Antidumping and Countervailing Duties: Congress and Agencies Should Take Additional Steps to Reduce Substantial Shortfalls in Duty Collection
Released: 2008-04-23T00:00:00

Letter

Background

The process for importing products into the United States involves several different private parties as well as the U.S. government. Exporters are companies that ship goods manufactured or produced in foreign countries to the United States. Importers may be companies that purchase the products from exporters or simply may be responsible for the facilitation of the importation of the goods. Importers are responsible for paying all duties, taxes, and fees on those products when they are brought into the United States. Importers also are required to obtain a general bond to secure the payment of their financial obligations. CBP is responsible for, among other things, collecting the duties, taxes, and fees assessed on those products and setting the formula for establishing importers’ bond amounts.

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. While AD/CV duties are intended to protect U.S. industries and workers from unfair foreign trade practices, they also have become a substantial source of revenue for the U.S. government. CBP is the U.S. agency responsible for collecting all import duties, which amounted to over $98 billion from fiscal years 2003 through 2006. A portion of these duties are AD/CV duties, of which CBP collected $8 billion in cash deposits (or 7 percent of the total). A recent Department of the Treasury (Treasury) analysis estimated that for fiscal years 2003 through 2006, the overall collection rate for all duties exceeded 99 percent and the collection rate for AD/CV duties was somewhat lower (96 percent). However, Treasury also reported that the collection rate for AD duties owed as a result of an administrative review by Commerce was less than 50 percent. Treasury estimated that approximately $589 million in total duties went uncollected during the period. Uncollected AD/CV duties represented 87 percent of that amount.

Figure 1 shows the amount of uncollected AD/CV duties owed for entries liquidated during each fiscal year, as of September 30. For example, for fiscal year 2007, CBP reported $237 million in uncollected AD/CV duties for entries liquidated during the year, as of September 30, 2007. The amount of uncollected duties for entries liquidated during fiscal year 2007 could decrease based on additional collections made in subsequent years.

According to government officials and private sector representatives, the substantial shortfalls in collecting AD/CV duties were first widely publicized after the enactment of CDSOA (also known as the Byrd Amendment) in 2001, which provided for the distribution of AD/CV duties to the injured domestic industries, instead of, as in the past, going to Treasury. Following the repeal of CDSOA in 2006 after a decision by the World Trade Organization (WTO) that the law violated WTO rules, AD/CV duties collected will again be paid to Treasury.

The process for investigating, calculating, and assessing AD/CV duties can be a lengthy process and involves three key agencies. Commerce is responsible for determining whether the imports at issue are being sold at less than fair value (dumped) or are being subsidized by a countervailable subsidy. The ITC is responsible for determining whether an industry in the United States is being injured by the imports at issue. Both ITC and Commerce must make affirmative determinations in their respective investigations for AD/CV duties to be imposed. Commerce also sets the AD/CV duty, which is equal to the amount of dumping or subsidization. CBP is then responsible for collecting the AD/CV duties.

At the completion of its investigation, Commerce issues an AD/CV duty order, which specifies the products for which importers must pay AD/CV duties, and indicates the rates applicable to several specific exporters and a catch-all rate for all other exporters that did not receive a specific rate. The AD/CV duty order also instructs CBP to collect cash deposits at the time of importation at those rates on all merchandise subject to the order. As shown in figure 2, the merchandise also can be subject to an administrative review by Commerce 12 months after the issuance of the AD/CV duty order. During the administrative review, Commerce analyzes previous imports to determine the actual level of dumping or subsidization for those imports. At the conclusion of the administrative review (typically about 18 months after the review’s initiation), the liquidation rate (i.e., the final duty rate) for the merchandise is established. Commerce communicates the final duty rate to CBP through liquidation instructions and CBP instructs staff at each port of entry to assess final duties on all relevant entries (i.e., applying the rate to the value of goods imported). The liquidation process is complete when CBP refunds money (if the cash deposit rate was higher than the liquidation rate) or issues a supplemental bill (if the liquidation rate is higher than the cash deposit rate). If the cash deposit rate is equal to the liquidation rate, CBP does not issue a refund or a supplemental bill and the entry is liquidated “as entered.” These actions must be completed by Commerce and CBP within 6 months. (App. III provides additional information regarding the AD/CV duty collection process.)

To collect additional AD/CV duties an importer owes, CBP sends the importer a monthly bill. An importer has 6 months from the date of liquidation or reliquidation to protest the bill amount. After the protest period has expired, if an importer has not paid the bill, CBP requests payment from the surety (insurance) company that underwrote the bond the importer provided when the products entered the United States. According to CBP officials, if CBP does not receive full payment of the bill within 8 months of sending the first bill, it “sanctions” the delinquent importer. CBP officials also explained that importers that have not been sanctioned are allowed to have their merchandise released from the port of entry without paying all estimated duties, taxes, and fees so long as they commit to make such payment within 15 days. When importers are sanctioned, CBP revokes this privilege and requires the full payment of all estimated duties, taxes, and fees before products can leave the port of entry. If CBP does not receive payment within 1 year of issuing the first bill, CBP’s Revenue Division (which is responsible for collecting payment) refers the case to CBP’s Office of Chief Counsel, which determines the next course of action. In addition, the Office of Chief Counsel determines whether the bill should be written off.

While the time frames for completing each step in the process for assessing and collecting AD/CV duties are established by law, AD/CV duties also are subject to judicial review, which is not subject to time frames. According to CBP and Commerce officials, importers and surety companies frequently obtain legal injunctions or file protests related to the application of AD/CV duties. In instances where litigation occurs, the process can take months or years longer than described here.

Uncollected AD/CV Duties Are Substantial and Highly Concentrated

Uncollected AD/CV duties from fiscal years 2001 through 2007 amount to over $613 million and are highly concentrated among a few industries, products, countries of origin, and importers. For example, uncollected AD/CV duties are highly concentrated in four products from one country. In addition, a relatively small number of large AD/CV duty bills and unresolved legal protests accounts for a sizeable portion of the uncollected AD/CV duties. According to CBP billing records, about $350 million worth of AD/CV duty bills are in various stages of the collection process. Of those bills, CBP officials expect that most of the nearly $290 million referred to its Office of Chief Counsel will be written off. Private sector representative and congressional staff have found CBP’s detailed reporting on uncollected AD/CV duties critical to conducting oversight of CBP’s collection efforts. However, the law generating this reporting has been repealed.

Uncollected AD/CV Duties Are Highly Concentrated

Data on all open, unpaid bills for AD/CV duties as of September 2007 (which amounted to more than $613 million) show that uncollected AD/CV duties are highly concentrated in five ways: by (1) industry, (2) product, (3) country of origin, (4) exporter’s new shipper status, and (5) importer. In this report we use the phrase “uncollected AD/CV duties” to mean the sum of all open, unpaid bills for AD/CV duties issued by CBP, which includes those currently under protest. Nearly 100 percent of these uncollected duties are AD duties.

As shown in figure 3, uncollected AD/CV duties are highly concentrated in four ways: By industry. The agriculture/aquaculture industry accounts for 87 percent of the total, and the steel industry accounts for 7 percent.

By product. Since fiscal year 2001, CBP has assessed AD/CV duties related to 597 AD/CV duty orders on specific products. Of those, as of September 2007, 120 duty orders have some amount of uncollected duties. Approximately 84 percent of the total amount of uncollected AD/CV duties is associated with four products, all from China: crawfish tail meat, garlic, honey, and mushrooms.

By country of origin. Importers purchasing from China are responsible for 90 percent of all uncollected AD/CV duties.

By exporter’s “new shipper” status. Importers that purchased goods from companies undergoing a special “new shipper” review account for a substantial amount of uncollected duties. As will be discussed in more detail later in this report, under U.S. law, these importers were allowed, until recently, to pay estimated AD/CV duties by posting a bond instead of paying in cash as other importers are required to do. Importers that purchased goods from companies undergoing a “new shipper” review are responsible for approximately 40 percent of uncollected AD/CV duties.

Uncollected AD/CV duties also are highly concentrated among a group of importers. CBP data show that from October 2000 through July 2007, about 27,000 importers were subject to AD/CV duties. Of those, 520 (or less than 2 percent) had uncollected AD/CV duties as of September 2007.

Among those importers that owe AD/CV duties, the majority of the amount of uncollected AD/CV duties is owed by a relatively small number of companies. As shown in table 1, the top 4 importers that owe the most AD/CV duties account for more than one-third of the total amount of uncollected AD/CV duties, and the top 20 importers account for 63 percent. For example, as of September 2007, “Importer 1” had 133 outstanding AD/CV duty bills amounting to $122 million, which was secured by a bond of $700,000.

Most AD/CV Duty Bills Are Small, but a Few Are Very Large

As shown in figure 4, most AD/CV duty bills are small, but a relatively few large bills skew the average bill amount. Our analysis of CBP billing records shows that for the approximately 23,000 open, unpaid AD/CV duty bills as of September 2007, the median bill amount was $309, which means that half of AD/CV duty bills were less than $309 and half of the bills were more. However, a relatively small number of bills for more than $1 million increased the average (mean) bill amount to more than $26,000.

Unresolved Protests Affect the Amount of Uncollected AD/CV Duties

Unresolved protests of AD/CV duty bills substantially affect the collection of AD/CV duties. After the completion of Commerce’s administrative review, importers and surety companies can protest the amount of duties CBP has assessed. As of September 2007, approximately $265 million (or 43 percent) of the total amount of uncollected AD/CV duties was subject to protests. These protests affect the extent of uncollected AD/CV duties in two key ways. First, until the protest is decided, CBP does not take additional collection action. According to CBP officials, delays in its ability to take collection action can impair their ultimate ability to collect the full amount of duties owed. Second, if an importer or surety prevails in its protest, the AD/CV duty bill is reduced or eliminated.

A Sizeable Amount of AD/CV Duty Bills Is Likely to Be Written Off

According to CBP billing records, about $350 million worth of AD/CV duty bills are in various stages of the collection process. Approximately $290 million of these unpaid AD/CV duty bills has been sent to CBP’s Office of Chief Counsel to determine the appropriate legal action. The Office of Chief Counsel may take additional collection action such as sending importers and sureties formal demands for payment or referring the case to the Department of Justice (Justice) for litigation. In cases where at least one viable party is located, the case is referred to Justice for litigation unless the cost of collection is anticipated to exceed the amount recoverable. The Office of Chief Counsel reports that it is currently working with Justice to collect over $80 million in outstanding AD/CV duties from two sureties that are undergoing insolvency proceedings.

CBP officials expect that most of the nearly $290 million referred to its Office of Chief Counsel will be written off after proper legal review. From fiscal years 2001 through 2007, CBP wrote off approximately $34 million in AD/CV duties, most of which ($28 million) was written off in fiscal years 2006 or 2007. The Office of Chief Counsel cited several reasons for writing off outstanding bills, including (1) CBP is unable to locate the debtor(s), (2) the importer has no assets, (3) the debt against the debtor has been discharged in bankruptcy, and (4) the cost of collection is anticipated to exceed the amount recoverable.

Law Which Generated CBP Reporting on Uncollected AD/CV Duties Has Been Repealed

According to private sector representatives from industries receiving payments under CDSOA, the reporting required by CDSOA allowed them for the first time to easily identify the amount of money collected for each AD/CV duty order. Though not required by CDSOA, in fiscal year, 2003 CBP began publicly reporting the amount of uncollected duties. This reporting included detailed data on the amount of AD/CV duties uncollected for each product subject to AD/CV duties. According to private sector representatives and congressional staff, such reporting has been critical to oversight of CBP’s efforts to collect AD/CV duties.

However, in February 2006, CDSOA was repealed. Nonetheless, ensuring that Congress and the affected domestic industries have access to detailed data on uncollected AD/CV duties is critical to the oversight of CBP’s collection efforts. For example, representatives of the crawfish and steel industries (for which some imports are subject to AD/CV duties) indicate that detailed reporting on uncollected AD/CV duties is necessary to ensure that injured U.S. industries are receiving the full amount of protection intended by the imposition of AD/CV duties.

Four Key Factors Contribute to Uncollected AD/CV Duties; the Government Has Addressed Some of These Factors

Four key factors contribute to uncollected AD/CV duties; the U.S. government has addressed some of these factors. First, the retrospective component of the U.S. AD/CV duty system creates the risk of uncollected duties because the final amount of AD/CV duties an importer owes can exceed the amount it paid when goods entered the country. Second, “new shipper” reviews pose two types of risks for the collection of AD/CV duties. Congress addressed one of these risks by temporarily suspending importers’ ability to post bonds and requiring a cash payment to cover the estimated AD/CV duties owed at the time of importation when purchasing from a new shipper. Third, all importers must provide a general bond to secure the payment of duties, but CBP’s standard bond formula provides little protection of AD/CV duty revenue because it sets bond amounts at a low level. CBP addressed this by revising its standard bond formula for imports subject to AD/CV duties, but the revision has only been applied to one product and faces challenges in domestic courts and internationally. Fourth, CBP collects minimal information regarding importers and does not conduct background or financial checks, which creates challenges to locating and collecting AD/CV duties.

Retrospective Component of U.S. AD/CV Duty System Creates Risk for Duty Collection

Two aspects of the retrospective component of the U.S AD/CV duty system create risk for duty collection. First, under the U.S. AD/CV duty system, the amount of duties owed (determined through an administrative review by Commerce) can exceed the amount of estimated AD/CV duties an importer paid at the time of importation. Second, the long lag time between the time of importation and the time when final AD/CV duties are assessed creates a risk that CBP will be unable to collect the full amount of AD/CV duties owed. During this time, importers may disappear, cease business operations, or declare bankruptcy, which has created challenges to CBP’s ability to collect AD/CV duties owed.

Retrospective Calculation of Final Duties Creates Risk of Uncollected Duties

Under the U.S. AD/CV duty system, importers must pay estimated AD/CV duties at the time of importation, but the final amount of duties is not determined until later. As a result, after Commerce conducts an administrative review to establish final AD/CV duty rates, the final amount of duties owed can exceed the estimated amount of duties the importer paid at the time of importation. In these cases, CBP must attempt to collect the duties from importers who are, at times, unable or unwilling to pay. According to a 2007 Treasury report on major duty collection problems, these situations create the most significant collection problems. Some importers are unable to pay the additional amount because it exceeds their available assets. Others, such as illegitimate importers, expect that their final assessment will exceed their cash deposit and plan to avoid their final duty obligation, according to Treasury officials.

Final AD duty rates are lower or the same as the estimated duty rates the vast majority of the time. However, in some cases, final duty rates are significantly higher. In analyzing 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. In instances when rates increased, the median increase was less than 4 percentage points, meaning that half of the time the rate increased less than 4 percentage points. However, because of some large increases, the average rate increase was 62 percentage points, and some exceeded 200 percentage points. When there was a rate decrease, the median decline was 7 percentage points, meaning that half of the time the rate decreases were less than 7 percentage points. However, some larger decreases caused the average rate decrease to be 21 percentage points.

When these rate changes were applied to each entry, CBP provided refunds or issued supplemental bills to the importers. In part because there were more refunds than supplemental bills, on balance, the average result was a refund of $324. For the 24 percent of the entries that had a rate decrease, the average refund amount was $2,733. For the 16 percent of the entries that had a rate increase, the average supplemental bill was $2,137, but one was more than $7 million. Notably, the majority (58 percent) of uncollected duty bills over $500,000 are attributed to rate increases greater than 150 percentage points. Figure 5 shows the amounts of uncollected AD/CV duties by various levels of rate increases.

Long lag times between initial entry of a product and final assessment of duties further increase the risk of uncollected duties, especially when dealing with illegitimate importers. According to CBP officials, the more time that elapses between the entry of goods and the assessment of final duties, the lower the likelihood they will be able to collect any additional duties owed because importers may disappear, cease business operations, or declare bankruptcy. As seen in figure 6, half of all entries subject to AD/CV duties took 29 months (about 2.4 years) or less to liquidate (i.e., close the entry or issue a bill or refund). For one entry, however, more than 18 years elapsed between the entry of the goods and when the entry was liquidated. On average, this process took about 3.3 years.

According to CBP and Treasury officials, some importers attempting to avoid AD/CV duties take advantage of the long lag times created by the system to deliberately evade paying AD/CV duties. Since, on average, more than 3 years elapse between the entry of the goods and the final assessment of duties, importers can bring in a large volume of merchandise subject to AD/CV duties before final duties are assessed.

New Shipper Reviews Enhance Risk for Uncollected AD/CV Duties; Congress Has Partially Addressed This Risk

U.S. law pertaining to the application of AD/CV duties to “new shippers” poses two types of risks related to the collection of these duties. The first risk is linked to the ability of importers purchasing from new shippers to post bonds instead of having to pay cash deposits. In the course of an AD/CV duty investigation, Commerce typically determines an AD/CV duty rate applicable to a good associated with several specific manufacturers and exporters as well as a rate for all those manufacturers and exporters of the good not individually investigated. After the conclusion of an AD/CV duty investigation, some exporters who are not individually investigated may request a review in order to receive their own rates because they believe they could receive a lower rate. A “new shipper” (a manufacturer/exporter) who did not export the subject merchandise during the initial period of investigation and is not affiliated with any exporter who exported the subject merchandise can request that Commerce conduct a review to establish the shipper’s own individual AD/CV duty rate. Once Commerce initiates a new shipper review, importers purchasing from the manufacturer/exporter undergoing the review used to have the option of paying estimated AD/CV duties by providing a bond in lieu of paying cash. As discussed earlier in this report, importers that were allowed to provide bonds in lieu of cash deposits are responsible for about 40 percent of the amount of uncollected AD/CV duties.

Congress has partially addressed this risk of uncollected AD/CV duties associated with new shipper reviews. In August 2006, Congress temporarily suspended the “new shipper bonding privilege” that allowed importers who purchased from companies undergoing a new shipper review to provide a bond, instead of cash, to cover the estimated AD/CV duties due at entry. As a result, all importers must now provide a cash deposit to cover the estimated duties at entry until July 2009. This new policy eliminated the risk of uncollected AD/CV revenues when the final duty amounts were assessed at the cash deposit rate or less because CBP does not have to issue a bill for the bonded amount. However, supplemental duties due to rate increases remain unprotected.

The new law also required CBP to apply the revised policy retroactively to April 1, 2006. Thus, those importers who already had obtained bonds for AD/CV duties on shipments from new shippers during the approximately 4.5 months preceding the legislation were required to make cash payments for these shipments. CBP identified $96 million worth of such bonds that needs to be replaced with cash. While CBP has taken steps to collect this money, as of January 2008, it had collected only approximately $100,000 in total.

The second risk is linked to the level of imports required to obtain an AD/CV duty rate as a result of a new shipper review. U.S. law does not specify any minimum amount of exports or number of transactions that a manufacturer or exporter must make to be eligible for a new shipper review. As a result, an exporter can be assigned its own individual AD/CV duty rate based on a very minimal amount of exports. For example, a new shipper can purposely make one commercial shipment to the United States at a relatively high price for which the importer would pay a relatively high AD/CV duty rate, then request a review of that shipment. Commerce’s review (based on the one shipment) will determine that the new shipper was not dumping the product in the United States and assigns a 0 percent AD/CV duty deposit rate. Once Commerce assigns the new shipper a 0 percent AD/CV duty rate, the AD/CV duties the importer paid on the one commercial shipment are refunded, with interest. In addition, no AD/CV duty deposits are collected on future shipments, but additional duties may be owed if those shipments are determined to have been dumped or subsidized when an administrative review is completed in approximately 12 to 18 months.

CBP’s Standard Bond Formula Provides Little Protection of AD/CV Duty Revenue; CBP Has Taken Steps to Address This Risk, but Faces Challenges

CBP’s standard bond setting formula provides little protection for securing AD/CV duty revenue when the final amount of AD/CV duties owed exceeds the amount paid at the time of importation. 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. CBP determines the appropriate amount of a bond required for each importer. 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).

As seen in table 1 earlier in this report, CBP’s standard bond formula is insufficient to protect AD/CV duty revenue in some cases. Table 1 presents data on the top 20 importers with uncollected AD/CV duties and their bond amounts, which are insufficient to protect AD/CV duty revenue for all 20 importers. When AD/CV duties are retrospectively increased, the standard bond formula can be insufficient to cover the importer’s new obligation. If an importer fails to pay the supplemental AD/CV duties, CBP can collect from the surety, up to the amount of the bond that was provided at the time of importation. However, CBP frequently faces a lengthy process of trying to collect from bonding agents who can, and often do, protest CBP’s decision to collect the bond amount. According to Treasury’s analysis, if an importer defaults and the amount of the bond is insufficient to cover the importer’s new obligations, duties due in excess of the bond coverage are often uncollected.

In July 2004, in response to problems collecting AD duties, CBP announced a revision to its standard bond policy for bonds covering certain imports subject to AD/CV duties. The revised bond formula was intended to reduce the risk of uncollected duties, but CBP has tested it on only one product subject to AD duties. The revised policy requires importers to obtain a bond equal to 100 percent of the estimated AD/CV duties for items imported over the previous 12 months. Essentially, the new requirement doubles the AD/CV duty revenue protected in that CBP now receives a cash deposit, plus an increased bond approximately equal to the cash deposit. In February 2005, CBP applied the revised policy to imports of shrimp from six countries subject to AD duties as a “test case” before applying the policy more broadly.

In October 2006, we reported on the implementation of the test case and its effects. We found that the revised bonding requirement achieved its goal of increasing the amount of AD duties secured. CBP data showed that the policy increased the amount of duty revenue protected by 85 percent, but that the costs imposed on shrimp importers as a result of the revised policy are substantial. For example, shrimp importers must pay higher premiums and often are required by sureties to provide 100 percent collateral. According to shrimp importers, this reduced the amount of funds available to operate their business, tied up collateral for several years, and strained the borrowing capacity of some importers.

While the policy has protected revenue and had some negative impacts on importers, it is not possible to assess its full effects on AD/CV duty collections for three reasons. First, it has been applied to one product, shrimp, which has little history in terms of duty collections. Second, the domestic shrimp industry and over 100 shrimp exporters reached agreements to not request that Commerce conduct administrative reviews. In exchange for cash payments from exporters and the cooperation of the exporters on issues related to illegal antibiotics and circumvention, the domestic industry agreed not to request an administrative review of these exporters. This eliminated the possibility of duty rate increases which can result in uncollected duties. Thus, it is not possible to separate the effects of the policy from the effects of the agreements. Third, some U.S. importers and WTO members have challenged the legality of the policy. The U.S. Court of International Trade has issued an injunction on the implementation of the policy for some importers, and a WTO dispute settlement panel issued a report in February 2008 indicating that the revised policy as applied to imports of shrimp from India and Thailand is inconsistent with WTO rules. The policy is currently still being applied to most shrimp importers, but it has not been applied to importers of other products.

CBP Collects Little Information Regarding Importers of Record, Creating Challenges to Locating Debtors and Collecting Duties

CBP collects a minimal amount of information from companies applying to be importers of record, which challenges its ability to subsequently locate and collect duties from delinquent debtors. Aside from basic information such as an importer’s name and its mailing address, CBP requires one additional unique identifying number. This number can be an Internal Revenue Service Taxpayer Identification Number (for a company) or a Social Security number (for an individual). In addition, applicants can request that CBP assign them a unique number for CBP’s tracking purposes. Companies seeking to avoid paying AD/CV duties can easily drop identification numbers and obtain new ones, making the numbers an ineffective tool for enforcement. Regardless of the type of unique identifying number the importer uses, the company (or individual) is not subject to any credit or background checks before being allowed to import products into the United States. With such limited information about importers, locating them can be difficult, especially if they are trying to evade duties. According to CBP officials responsible for attempting to collect delinquent AD/CV duties, their collection efforts often are ineffective because by the time they are able to attempt to collect, importers have ceased business operations.

CBP officials pointed out that foreign companies and individuals are allowed to be importers, and that CBP’s ability to collect from such importers, especially illegitimate ones, is very limited. According to CBP officials, the number of nonresident importers (i.e., foreign importers of record) seems to be growing and poses unique issues when it comes to collecting AD/CV duties. CBP officials indicated that if foreign importers of record do not pay supplemental duties, the cost of attempting to collect the duties would be high and would likely exceed the amount collected.

Although Improvements Made, Weaknesses in Interagency Communication Impede Processing of AD/CV Duties, but the Overall Revenue Effect Appears Minimal

Despite some improvements, weaknesses in interagency communications impede CBP’s ability to process the final amount of AD/CV duties within the required 6 months. In recent years, CBP and Commerce have taken several steps to improve communication regarding AD/CV duties, but untimely action by Commerce and CBP’s need to seek clarification from Commerce during the liquidation process present challenges to completing the process in the time allowed. Many entries are not addressed within the statutory 6-month period, though the overall effect on revenue appears minimal. Human capital challenges at Commerce affect its ability to effectively perform its role in the liquidation process, but Commerce lacks a strategy for addressing these challenges.

Agencies Have Taken Steps to Improve Communication

In recent years, agencies have taken steps to improve communication related to processing AD/CV duties. First, Commerce established a Customs Unit within the Import Administration in January 2005 that provides essential customer services and information to both government and private sector stakeholders involved in the AD/CV duty process. The Customs Unit serves as the focal point for CBP on customs issues, maintains a call center, and fosters communication daily with CBP via e- mail and telephone. Both CBP and Commerce officials agree that the formation of the Customs Unit has improved their interagency communication. Commerce also has taken steps to improve the template it uses to guide the development of liquidation instructions. In addition, according to Commerce, officials from Commerce, CBP, Immigration and Customs Enforcement, and occasionally the Department of Justice or U.S. Attorney’s Office attend a monthly trade enforcement meeting at which they discuss AD/CV duty collections, including open and potential fraud cases.

CBP and Commerce also have taken steps to improve their handling of the protests filed by importers and surety companies regarding the amount of duties owed. For instance, according to Commerce officials, in 2006, Commerce increased the number of staff processing protests from one to five, enabling the agencies to reduce the backlog of 250 protests. In addition, CBP enhanced its tracking system to monitor the status of the protests it sends to Commerce for advice on how to resolve the protest. Also, CBP is in the process of clarifying instructions to its ports on procedures for handling AD/CV duty-related protests.

CBP is undertaking steps to improve its data systems for processing AD/CV duties, as part of the agency’s larger project to replace its 20-year- old data system—called the Automated Commercial System (ACS)—with the Automated Commercial Environment (ACE). CBP is building a separate AD/CV duty module within ACE, soliciting input from Commerce officials throughout the project. According to CBP officials, ACE will enhance its ability to handle more AD/CV duty tasks automatically. Currently, thousands of entries subject to AD/CV duties require manual entry for liquidation, which is resource and time intensive. According to CBP officials, the AD/CV duty module in ACE is expected to be completed sometime after January 2011.

Weaknesses in Interagency Communication Create Impediments, Impairing CBP’s Ability to Process AD/CV Duties

Communication weaknesses in the interagency process for liquidating entries subject to AD/CV duties impede CBP’s ability to process AD/CV duties in a timely manner. This process involves action by both Commerce and CBP and is governed by statutory and self-imposed deadlines. However, untimely and unclear communication creates impediments to completing the process within these time frames. Many entries are not liquidated within the specified time frame, though the amount of revenue lost or gained appears to be minimal. Human capital challenges at Commerce contribute to these weaknesses, but Commerce lacks a strategy for addressing these challenges.

Liquidation Process Involves Action by Commerce and CBP and Is Governed by Statutory and Self-Imposed Deadlines

Commerce and CBP must take several steps in order to liquidate an entry subject to AD/CV duties that has undergone an administrative review. Under U.S. law, this process must be completed (by sending a bill or refund or closing the transaction) within 6 months of Commerce publishing a notice in the Federal Register specifying (1) the final AD/CV duty rates or (2) a final court decision to liquidate entries that were enjoined subject to litigation, whichever comes later. There are three basic steps in the liquidation process.

First, after concluding an administrative review, Commerce publishes the review’s final results in the Federal Register, and commits to sending specific instructions to CBP within 15 days after the notice in the Federal Register or the lifting of any injunction. Commerce often prepares these liquidation instructions using a template. Commerce then sends the instructions to CBP headquarters to liquidate the covered entries at the final AD/CV duty rate determined by the administrative review. Second, CBP headquarters reviews the instructions sent by Commerce to ensure they are sufficiently clear. CBP headquarters then forwards the instructions to each port of entry. Third, CBP staff at ports of entry liquidate the entries in one of three ways: (1) refunding the difference to the importer when the final duty liability is lower than the cash deposit collected at the time of importation; (2) issuing a bill to the importer for the difference when the final duty liability is higher than the cash deposit collected at the time of importation; or (3) closing the entry when the cash deposit is the same as the final duty liability.

Untimely and Unclear Liquidation Instructions Create Impediments to Liquidation

We identified two main impediments to CBP’s ability to liquidate entries subject to AD/CV duties. One impediment is untimely liquidation instructions from Commerce. Specifically, we identified instances where Commerce failed to send the liquidation instructions within its self- imposed 15-day deadline. Since approximately January 2006, CBP has been documenting “message logs” for the purpose of tracking the timeliness of Commerce’s delivery of liquidation instructions. In reviewing these logs for a 4-month period, we determined that Commerce sent the liquidation instructions to CBP headquarters within 15 days of publishing the relevant Federal Register notice approximately 20 percent of the time. In addition, almost 30 percent of the instructions were sent more than 100 days after the Federal Register notice was published. After reviewing the instances we identified where instructions were sent more than 100 days after the Federal Register notice, Commerce officials determined that such a delay was often (about 70 percent of the time) beyond their control. For example, Commerce officials noted that some cases are subject to legal injunctions or North American Free Trade Agreement rules which allow longer time frames for the issuance of liquidation instructions. However, they also noted that some liquidation instructions are sent more than 100 days after the publication of the Federal Register notice or the lifting of any injunction because of administrative oversight due primarily to heavy workload.

According to Commerce officials, they recognize the importance of sending liquidation instructions in a timely manner, but lacked a mechanism for ensuring that this occurred. After we made Commerce officials aware of the untimely liquidation instructions we identified, in December 2007, the Deputy Assistant Secretary for AD/CV Duty Operations sent a memo to each of the nine Office Directors responsible for AD/CV duty operations reiterating the need to ensure that liquidation instructions are timely. He also announced a plan for tracking the timeliness of liquidation instructions, including a requirement that each of the Office Directors report quarterly on their office’s efforts to meet the goal of issuing instructions 15 days after the pertinent notice in the Federal Register or the lifting of any injunction.

A second impediment to the timely liquidation of some entries subject to AD/CV duties is a lack of clarity in Commerce’s liquidation instructions and the extra time taken by CBP to obtain clarification. CBP and Commerce officials acknowledge that liquidation instructions can be complicated and difficult to draft and may be very detailed. However, according to CBP headquarters officials, they are unable to send liquidation instructions to field offices to act upon in a significant percentage of cases because Commerce’s instructions are unclear.

Commerce communicates its instructions to CBP through ACS. If CBP needs to clarify or correct liquidation instructions, it will return the instructions back to Commerce through ACS. Our analysis of CBP’s log of instructions returned to Commerce for clarification found that CBP sought clarification for approximately 21 percent of liquidation instructions that Commerce sent within the 7-month period we reviewed. Further, CBP’s log noted that several instructions were sent back for clarification for a second or third time.

Many Entries Not Liquidated Within 6-Month Deadline, but Revenue Lost or Gained Appears Minimal

We identified over 37,000 entries out of a total of approximately 3.1 million entries (approximately 1 percent) subject to AD duties liquidated from October 2004 through June 2007 that were “deemed liquidated” (i.e., CBP failed to complete the liquidation process within the 6-month period). If CBP cannot complete the liquidation process within 6 months of Commerce’s notice in the Federal Register, it may not collect the appropriate amount of AD/CV duties. When CBP fails to complete the liquidation process within 6 months, an entry is “deemed liquidated” and the entry is liquidated at the rate asserted by the importer at the time of entry (e.g., the cash deposit rate). This precludes CBP from attempting to collect any supplemental additional duties that might have been owed because of an increase in the AD/CV duty rate. Similarly, it means that CBP does not refund money owed to importers as a result of a decrease in the AD/CV duty rate.

The potential revenue lost or gained on entries deemed liquidated appears minimal. In the vast majority of the 37,000 cases of deemed liquidation we identified, no revenue appears to have been lost or gained as a result of the deemed liquidation. We identified 507 entries which should have resulted in the collection of additional revenue, but were deemed liquidated. Our analysis showed that the United States did not receive approximately $106,000 in revenue for these entries. More significantly, we identified 171 entries which should have resulted in approximately $1.5 million of refunds to importers, but were deemed liquidated.

Human Capital Challenges at Commerce Affect Liquidation Process, but Commerce Lacks a Strategy for Addressing the Challenges

Commerce officials acknowledge that human capital challenges limit their ability to draft clear and timely liquidation instructions in some cases, but they have no clear strategy for addressing these challenges. They attribute these human capital challenges to a hiring freeze that has been in place since January 2006, which affected the hiring of International Trade Compliance Analysts who are responsible for drafting AD/CV duty liquidation instructions. According to Commerce officials, the AD/CV duty operations offices have lost 46 International Trade Compliance Analysts since January 2006, and they had been unable to refill these positions due to the hiring freeze. As a result, as shown in figure 7, as of January 2008, the Import Administration had less than half (103 of 211) of the International Trade Compliance Analysts which it was authorized.

Despite the substantial decline in the number of staff, there has been only a slight decline in caseload since fiscal year 2004. As shown in table 2, the caseload per analyst has increased substantially since fiscal year 2004. According to Commerce officials, this growth in caseload for International Trade Compliance Analysts is a key reason that some liquidation instructions are not sent in a timely manner.

Commerce has taken some steps to improve its human capital, but lacks a clear strategy for addressing its human capital challenges. For instance, Commerce officials report that the agency released a job announcement for the International Trade Compliance Analyst position to support the nine AD/CV duty operational offices, and they have hired nine new analysts since September 2007. They also have requested additional funding to establish an additional office to focus on CV duty investigations involving nonmarket economies. However, according to Commerce officials, they have not conducted a comprehensive analysis to understand its human capital challenges and have no formal human capital plan to address these challenges.

Options for Improving the Collection of AD/CV Duties Have Potential Advantages and Disadvantages

Congress and the relevant agencies face two sets of options to consider in attempting to improve the collection of AD/CV duties. Each set has both potential advantages and disadvantages. One set of options would be for Congress to fundamentally alter the U.S. AD/CV duty system by eliminating its retrospective component and making it prospective. The other set of options involves adjusting specific aspects of the current U.S. AD/CV duty system while retaining its retrospective nature. This set includes such options as adjusting the requirements for “new shippers,” heightening the requirements for becoming an importer of record, revising the bond requirements for importers, and lengthening the statutory deadline for assessing final AD/CV duties. Consideration of any option should include analysis of whether the change would be consistent with international trade agreements, including WTO rules.

Congress Could Eliminate the Retrospective Component of the U.S. AD/CV Duty System

U.S. law could be changed to eliminate the retrospective component of the U.S. AD/CV duty system and, instead, treat AD/CV duties assessed at the time the product enters the country essentially as final. Under the current U.S. AD/CV duty system, when Commerce issues an AD/CV duty order, it establishes estimated AD/CV duty rates. Commerce then instructs CBP to collect estimated duties at those rates from importers when products subject to the order enter the country. However, as discussed earlier, Commerce often conducts an administrative review, during which it analyzes additional imports (typically 1 year of entries) and calculates the final duty rates (and thus the amount of duties owed by the importer). In this way, the U.S. system is retrospective in nature, in that the final amount of duties is based on the actual amount of dumping or subsidization for that year.

The Prospective AD/CV Duty Systems of Other Countries Present Alternatives

Other countries we reviewed do not determine their final AD/CV duties by calculating actual amount of duties owed after products enter the country. While each country’s AD/CV duty system operates differently, major U.S. trading partners such as Canada, Australia, and the European Union have AD/CV duty systems that are fundamentally prospective. Under these countries’ systems, the AD/CV duties assessed at the time a product enters the country are essentially treated as final. App. II provides illustrative examples of the calculation of AD/CV duties under different scenarios. If and when the AD/CV duty rate is changed, it is applied only to future imports and has no effect on the amount of duties owed for previous imports. As a result, other countries reported that they have no major problems collecting AD/CV duties.

Canada’s AD duty system often is referred to as a prospective normal value system. Canadian officials conduct investigations to determine whether imports are being dumped or subsidized and whether they are causing injury to Canadian industry; if so, they impose AD/CV duties. According to Canadian officials, when the government finds that dumping is occurring, the Canadian government calculates a “normal value” for the product, which is used to calculate the amount of AD duties applicable on all future shipments to Canada. For all future imports, if the normal value of the goods exceeds the export price, the importer owes AD duties in an amount equal to the difference between the two prices. Thus, the amount of duties owed, if any, varies based on the export price. The lower the export price, the greater the duties owed, and vice versa. If the export price is equal to or higher than the normal value, the importer owes no AD duties. Officials stated that this normal value is used until the Canadian government conducts a review to update it, which typically occurs annually. These reviews are initiated either by the government or at the request of an importer or exporter based on market or price changes. Following the completion of a review, the new normal value is used for all future imports, but is not used to recalculate the amount of duties owed on prior imports (unlike in the U.S. system). Officials further explained that under Canadian law, importers and certain exporters (for example, those from the United States and Mexico) also may request a redetermination of the normal value or export price after duties have been assessed on a transaction for the purpose of obtaining a refund. Any duties found to have been paid in excess as a result of the redetermination will be refunded to the importer. As of November 2007, Canada imposed AD duties on 17 products and CV duties on 6 products. In 2006, Canada collected approximately $24 million in AD/CV duties.

Australia’s AD duty system also is prospective and the duties are assessed based on the normal value calculated during an investigation of unfairly priced imports. However, as Australian officials explained, the AD duties owed may have two components: one fixed and one variable. The fixed component is the difference between the normal value and the export price during the AD duty investigation. This amount is assessed on all future imports on a per-unit basis. The variable component is the additional duties that will be assessed if an exporter lowers its price for an individual transaction below what it charged during the investigation. The additional duties will be assessed at an amount equal to the difference between the two prices. Like the Canadian system, Australia periodically reviews the normal value and makes any adjustments on a prospective basis. As of October 2007, Australia imposed AD duties on 35 products and CV duties on 1 product.

The European Union’s (EU) AD/CV duty system also is prospective, with the amount of the duties based on the amount of dumping or subsidization applied on an ad valorem (percentage) basis. EU officials stated that they conduct an investigation to determine whether imports are being dumped or subsidized and whether they are causing injury to a European industry. If so, they then establish the normal value for the product and compare this to the export price. Officials further explained that they calculate the percentage difference between these two prices and set this as the AD/CV duty rate. This rate is then applied to all future imports of the product. As a result, the amount of the AD/CV duties owed is a simple percentage the current export price. Thus, the lower the export price, the lesser the amount of duties owed; the higher the price, the greater the amount of duties owed. According to EU officials, EU regulations allow for the periodic review of AD/CV duties as well as for the refund of any duty paid determined to be in excess of the actual margin of dumping and/or subsidization of the exporter concerned. Officials stated that these periodic reviews have a prospective effect, that is, the new rate of duty will affect only future imports (contrary to the U.S. system, the amount of duty cannot be increased retrospectively). Separately, importers have the opportunity to request a refund review, which would concern past imports. As of December 2006, the European Union had 134 AD measures and 2 CV measures in force. The AD measures covered 59 products and 32 countries, while the CV measures covered 10 products and 5 countries.

Trade-Offs Involved When Considering Prospective and Retrospective AD/CV Duty Systems

Prospective and retrospective AD/CV duty systems differ in a variety of ways, and the specific design features of each system influence their relative advantages and disadvantages. The types of trade-offs associated with each system can be illustrated by comparing three specific characteristics: Timing for determining and collecting final AD/CV duties. 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. Establishing the final amount of AD/CV duties owed at the time of importation also creates certainty for importers. This enables legitimate importers to plan their business operations. In addition, some prospective AD/CV duty systems and retrospective systems assess AD/CV duties that increase or decrease as the degree of dumping or subsidization increases or decreases, which can provide exporters an incentive to eliminate or reduce dumping. For example, under Canada’s “prospective normal value” AD/CV duty system, Canada’s investigation results in establishing a normal value which is known to all parties. Exporters can then raise their prices up to that normal value, thereby eliminating their dumping and avoiding any AD/CV duties.

In a retrospective AD/CV duty system, the amount of AD/CV duties owed is not determined until well after the time of importation. Importantly, our analysis showed that, in the U.S. system, final duties are assessed, on average, more than 3 years after importation. This time lag, which often is the result of the time required to conduct the administrative review necessary to calculate final AD/CV duties and any judicial review of the results of the review, has several potential implications. First, the threat of an administrative review can deter some companies from dumping. An administrative review could result in AD/CV duty rates being increased from the estimated rate paid at the time of importation, which could mean significant new duty liability for an importer. As such, since legitimate importers seek price certainty, they may be less inclined to purchase from exporters whose AD/CV duty rates fluctuate substantially over time. Second, the time lag creates collection risks for the U.S. government. As discussed earlier, the long lag times between entry and final duty assessments in the U.S. system increase the risk of uncollected duties, as importers may become unable or be unwilling to pay the final amount of AD/CV duties when they are assessed. Third, the 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. During this time lag, the importer may continue to import dumped or subsidized products into the country, thus incurring additional duty liability and increasing the U.S. government risk for noncollection. “Accuracy” of AD/CV duties paid. Under a prospective AD/CV duty system, the amount of duties assessed may not match the amount of actual dumping or subsidization. Under some prospective systems, the amount of AD/CV duties an importer is assessed is based on dumping or subsidization that occurred in a previous period. As a result, if the amount of dumping or subsidization changes, the amount of duties paid in the current period may not equal the amount of dumping or subsidization that is currently occurring. However, the government is able to collect the full amount of AD/CV duties assessed because the duties are paid at the time of importation.

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. The amount of the final AD/CV duty liability may not be established until the government reviews all the imports for a given period and calculates the amount of dumping or subsidization that has occurred. As a result, a retrospective system can assess duties that exactly reflect the amount of dumping or subsidization. However, in practice, a substantial amount of retrospective AD/CV duty bills are not collected. This gap between the amount of duties assessed and the amount collected means that the government is not fully remedying the unfair trade practice. This suggests that assessing a more accurate duty rate does not necessarily result in receiving more accurate duty amounts from importers. It also raises concerns about the equity of the system, as those who evade AD/CV duties gain a competitive advantage at the expense of those companies that pay the full amount of duties owed.

Administrative simplicity for customs officials. Both prospective and retrospective AD/CV duty systems may involve complex processes for determining appropriate AD/CV duty rates. However, they differ with respect to their simplicity for customs officials responsible for collecting AD/CV duties.

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. For example, according to Canadian customs officials, its AD/CV duty system places little burden on customs officials. Since all duties are paid when products enter the country, customs officials face little, if any, additional work to process imports subject to AD/CV duties.

Retrospective AD/CV duty systems can create a substantial burden for customs officials. According to CBP officials, the U.S.’s retrospective AD/CV duty system places a unique and significant burden on its resources. For example, it creates a considerable amount of administrative duties related to identifying, tracking over time, and properly processing entries subject to AD/CV duties. When CBP needs to collect additional duties beyond those paid at the time of importation, additional resources also are needed to attempt to collect those duties, which can involve attempting to locate importers that have disappeared or collecting from importers that have declared bankruptcy, and may also necessitate working with other agencies such as Justice. According to CBP officials, the retrospective AD/CV duty system increases workload and diverts focus from other priority trade issues.

Congress and Agencies Could Adjust Specific Aspects of the Current U.S. AD/CV Duty System

Adjustments to specific aspects of the U.S. AD/CV duty system could be made without altering its retrospective nature. We identified four types of changes. One type of change includes revising the requirements related to “new shippers.” A second adjustment involves heightening the requirements for becoming a U.S. importer. A third type of change includes revising the bond requirements for importers. Each of these changes would impose additional costs on both legitimate and illegitimate companies. A final change includes lengthening the amount of time CBP is provided to make a final assessment of AD/CV duties. Such a change could reduce the amount of foregone revenue, but could make collections more difficult in some situations.

Congress Could Make Adjustments to the Requirements for New Shipper Reviews

Requirements for new shipper reviews could be adjusted in two different ways. First, Congress could extend or make permanent its suspension of the new shipper bonding privilege. Doing so would require all importers to pay estimated AD/CV duties in cash at the time of entry, thus eliminating the need to attempt to collect from surety companies.

Second, Congress could revise the level of exports required for exporters applying for “new shipper” status to potentially reduce the risk of uncollected duties. As discussed previously, under U.S. law, a company applying to be a new shipper is entitled to an expedited review of its exports for the purpose of establishing an AD/CV duty rate to that company’s exports in the future. According to Commerce officials, since such companies typically have exported only one shipment of the goods subject to AD/CV duties, which is almost always at a relatively high price, they typically calculate a cash deposit rate of 0 percent. As a result, importers purchasing from these companies pay no AD/CV duties at the time of importation. However, Commerce may later determine that the exports were dumped or subsidized, and therefore retrospective bills would be issued. As described earlier, these retrospective bills are a key factor contributing to uncollected AD/CV duties. To mitigate this risk, Congress could choose to provide Commerce the discretion to require companies applying for a new shipper review to have a greater volume of imports before establishing an individual AD/CV duty rate. According to Commerce officials, such discretion would be useful because it could help mitigate the risks posed by establishing an AD/CV duty rate based on one shipment.

Revising the requirements for new shippers could reduce the risk of uncollected duties by making it harder for exporters to manipulate new shipper reviews and evade duties. However, a large volume of imports may be required to prevent some exporters from intentionally manipulating the new shipper review process. In addition, requiring a greater volume of imports could unfairly burden legitimate new shippers by requiring them to export more than they otherwise might before they could obtain an individual cash deposit rate.

Requirements for Becoming an Importer of Record Could Be Heightened

CBP or Congress could heighten the requirements for a company applying to be an importer of record to potentially reduce the likelihood that importers would prove unable to pay their duty liabilities. As discussed previously, the requirements for becoming an importer in the United States are minimal and do not involve any financial or background checks. Heightened requirements might include mandatory financial or background checks. However, according to CBP officials, performing financial checks would provide a limited assessment of importers’ future ability to pay additional AD/CV duties because their financial situations can change quickly. Additionally, a financial check does not address a company’s willingness to pay additional AD/CV duties. It also would create a significant new burden on CBP, which would need to conduct or oversee these financial or background checks. For example, CBP data indicate that from fiscal years 2005 through 2007, there was an average of over 350,000 importers of record. Of those, about 130,000, on average, were new importers each year. Moreover, these financial or background checks would need to be updated periodically, which would compound the resource requirements over time. In addition, it is possible that the heightened requirements would be imposed on all importers to be fair. Given that the vast majority of importers comply with customs laws and pay their duty liabilities, such a broad approach may not be a cost- effective way to improve the collection of AD/CV duties.

CBP Could Revise Its Bonding Requirements

Bond requirements could be modified to provide additional protection in the case that importers are unable or unwilling to pay their duty bills. One option would be for CBP to expand the application of its revised bond policy for imports subject to AD/CV duties. As explained earlier, this policy was established in July 2004, and significantly increased the value of bonds required of importers. At the time it was initially implemented, CBP officials envisioned applying the policy to shrimp imports as a test case and subsequently applying the policy to additional imports they believe pose a significant risk for uncollected AD/CV duties. To date, the policy has been applied only to imports of shrimp from six countries subject to AD/CV duties. As we have previously reported, this policy effectively doubled the amount of revenue protected by requiring (in addition to the cash deposits required at the time of entry) a continuous bond essentially equal to the cash deposits. However, expanding the application of the policy entails substantial drawbacks. For example, some importers covered by the expanded policy would face a significant increase in their costs. Shrimp importers reported that they experienced increased costs due largely to substantial collateral requirements needed to obtain the bonds. According to importers, these costs reduced their profitability and forced some importers to exit the industry. In addition, the revised continuous bonding policy has been challenged in U.S. court and at the WTO. The U.S. Court of International Trade has issued an injunction on the implementation of the policy for some importers, and a WTO dispute settlement panel issued a report in February 2008 indicating that the revised policy as applied to imports of shrimp from India and Thailand is inconsistent with WTO rules.

CBP also could set new bond requirements based on its assessments of an importer’s likely ability to pay AD/CV duties. CBP could create a set of criteria to judge each importer’s ability to pay and require larger bonds of companies judged to have a lower likely ability to pay, which would increase the amount of AD/CV duty revenue protected. Such an approach could allow CBP to target importers considered to be at high risk for uncollected AD/CV duties and require them to provide larger bonds. However, performing such analyses of individual importers’ likely ability to pay retrospective AD/CV duties, like background and financial checks, would create a substantial administrative burden for CBP. Such analyses would create a substantial new workload because of the likely complexity of the analyses, the large number of importers (approximately 350,000), and the need to regularly update the analyses.

CBP also could require importers to provide an additional bond for each entry subject to AD/CV duties in addition to the already required continuous bond. Some representatives from surety companies said that this requirement could protect additional revenue while creating only a minimal burden on CBP. They suggest that this type of requirement would allow surety companies to identify, in advance, when they are insuring the payment of AD/CV duties, which are at greater risk of nonpayment by importers. Since they face a greater risk of having to pay out on bonds related to AD/CV duties, surety companies would likely increase the cost to importers of obtaining the bond, perhaps through increased premium rates or collateral requirements. These increased costs could deter malfeasance by illegitimate importers by increasing the cost of importing merchandise subject to AD/CV duties. However, it may impose costs on legitimate importers that pose little risk of failing to pay retrospective AD/CV duties. At the same time, competition among surety companies could force them to offer better bond prices for lower-risk importers, reducing the costs for importers not at risk of uncollected duties.

Congress Could Extend the Length of Time Allowed for CBP to Liquidate Entries Subject to AD/CV Duties

Congress could choose to extend the time frame allowed by law for CBP to liquidate entries subject to AD/CV duties. As discussed earlier, CBP has 6 months to liquidate entries subject to AD/CV duties from the time that Commerce publishes a notice in the Federal Register establishing (1) the final AD/CV duty rates or (2) the lifting of an injunction against liquidation, whichever comes last. According to CBP officials, this 6-month deadline can be very hard to meet, especially when a large volume of imports needs to be liquidated or a case is extremely complex. According to CBP officials, for most imports, the Harmonized Tariff System code for a product determines the applicable duty. However, in some AD/CV duty cases, no Tariff code exists for the specific products that Commerce investigated and imposed duties on. An example is wooden bedroom furniture from China. According to CBP officials, there is a Tariff code for wooden furniture, but there is not one for wooden bedroom furniture, for which there is an AD order in effect. As a result, CBP needs to examine the invoices for every entry of wooden furniture from China to see if it falls within the scope of the AD order. This is very labor intensive and creates an opportunity for companies to circumvent the duties. Extending the amount of time for CBP to liquidate entries subject to AD/CV duties could reduce the potential for entries to be “deemed liquidated,” which can lead to foregone revenue if additional duties should have been paid. However, extending this time frame could delay refunds to some importers. As discussed earlier, the more time between a product’s entry into the country and when entries are liquidated, the greater the chance duties will be uncollected.

Conclusions

The existence of a substantial amount of uncollected AD/CV duties undermines the effectiveness of the U.S. government’s efforts to deter unfair foreign trade practices and reduces the amount of revenue available to the U.S. government. With more than $600 million in AD/CV duties currently uncollected, a large portion of which is likely to be written off, the U.S. government’s efforts to remedy injurious unfair trade practices also has been seriously compromised. This problem was first widely recognized after 2000, and has gained increased prominence and visibility based on annual public reporting by CBP. However, a recent change in U.S. law eliminated the legal requirement that generated CBP’s reporting on uncollected AD/CV duties.

While Congress and the relevant agencies have taken some steps in recent years, they have not yet fully addressed the factors contributing to uncollected AD/CV duties, and serious risks remain. Some of these factors stem from shortfalls in the capabilities and operation of the relevant agencies. For instance, human capital deficiencies at Commerce and untimely or unclear liquidation instructions have hampered the imposition and collection of AD/CV duties. Increased attention and interagency coordination in these areas could help ensure the steps in the AD/CV duty process are completed in a timely manner.

Taking additional steps to mitigate the risk to AD/CV duty collections, however, requires consideration of additional options and evaluation of their relative advantages and disadvantages. Certain adjustments could be made within the existing framework of the U.S. AD/CV duty system to further protect AD/CV duty revenue. Adjustments such as altering importers’ bond requirements would protect additional revenue, but also could have significant implications for the trade community and our trading partners, which would need to be carefully considered. Providing Commerce with the discretion to establish a minimum level of exports needed to qualify for a special new shipper review could reduce the possibility of uncollected AD/CV duties and would affect both legitimate and illegitimate importers and exporters. On the other hand, additional analysis is required to determine whether eliminating the retrospective aspect of the duty collection process could help achieve the AD/CV duty system’s intended purposes more effectively. Such fundamental alteration of the system would entail weighing the implications for a variety of stakeholder groups including affected domestic producers, exporters, importers, and the relevant federal agencies.

Matters for Congressional Consideration

In order to help reduce the amount of uncollected AD/CV duties, Congress should consider taking the following three actions: First, Congress should require the Secretaries of Commerce, Homeland Security, and the Treasury to work together to conduct an analysis and report to Congress on the relative advantages and disadvantages of prospective and retrospective AD/CV duty systems. The report should address the extent to which each type of AD/CV duty system would likely achieve the goals of remedying injurious dumping or subsidized exports, minimizing uncollected duties, reducing incentives and opportunities for importers to evade AD/CV duties, effectively targeting high-risk importers, and creating a minimal administrative burden. To ensure the report is completed in a timely manner, Congress should establish a specific date by which the report is to be delivered.

Second, Congress should require CBP to publicly report on an annual basis regarding the amount of uncollected duties for that year for each AD/CV duty order. In addition, the report should indicate the total amount of all open, unpaid bills for each AD/CV duty order.

Third, Congress should consider providing Commerce with the authority to establish, at its discretion, a minimum amount or value of exports from companies requesting a new shipper review.

Recommendations for Executive Action

In order to help ensure the full collection of AD/CV duties and improve the liquidation process, we make the following three recommendations for executive action: First, the Secretary of Homeland Security, in consultation with other relevant agencies, should determine whether CBP can adjust its bonding requirements to further protect revenue without violating U.S. law or international obligations and without imposing unreasonable costs upon importers.

Second, the Secretary of Commerce should work with the Secretary of Homeland Security to identify opportunities to improve the clarity of liquidation instructions. The Secretary of Commerce should report to Congress within 1 year on the steps it has taken to improve the clarity of liquidation instructions.

Third, to ensure that the Import Administration has sufficient human capital to issue timely and clear liquidation instructions to CBP, the Secretary of Commerce should develop a strategic human capital plan encompassing its AD/CV duty operational offices.

Agency Comments and Our Evaluation

We provided a copy of this report to the Departments of Commerce, Homeland Security, Justice, and the Treasury, as well as the U.S. International Trade Commission and the Office of the U.S. Trade Representative. The Department of Commerce’s comments are contained in appendix IV. The Department of Homeland Security’s comments are contained in appendix V. The Department of the Treasury’s comments are contained in appendix VI. The Departments of Homeland Security and Commerce agency generally agreed with our recommendations. In addition, we received technical comments from the Departments of Commerce, Homeland Security, and Justice, as well as the United States International Trade Commission and the Office of the U.S. Trade Representative. We have incorporated these comments as appropriate.

As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time we will send copies of this report to the appropriate congressional committees as well as the Secretaries of Commerce, Homeland Security, Justice, and the Treasury, the Chairman of the U.S. International Trade Commission, and the U.S. Trade Representative. We will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov.

If you or your staffs have any questions about this report or need additional information, please contact me at (202) 512-4347 or YagerL@gao.gov. Contact points for our offices of Congressional Relations or Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix VII.

Appendix I: Objectives, Scope, and Methodology

To help reduce uncollected antidumping (AD) and countervailing (CV) duties, the Senate Appropriations and Finance Committees asked us to review the reasons why the duties are uncollected and what the U.S. government has done to address this problem. In addition, they asked us to identify options for improving the AD/CV duty system. Specifically, we examined (1) the extent and nature of uncollected AD/CV duties, (2) the key factors contributing to risks for uncollected AD/CV duties and the steps taken to improve the collection of AD/CV duties, (3) interagency communications that affect the processing of AD/CV duties, and (4) potential options for improving AD/CV duty collections.

To analyze the extent and nature of uncollected AD/CV duties, we analyzed data received from U.S. Customs and Border Protection’s (CBP) Office of Finance. They include all open, unpaid bills for AD/CV duties as of September 30, 2007. These data include key characteristics like the bill amount, whether or not the bill was under protest, and the importer number. The bill amount includes the principal amount of the bill, but not any accrued interest. While we include in our reporting uncollected AD/CV duties subject to ongoing protests, we also analyzed bills not subject to protests. The results from both analyses were similar. We assessed the reliability of the data by (1) performing electronic testing of required data elements, (2) reviewing existing information about the data and the system that produced them, and (3) interviewing agency officials knowledgeable about the data. Based on our data reliability assessment we deleted less than 1 percent of the original cases. Our analysis consisted of 120 unique AD/CV duty orders and more than 23,000 individual bills. We determined that these data were sufficiently reliable for the purposes of this report.

To identify new shippers with open, unpaid bills; new shippers with bills under protest; and differences between estimated and final duty rates, we merged two data sets received from CBP. One data set included all open, unpaid AD/CV duty bills since fiscal year 2001, as of September 30, 2007, and indicated whether the bills were under protest. The other data set included all entries subject to AD/CV duties that were liquidated between October 2000 and July 2007, the AD/CV duty order date, and whether the estimated AD/CV duties paid at entry were secured using cash or a bond. We identified entries involving a company undergoing a new shipper review as those where the importer was allowed to post a bond to secure AD/CV duties after the AD/CV duty order was issued. In addition, we needed to select only those entries involving one entry line because CBP’s data regarding open, unpaid bills do not separate out the amount attributable to individual AD/CV duty orders if multiple orders were involved. Our analysis of new shippers consisted of 559 orders and approximately 1.4 million entries.

To analyze the differences between estimated and final AD/CV duty rates, we needed to select only those entries involving one AD/CV duty order because CBP’s data do not separate out the liquidation rate applicable to each order if multiple orders were involved. Once we selected those records with only one AD/CV duty order, we calculated liquidation rates by dividing the liquidation amount by the line value. We are not reporting results related to changes in CV duty rates because one case (softwood lumber from Canada) accounted for the vast majority of entries in our data set, and thus would have unreasonably biased the results. We also excluded the AD order on softwood lumber from Canada from our analysis because the liquidation rate for those entries were set as a result of a binational political agreement, which is outside the typical practice.

We assessed the reliability of the data by (1) performing electronic testing of required data elements, (2) reviewing existing information about the data and the system that produced them, and (3) interviewing agency officials knowledgeable about the data. We determined that these data were sufficiently reliable for the purposes of this report.

To identify the key factors that contribute to uncollected AD/CV duties and the steps taken to improve the collection of AD/CV duties, we reviewed reports and documents related to AD/CV duty collections from CBP and the Departments of Commerce and the Treasury. We further reviewed reports from the Congressional Research Service as well as legal journals. To determine the length of time it took Commerce to send AD/CV liquidation instructions to CBP, we analyzed CBP’s internal “message log” spreadsheets for the period of April 2007 through July 2007. These spreadsheets indicated the dates CBP received and posted liquidation instructions from Commerce. To determine reasons why Commerce sometimes delayed sending instructions to CBP, we requested that Commerce analyze the circumstances of 63 entries where it took Commerce more than 100 days to send AD/CV duty liquidation instructions to CBP. We analyzed CBP’s internal “reject log” spreadsheets from January 2007 through July 2007, which logged the instructions that CBP sent back to Commerce for clarification. We additionally analyzed data from Commerce related to the authorized versus actual staffing levels for the International Trade Compliance Analyst position from fiscal year 2004 through January 2008. We further examined Commerce data to assess caseload growth for this Analyst position. In addition, we interviewed a variety of Department of Homeland Security officials. This included officials from CBP’s Offices of International Trade, Finance, and Field Operations. We interviewed officials from Immigration and Customs Enforcement’s Office of Commercial Fraud Investigations. Additionally, we interviewed officials from the Departments of the Treasury, Justice, and Commerce. To obtain information on private sector views on the factors contributing to uncollected AD/CV duties, we interviewed officials from domestic trade industries as well as importer and surety associations.

To determine the steps the U.S. government has taken to improve collection of AD/CV duties, we analyzed CBP policies and procedures for collection of duties. We interviewed CBP officials in the Office of Technology, Office of International Trade, and Office of Field Operations, as well as its Debt Management Branch in Indianapolis. We also interviewed officials at the Department of Commerce International Trade Administration’s Customs Unit and the Department of the Treasury. We requested and reviewed documentation from the Department of Commerce and CBP regarding steps they have taken to improve the collection of AD/CV duties. In addition, we reviewed the Department of the Treasury’s July 2007 report on major duty collection problems. We interviewed representatives of domestic industries and importers affected by AD/CV duties and trade lawyers and academics with expertise in AD/CV duty issues. We reviewed governmentwide guidance on debt collection, including OMB Circular A-129—Policies for Federal Credit and Non-Tax Receivables and segments of the Debt Management Improvement Act. Our analysis included reviewing our prior report on CBP’s revised continuous bonding policy.

To identify and analyze potential options for improving AD/CV duty collections, we reviewed academic literature regarding the operation of various countries’ AD/CV duty systems and their relative advantages and disadvantages. Additionally, we obtained information from the governments of Australia, Canada, and the European Union regarding how their AD/CV duty systems operate and whether lessons could be learned from the operation of their systems. We did not independently analyze the laws and regulations of Australia, Canada, or the European Union. We also interviewed agency officials, including officials from CBP and the Department of Commerce’s Trade Remedy Compliance Staff, which are responsible for helping U.S. exporters understand other countries’ AD/CV duty systems. We interviewed private sector representatives including both domestic producers and importers in a variety of industries such as steel and agriculture/aquaculture. In addition, we interviewed representatives from an association of retailers and the surety industry.

We conducted this performance audit from June 2007 to March 2008 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.

Appendix II: Examples of the Calculation of AD/CV Duties in the United States, Australia, Canada, and the European Union

Assumptions: Normal value calculated during investigation = $110; average import price calculated during investigation = $100

At entry: Percentage difference between the normal value and average import price during the investigation (10%)

At liquidation: Percentage difference between the normal value and the current import price difference between the current import price and the average import price investigation (10%)

At liquidation: $85 + $25 = $110 $85 + $25 = $110 $85 + $25 = $110 This reflects the amount of duties assessed under each system. As discussed in the body of the report, in the United States, there can be a substantial difference between the amount of duties assessed and the amount paid.

Appendix III: Illustration of the Process and Maximum Time Frames for Collecting AD/CV Duties

Undetermined time (up to 24 month extra) protet?

Decide whether to issudditionl dty ill? ill?

adminitrative review No

Dring it dminitrtive review, Commerce has p to 18 month to lyze importring the previous yer to determine the ctuamont of dmping or subsidiztion nd clcte the finl dty rte for the import, which me more, less, or the same mont as the etimted dty rte.

Commerce end CBP hequarter intrction to liquidte the import t the finl rte determined dring Commerce’ dminitrtive review. CBP hequarter, in trn, intrct ff t ech port of entry to liquidte the import t the finl dty rte determined Commerce. The gencieve 6 month to complete thi process. If the finl rte i greter or lesser thn the etimted rte, subsquent ill or refnd will e issued. At thi time, importer or suretieo file prote with CBP, which cignificntly prolong the process.

CBP ttempt to collect on onding dty ill ending printed ill to the importer pproximtely every 30 d.

After ill i over 237 d delinquent, CBP “sanctions” the importer. Thesanction require the importer to y the fll mont of dtie owed t the time of entry on ll fre import.

Appendix IV: Comments from the Department of Commerce

Appendix V: Comments from the Department of Homeland Security

Appendix VI: Comments from the Department of the Treasury

Appendix VII: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Christine Broderick (Assistant Director), Jason Bair, Joseph Brown, Deborah Owolabi, Lisa Mirel, Karen Deans, Etana Finkler, Grace Lui, Michael Hoffman, and Ken Bombara made key contributions to this report. Stephen Caldwell, Thomas Costa, Lucia DeMaio, Ian Ferguson, Laurie Hamilton, Elisabeth Helmer, Evelyn Logue, Jackie Nowicki, Michael Rohrback, Ellery Scott, and Jena Sinkfield also contributed to the report.