Court Overturns Longstanding Country-of-Origin Methodology Used for Trade Order Scope Determinations

by King & Spalding

The scope definition contained in a trade relief order determines whether a product is subject to antidumping or countervailing duties, i.e., whether the imported product is "subject merchandise." When component parts of subject merchandise are processed in a third country to produce the finished product, the Department of Commerce (Commerce) must determine whether the processing in the third country is sufficient to "substantially transform" the components so as to change the country of origin from the country where the components were produced to the country where the final processing occurred. If the third-country processing does not substantially transform the components, the country of origin does not change and the finished product's country of origin is the country where the components were produced.

Commerce's reliance on the substantial transformation test to determine a product's country of origin has co-existed with separate statutory anticircumvention provisions for over 30 years. But the Court of International Trade recently overturned this established co-existence. See Peer Bearing-Changshan v. United States, Slip Op. 14-62 (June 10, 2014). In effect, the court found that when Congress enacted the anticircumvention provisions it narrowed Commerce's country-of-origin-based scope authority. This decision appears to be directly contrary to Congress' expressed intent to expand Commerce's authority to combat circumvention of trade relief by enacting the provisions. Moreover, in opining on the factual record, the court strongly suggested that the specific merchandise being considered – tapered roller bearings (TRBs) – could not be covered by the antidumping order under the anticircumvention provisions.

In the underlying administrative proceeding, Commerce found that the TRBs that resulted from processing in Thailand of component parts that were imported from a Chinese producer were subject to the antidumping duty order on TRBs from China. The manufacturing operations performed in Thailand were grinding and honing of unfinished, Chinese-origin cups and cones and assembly operations using finished cups and cones and Chinese-origin cages and rollers. Despite the fact that the parts shipped to Thailand for final processing were dedicated components, the court emphasized that no individual part exported from China to Thailand plausibly could have been found to be an unfinished bearing.

Commerce had applied its substantial transformation test and, in that context, found that: (1) the processing in Thailand did not result in significant value added; (2) the grinding and assembly processes were "relatively minor compared with the totality of the upstream processes" performed in China; and (3) the value of energy and labor consumed by the Thai processor in the grinding and assembly of TRB components "was insignificant when compared to the total value of the finished merchandise." The court disallowed Commerce's analytical approach. It held that including the "unfinished" parts within the scope of the order unlawfully enlarged the order. The court held that such an enlargement was only lawful when done pursuant to the distinct statutory anticircumvention provisions that applied to processing of merchandise in third countries. Examining the legislative history of the anticircumvention provisions, the court concluded that "Congress implicitly recognized limits on the Department's authority to place within an order merchandise assembled in a third county." Because Commerce had "avoided any reliance on its anticircumvention authority," the court reversed Commerce's decision. Moreover, the court opined that the TRB parts likely could not be reached under the anticircumvention authority, either, because the process of assembly or completion in the foreign country was not "minor or insignificant" in the view of the court.

It is too soon to know whether the court decision will be appealed to the Court of Appeals for the Federal Circuit, but given the nature of the decision an appeal would appear to be warranted. That said, Commerce sometimes does not appeal Court of International Trade decisions that it disagrees with because Commerce is not bound by those decisions for future investigations, but it would be bound if the Federal Circuit were to affirm such a decision. Commerce may simply decide to re-litigate the question before a different Court of International Trade judge when the issue arises again, as it surely will.

Brian McGill


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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