvador where they are buffed and cleaned. Ed then sends the buffed

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use.

Chapter 12: Imports, Customs, and Tariff Law

sheets to China in Costa Rica where they are made into the top and bottom halves of doll

molds. The molds are then sent to Becky in Belize. Becky adds a hinge to pairs of mold tops

and bottoms so that they close (like a book). Becky sends 100 molds to Gary in Guam at the

price of $1 per mold.

Gary then sends the molds to Dieter in Germany where the plastic is poured into the molds,

producing doll bodies. Meanwhile, underage workers in Dieter’s factory transform the Saran into

strands of long blond Lili doll hair. Dieter then sends 100,100 Lili kits (which include a doll body,

strands of hair, and doll arms that must be attached to the body) to France. There, the dolls are

put together, blue eyes are painted on, and a bathing suit is added. 100,000 dolls are then sent

to Ciprian in Romania to be boxed.

ASSIGNMENT. Address each of the transactions (note country of origin, duty to be paid, value

wherever value can be computed, and classification, where available). Use the above-stated

rules and your customs protocol.

permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

use.