Antidumping and Countervailing Duties: Options for Improving Collection
Published: 2011-05-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Since fiscal year 2001, the federal government has been unable to collect over $1 billion in antidumping (AD) and countervailing (CV) duties imposed to remedy injurious, unfair foreign trade practices. These include AD duties imposed on products exported to the United States at unfairly low prices (i.e., dumped) and CV duties on products exported to the United States that were subsidized by foreign governments. These uncollected duties show that the U.S. government has not fully remedied the unfair trade practices for U.S. industry and has lost out on a substantial amount of duty revenue to the U.S. Treasury. This statement summarizes key findings from prior GAO reports on (1) past initiatives to improve AD/CV duty collection and (2) additional options for improving AD/CV duty collection.
section_title: What GAO Found
paragraphs: U.S. Customs and Border Protection (CBP), Congress, and Commerce have undertaken several initiatives to address the problem of uncollected AD/CV duties, but these initiatives have not resolved the problems associated with collections. Some of these initiatives include the following: (1) Temporary adjustment of standard bond-setting formula. Importers generally provide a general bond to secure the payment of all types of duties, but CBP determined in 2004 that the amount of this bond inadequately protected AD/CV duty revenue. CBP took steps to address this by revising its standard bond-setting formula and tested it on one product (shrimp) to increase protection for AD/CV duty revenue when the final amount of duties owed exceeds the amount paid at the time of importation. The enhanced bonding requirement was subject to domestic and World Trade Organization litigation, and CBP decided to terminate the requirement in 2009. (2) Temporary suspension of new shipper bonding privilege. Importers purchasing from "new shippers"--shippers who have not previously exported products subject to AD/CV duties--are allowed to provide a bond in lieu of cash payment to cover the initial AD/CV duties assessed, which is known as the new shipper bonding privilege. Congress partially addressed the risk that CBP would not be able to collect initial AD/CV duties from such importers by suspending the new shipper bonding privilege for 3 years and requiring cash deposits for initial AD/CV duties, but the privilege was reinstated in July 2009. The Department of the Treasury stated, however, that the added risk associated with the bond compared with the cash deposit is low. Additional options exist for improving the collection of AD/CV duties. First, the retrospective nature of the U.S. system could be revised. Under the existing U.S. system, importers pay the estimated amount of AD/CV duties when products enter the United States, but the final amount of duties owed is not determined until later, a process that can take more than 3 years on average. This creates a risk that the importer may disappear, cease business operations, or declare bankruptcy before the government can collect the full amount owed. Other major U.S. trading partners have AD/CV duty systems that, while different from one another, treat as final the AD/CV duties assessed at the time a product enters the country. Second, Congress could revise the level of exports required for exporters applying for new shipper status. Under U.S. law, new shippers to the United States can petition for their own separate AD/CV duty rate. According to Commerce, a shipper can be assigned an individual duty rate based on as little as one shipment, intentionally set at a high price, resulting in a low or 0 percent duty rate. This creates additional risk by putting the government in the position of having to collect additional duties in the future rather than at the time of importation.

section_title: Letter
paragraphs: Thank you for the opportunity to appear before the subcommittee to  present our findings on the enforcement of antidumping and  countervailing duties. Since fiscal year 2001, the federal government has  been unable to collect over $1 billion in antidumping (AD) and  countervailing (CV) duties imposed to remedy injurious, unfair foreign  trade practices. These include AD duties imposed on products exported  to the United States at unfairly low prices (i.e., dumped) and CV duties on  products exported to the United States that were subsidized by foreign  governments. These uncollected duties show that the U.S. government has  not fully remedied the unfair trade practices for U.S. industry and has lost  out on a substantial amount of duties that would have increased revenue  to the U.S. Treasury.
In my statement today, I will summarize key findings from our prior  reports on (1) past initiatives to improve AD/CV duty collection and (2)  additional options for improving AD/CV duty collection. This statement is  based on a body of work that we have conducted over the last several  years for Congress on issues related to the enforcement of U.S. trade laws,  particularly a 2008 report on collection of AD/CV duties and a report,  issued earlier this year, that included improved collection of AD/CV duties  among opportunities for enhancing government revenue. Since our 2008  report was issued, we have followed up with the U.S. government agencies  involved in responding to our recommendations to improve AD/CV duty  collection. We conducted our work in accordance with generally accepted  government auditing standards. Those standards require that we plan and  perform the audit to obtain sufficient, appropriate evidence to provide a  reasonable basis for our findings and conclusions based on our audit  objectives. We believe that the evidence obtained provides a reasonable  basis for our findings and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: The United States and many of its trading partners have established laws to  remedy the unfair trade practices of other countries and foreign companies  that cause injury to domestic industries. U.S. law authorizes the imposition  of AD/CV duties to remedy these unfair trade practices, namely dumping  (i.e., sales at less than normal value) and foreign government subsidies. The  U.S. AD/CV duty system is retrospective, in that importers pay estimated  AD/CV duties at the time of importation, but the final amount of duties is not  determined until later. By contrast, other major U.S. trading partners have  AD/CV duty systems that, although different from one another, are  fundamentally prospective in that AD/CV duties assessed at the time a  product enters the country are essentially treated as final.
Two key U.S. agencies are involved in assessing and collecting AD/CV  duties owed. The Department of Commerce (Commerce) is responsible for  calculating the appropriate AD/CV duty rate, which it issues in an AD/CV  duty order. Commerce typically determines two types of AD/CV duty rates  in the course of an initial AD/CV duty investigation on a product: a rate  applicable to a product associated with several specific manufacturers and  exporters, as well as an “all others” rate for all other manufacturers and  exporters of the product who were not individually investigated. After the  initial AD/CV duty investigation, Commerce can often conduct two  subsequent types of review: administrative and new shipper.
Administrative review: One year after the initial rate is established,  Commerce can also conduct a review to determine the actual, rather  than estimated, level of dumping or subsidization. At the conclusion of  the administrative review, the final duty rate, also known as the  liquidation rate, is established for the product.
New shipper review: After an initial rate is established, a new shipper  (i.e., a shipper who has not previously exported the product to the  United States during the initial period of investigation and is not  affiliated with any exporter who exported the subject merchandise) who  is subject to the “all others” rate can request that Commerce conduct a  review to establish the shipper’s own individual AD/CV duty rate.
U.S. Customs and Border Protection (CBP), part of the Department of  Homeland Security, is responsible for collecting the AD/CV duties. The  initial AD/CV duty order issued by Commerce instructs CBP to collect  cash deposits at the time of importation on the products subject to the  order. Once Commerce establishes a final duty rate, it communicates the  rate to CBP through liquidation instructions, and CBP instructs staff at  each port of entry to assess final duties on all relevant products  (technically called liquidating). This may result in providing importers— who are responsible for paying all duties, taxes, and fees on products  brought into the United States—with a refund or sending an additional bill.
CBP is also responsible for setting the formula for establishing the bond  amounts that importers must pay. To ensure payment of unforeseen  obligations to the government, all importers are required to post a  security, usually a general obligation bond, when they import products  into the United States. This bond is an insurance policy protecting the  U.S. government against revenue loss if an importer defaults on its  financial obligations. In general, the importer is required to obtain a bond  equal to 10 percent of the amount the importer was assessed in duties,  taxes, and fees over the preceding year (or $50,000, whichever is greater).  In addition, importers purchasing from the new shipper can pay estimated  AD/CV duties by providing a bond in lieu of paying cash to cover the  duties—an option known as the new shipper bonding privilege.
We previously reported that over $613 million in AD/CV duties from fiscal  years 2001 through 2007 went uncollected, with the uncollected duties  highly concentrated among a few industries, products, countries of origin,  and importers. Recent CBP data indicate that uncollected duties from  fiscal year 2001 to 2010 have grown to over $1 billion and are still highly  concentrated. For example, according to CBP, five products from China  account for 84 percent of uncollected duties.
section_title: Past Initiatives to Improve AD/CV Duty Collection Have Made Little Progress
paragraphs: CBP, Congress, and Commerce have undertaken several initiatives to  address the problem of uncollected AD/CV duties. However, these  initiatives have not resolved the problems associated with collections.
subsections: section_title: CBP Temporarily Adjusted Standard Bond-Setting Formulas
paragraphs: In response to the problems of collecting AD/CV duties, in July 2004, CBP  announced a revision to bonds covering certain imports subject to these  duties, significantly increasing the value of bonds required of importers.  CBP’s goal was to increase protection for securing AD/CV duty revenue for  certain imports when the final amount of duties owed exceeds the amount  paid at the time of importation, without imposing an “excessive burden”  on importers. In February 2005, CBP applied this revision to imports of  shrimp from six countries as a test case, which covered a potential  increase in the final AD duty rate of up to 85 percent from the initial rate.  However, shrimp importers reported that the costs were substantial  because they had to pay up front higher premiums and larger collateral  requirements to obtain the bonds for the initial duties. These increased  up-front costs can deter malfeasance by illegitimate importers by  increasing the cost of importing merchandise subject to AD/CV duties, but  may also impose costs on legitimate importers that pose little risk of  failing to pay retrospective AD/CV duties. The enhanced bonding  requirement was subject to domestic and World Trade Organization  (WTO) litigation, and CBP decided to terminate the requirement in   April 2009.
section_title: Congress Temporarily Suspended New Shipper Bonding Privilege
paragraphs: Congress partially addressed the risk that CBP would not be able to  collect AD/CV duties from new shippers by suspending the new shipper  bonding privilege from August 2006 to July 2009. As a result, importers  purchasing from new shippers were required to post a cash deposit for  estimated AD/CV duties, like all other importers. This requirement  eliminated the risk of uncollected AD/CV revenues when the final duty  amounts were assessed at the cash deposit rate or less because CBP did  not have to issue a bill for the bonded amount. Upon the July 2009  expiration of the requirement, the new shipper bonding privilege was  reinstated. The Treasury stated in a 2008 report to Congress that the added  risk associated with the bond compared with the cash deposit is low.
section_title: Commerce Continues Efforts to Improve Liquidation Instructions
paragraphs: Commerce has taken steps to improve the transmission of liquidation  instructions to CBP, which should improve CBP’s ability to liquidate  AD/CV duties in a timely manner. Once Commerce determines the final  AD/CV duty, it publishes a notice in the Federal Register, and CBP has 6  months to complete the liquidation process. If CBP fails to complete the  liquidation process within 6 months, an entry is “deemed liquidated” at the  rate asserted by the importer at the time of entry. Once an entry has been  deemed liquidated, CBP cannot attempt to collect any supplemental  additional duties that might have been owed because of an increase in the  AD/CV duty rate from initial to final. Commerce’s liquidation instructions  are necessary for CBP to assess and collect the appropriate amount of  AD/CV duties in a timely manner. However, we reported in 2008 that there  were frequent delays in Commerce’s transmission of liquidation  instructions to CBP, and that about 80 percent of the time, Commerce  failed to send liquidation instructions within its self-imposed 15-day  deadline. In addition, we found that Commerce’s liquidation instructions  were sometimes unclear, thereby causing CBP to take extra time to obtain  clarification. In December 2007, after we made Commerce officials aware  of the untimely liquidation instructions, Commerce announced a plan for  tracking timeliness, including a quarterly reporting requirement. In April  2011 Commerce officials told us that Commerce had deployed a system for  tracking Commerce’s liquidation instructions. In addition, Commerce and  CBP established a mechanism for CBP port personnel to submit questions  to Commerce regarding liquidation issues.
section_title: Agencies Believe Using International Agreements to Collect Duties Would Be Difficult and Ineffective
paragraphs: The House and Senate Appropriations Committees directed us to examine  whether international agreements to which the United States is a party  could be strengthened to improve the collection of AD/CV duties from  importers with no attachable assets in the United States. We reported in  2008 that U.S. agency officials believed this would be both difficult and  ineffective because of two key obstacles: Few countries are willing to  enter into negotiations, and U.S. and foreign governments have a practice  of not enforcing a revenue claim based upon the revenue laws of another  country. In addition, agency officials stated that strengthening  international agreements would not substantially improve the collection of  AD/CV duties, given the retrospective nature of the AD/CV duty system  and the high cost of litigation.
section_title: Additional Options Exist for Improving Collection of AD/CV Duties
paragraphs: There are two key components of the U.S. AD/CV duty system that have  not been addressed but could improve the collection of AD/CV duties: the  retrospective nature of the system and the new shipper review process. In  addition, Commerce and CBP are contemplating changes to the bonding  process.
subsections: section_title: Retrospective Nature of U.S. System Could Be Revised
paragraphs: One key component of the U.S. AD/CV duty system is its unique  retrospective nature, which creates risks of uncollected duties both because  of time lags and rate changes. As discussed earlier, importers pay the  estimated amount of AD/CV duties when products enter the United States,  but the final amount of duties owed is not determined until later. In 2008, we  found that the average time elapsed between entry of goods and liquidation  was more than 3 years. The long time lag between the initial entry of a  product and the final assessment of duties heightens the risk that the  government will be unable to collect the full amount owed, as importers  may disappear, cease business operations, or declare bankruptcy.
The final amount owed under the retrospective system of the United  States can also be substantially more than the original estimate, putting  revenue at risk. We reported that, while final AD duty rates are lower than  or the same as the estimated duty rates the vast majority of the time, in  some cases final duty rates are significantly higher. On the basis of our  analysis of more than 6 years of CBP data covering over 900,000 entries  subject to AD duties, we found that duty rates went up 16 percent of the  time, went down 24 percent of the time, and remained the same 60 percent  of the time. When duty rates increased, the median increase was less than  4 percentage points. However, because of some large increases, the  average rate increase was 62 percentage points, with some increases  greater than 150 to 200 percentage points. The majority of uncollected  duty bills over $500,000 are attributed to rate increases greater than 150  percentage points.
In our 2008 report, we noted that the advantages and disadvantages of  prospective and retrospective AD/CV duty systems differ and depend on  specific design features.
In prospective AD/CV duty systems, the amount of AD/CV duties paid  by the importer at the time of importation is essentially treated as  final. This eliminates the risk of being unable to collect AD/CV duties  and creates certainty for importers. In a retrospective AD/CV duty  system, however, the amount of AD/CV duties owed is not determined  until well after the time of importation. This time lag can result in “bad  actors,” those importers who intentionally avoid paying required duties,  not being identified until they have been importing for a long time. Only  after its collections efforts are unsuccessful does the government  clearly know that duties owed by this importer are at serious risk for  noncollection.
Prospective AD/CV duty systems create a smaller burden for customs  officials because the full and final amount of AD/CV duties is assessed  at the time of importation, whereas, according to CBP, the  retrospective AD/CV duty system of the United States places a unique  and significant burden on CBP’s resources.
Depending on the design of the prospective AD/CV duty systems, the  amount of duties assessed is based on dumping or subsidization that  occurred in a previous period, and therefore may not equal the amount  of actual dumping or subsidization, whereas under a retrospective  AD/CV duty system, the amount of duties assessed reflects the actual  amount of dumping by the exporter for the period of review. However,  in practice, a substantial amount of retrospective AD/CV duty bills are  not collected.
In response to a recommendation in our 2008 report, Commerce reported  to Congress in 2010 on the advantages and disadvantages of retrospective  and prospective systems. While the Commerce report cites a variety of  strengths and weaknesses for both systems, it states that retroactive  increases in AD/CV duties are particularly harmful for small businesses  such as shrimp and seafood importers. Under a retrospective system, the  Commerce report notes, such small U.S. importers potentially face years  of uncertainty over duty liability that can hinder their ability to make  informed business decisions, plan investments, and create jobs.
section_title: New Shipper Review Process Could Be Enhanced
paragraphs: Another component of the AD/CV duty collection system that has not been  resolved is the new shipper review process. This process allows new  manufacturers or exporters to petition for their own separate AD/CV duty  rate. However, U.S. law does not specify a minimum amount of exports or  number of transactions that a company must make to be eligible for a new  shipper review, and according to Commerce officials, they do not have the  legislative authority to create any such requirement. As a result, a shipper  can be assigned an individual duty rate based on a minimal amount of  exports—as little as one shipment, according to Commerce—and can  intentionally set a high price for this small amount of initial exports. This  creates the possibility that companies may be able to get a low (or 0  percent) initial duty rate, which will subsequently rise when the exporter  lowers its price. This creates additional risk by putting the government in  the position of having to collect additional duties in the future rather than  at the time of importation. Importers that purchased goods from  companies undergoing a new shipper review are responsible for  approximately 40 percent of uncollected AD/CV duties.
section_title: Commerce and CBP Recently Proposed Additional Changes to the Bonding Process
paragraphs: Commerce and CBP have proposed additional changes to the bonding  process to try to reduce the risk of uncollected AD/CV duties. In April  2011, Commerce proposed a rule that would eliminate the bond that all  shippers post when entering products under an AD/CV investigation and  require a cash deposit instead. A key reason for the change is that  importers bear full responsibility for future duties, according to  Commerce. Separately, in May 2011, CBP’s Commissioner of International  Trade stated in a Senate hearing that CBP is developing internal guidance  to require that importers at risk of evasion take out onetime bonds that  cover at least the full value of the shipment (single-transaction bonds).  Currently, shippers typically take out a “continuous bond” that covers all  import transactions over the course of a year, and is calculated at 10  percent of the prior year’s duties (or $50,000, whichever is greater). GAO  has not reviewed these proposals or assessed their potential effect on the  collection of additional AD/CV duties .
section_title: Concluding Observations
paragraphs: The existence of a substantial amount of uncollected AD/CV duties  undermines the effectiveness of the U.S. government’s efforts to remedy  unfair foreign trade practices for U.S. industry. While Congress and federal  agencies have taken actions to address the problem of uncollected duties,  these initiatives have met with little success. Some additional options exist  that Congress could pursue to further protect government revenue. In  particular, Congress could eliminate the retrospective component of the  U.S. AD/CV duty system and consider the variety of alternative prospective  systems available. Congress could also make adjustments to specific  aspects of the U.S. AD/CV duty system without altering its retrospective  nature, such as by providing Commerce the discretion to require  companies applying for a new shipper review to have a minimum amount  or value of imports before establishing an individual AD/CV duty rate.  However, any effort to improve the U.S. AD/CV duty system should  consider the additional costs placed on legitimate importers while  attempting to address the issue of illegitimate importers. We continue to  respond to congressional interest in this issue, and have recently begun a  review of the evasion of trade duty laws, in response to a request from the  Subcommittee on International Trade, Customs, and Global  Competitiveness, Senate Committee on Finance.
Chairman Landrieu, Ranking Member Coats, this completes my prepared  statement. I would be happy to respond to any questions you or other  members of the subcommittee may have at this time.
section_title: Contacts and Staff Acknowledgments
paragraphs: For further information about this statement, please contact Loren Yager  at (202) 512-4347 or yagerl@gao.gov. Individuals who made key  contributions to this statement include Christine Broderick (Assistant  Director), Jason Bair, Ken Bombara, Aniruddha Dasgupta, Grace Lui,  Diahanna Post, and Julia Roberts.
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