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PRACTICAL TRADE & CUSTOMS STRATEGIES


May 31, 2013 Volume 2, Number 10

(Ab)normal Values in EU Anti-dumping Investigations


By Renato Antonini (Jones Day) 1 Introduction In order to adopt anti-dumping measures, investigating authorities must conclude, inter alia, that sales are made at dumped prices. In order to assess whether sales are dumped, investigating authorities will calculate the dumping margin by comparing the export prices with the so-called normal value. The normal value should in principle be the comparable domestic price in the ordinary course of trade for the like product in the exporting country. 2 However, when there are no sales of the like product in the ordinary course of trade in the domestic market of the exporting country or when the domestic sales do not permit a proper comparison due to the particular market situation or the low volume of the sales in the domestic market, the normal value can
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In This Issue
EU Anti-Dumping Investigations
EU investigating authorities have found that certain methodologies inflate the normal value of goods, an important factor in forming the basis for launching anti-dumping investigations. Page 1

Auditing Mexico FTA Origin Qualification

Mexico Launches Audits on FTA Origin Qualification


By Armando Beteta and Sergio Moreno (Ernst & Young) Mexican Free Trade Agreements (FTAs) grant the reduction or waiver of duties for products imported into Mexico which meet the rule of origin of the specific FTA. The rules of origin for each FTA establish criteria that must be met to obtain a duty preference, typically establishing that sufficient processing or content was added in the FTA area. Goods which do not meet the rule of origin do not qualify for the FTA duty preference. Additionally, subject to certain exceptions noted below, goods must generally be shipped directly from one FTA partner to another to qualify for the preference. Goods which are shipped first to an intermediate third country not part of the FTA typically lose FTA originating status. FTA claims must be supported by proper documentation of both originating status of the goods and direct shipment. Under new leadership, the Mexican tax authority (SAT) has initiated an ambitious FTA audit program that includes the traditional origin qualification reviews, plus focus on new areas such as compliance with duty deferral restrictions (e.g. NAFTA Article 303) and direct shipment requirements. Following is a brief description of this new audit program being implemented by the SAT.
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The Mexican tax authority has initiated an ambitious FTA audit program that includes the traditional origin qualification reviews, plus focus on new areas such as compliance with duty deferral restrictions and direct shipment requirements. Page 1

New U.S. Export Control Reform Rules

This article details the important implications of the new export control rules which will have massive consequences for export compliance systems and managers involved with aerospace and defense companies as well as commercial companies. Page 3

Pacific Alliance Members Hold Tenth Negotiating Round

In a tenth round of Pacific Alliance discussions, trade representatives from Mexico, Colombia, Peru, and Chile made progress in several important international trade areas including market access, rules of origin, technical barriers to trade, and regulatory improvement. Page 5

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Thomson Reuters/WorldTrade Executive 2013

Anti-Dumping
Anti-Dumping from page 1

either be a comparable price for the like product for export to any third country in the ordinary course of trade or the cost of production of the product in the country of origin plus a reasonable addition for administrative, selling and general costs and profit (the so-called constructed normal value). 3 In concrete terms, investigating authorities will normally have to compute the normal value using profitable domestic sales. If domestic sales are not profitable, not made in sufficient quantities, or do not allow a proper comparison due to a particular market situation, investigating authorities can resort to the alternative methodologies. Namely, they can either use profitable export sales to other countries or constructed normal value. In any event, the methodology used by investigating authorities should ensure that the domestic value used to compute dumping is normal, thus as close as possible to the selling price that the exporting producer could be expected to charge for the like product. 4 In the words of the Appellate Body, investigating authorities must ensure that normal value is, indeed, the normal price of the like product, in the home market of the exporter. Where a sales transaction is concluded on terms and conditions that are incompatible with

normal commercial practice for sales of the like product, in the market in question, at the relevant time, the transaction is not an appropriate basis for calculating normal value (emphasis added).5 However, the practice reveals that, in certain cases, investigating authorities use methodologies which inflate the normal value, thus leading to (ab)normal values. This article will address one of these cases, namely instances where the EU investigating authorities decided that the volume of domestic sales was not sufficient to use domestic prices and nevertheless used the profits generated by such domestic sales to compute the constructed normal value.6 The Normal Value As briefly touched upon in the introduction, the concept of normal value is spelled out in Article VI of the GATT 1994 and in Article 2.1 and 2.2 of the AD Agreement. The basic rule is that the normal value should be the comparable price, in the ordinary course of trade, for the like product when destined for consumption in the exporting country.7 Investigating authorities can, however, disregard the domestic prices if the domestic sales are not
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Published by WorldTrade Executive, a part of Thomson Reuters


Editorial Staff Publisher: Gary A. Brown, Esq.; Senior Editor: Matthew Nolan (Arent Fox LLP) Development Editor: Linda Zhang; Assistant Editor: Dana Pierce
Renato Antonini (Jones Day-Brussels) Jim Bartlett (Northrop Grumman) Steven Becker (Becker Law Offices) Lisa Crosby (Sidley Austin LLP) Gary Clyde Hufbauer (Peterson Institute for International Economics) Justin Miller (White & Case LLP) Mark Neville (International Trade Counselors) Matthew Nolan (Arent Fox LLP) Suzanne Offerman (Thomson Reuters) Kristine Price (Ernst & Young) Laura Siegel Rabinowitz (Sandler, Travis & Rosenberg)

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Practical Trade & Customs Strategies is published twice monthly, except in August and December, by WorldTrade Executive, a part of Thomson Reuters, P.O. Box 761, Concord, MA 01742 USA, Tel: (978) 287-0391, Fax: (978) 287-0302. Email: jay.stanley@thomsonreuters.com. www.wtexecutive.com. Subscriptions: $600 per year. Unauthorized reproduction in any form, including photocopying, faxing, image scanning, or electronic distribution is prohibited by law. Copyright 2013 by Thomson Reuters/WorldTrade Executive
 Thomson Reuters/WorldTrade Executive May 31, 2013

Export Controls Publication of the First Final U.S. Export Control Reform Rules: Dont Be Surprised, Be Prepared
By Wendy Wysong (Clifford Chance) The first set of final Export Control Reform rules should have caught no one by surprise given the steady drumbeat since 2009 announcing the U.S. governments intent to rethink its entire approach to protecting sensitive U.S. technology.1 These new rules, published in final form on April 16, 2013, by the U.S. Departments of Commerce2 and State3, have been previously published in five proposal notices, commented on extensively by interested parties, and discussed via weekly teleconferences with the officials involved. And yet, they promise a shock, pleasant or unpleasant, to export compliance systems and managers who have not experienced reforms on this scale in decades. The new rules begin a massive shake up of the existing controls for U.S. exports. The Reform effort boils down to this: only the most sensitive or strategic items will be covered by the strictest controls and those items will be enumerated in a positive list; the rest, that had been captured with catch-all provisions and other bucket classifications, will move to a different list and will be subject to less strict controls. In order to accommodate the move, both regulatory regimes were substantially modified by the new rules and the entire process was kicked off by transferring certain aircraft parts and engines, effective in 180 days, to be followed by additional transfers in coming months. The impact will be profound on aerospace and defense companies. However, there will also be a ripple effect on other companies, both in the defense sector and in the commercial sector, in industries such as electronics, chemical, satellite and military vehicles. Background After interagency review and industry consultation, certain items were deemed to no longer warrant the strict controls on exports, reexport or transfers imposed on defense articles by the International Traffic in Arms Regulations (ITAR, 22 CFR 120-130), administered by the U.S. Department of State Directorate of Defense Trade Controls (DDTC). Those items are to be moved from the U.S. Munitions List (USML) to the Commerce Control List (CCL). The CCL is administered by the U.S. Department of Commerce, Bureau of Industry & Security (BIS), pursuant to the Export Administration Regulations (EAR, 15 CFR 730-744), which govern the export, re-export, and transfer of virtually all items not covered under ITAR. Commodities Transferred The first set of items moved to the CCL includes certain aircraft and associated equipment (USML Category VIII) and certain gas turbine engines (USML Category XIX). The USML Categories are reserved now for enumerated items that provide the United States with a critical military or intelligence advantage. This will now trigger

The new rules begin a massive shake up of the existing controls for U.S. exports. The impact will be profound on aerospace and defense companies.

a massive effort to convert ITAR compliance managers to EAR experts, as companies will find that millions of their old parts will be caught up in this shift to an entirely new and at least initially more complicated licensing regime, with license exceptions and new classifications. New Classification In order to quell fears that the formerly tightly controlled USML items would not be appropriately controlled when moved to the traditionally less-strict CCL, BIS created a new category of Export Control Classification Numbers (ECCNs), the 600 series, to govern the level of licensing requirements, exemptions, and restrictions that would apply. For example, certain license exceptions applicable to other ECCNs will not be available to items classified in the 600 series, and BIS proposed amendments to exceptions for temporary exports and imports (TMP), servicing and replacement of parts (RPL), exports to various government entities (GOV), release of unrestricted technology and software (TSU), and intracompany transfers (STA). Moreover, while the 25 percent EAR threshold for foreign-made items incorporating less than de minimis levels of U.S. content will apply for
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exports abroad to non-arms embargoed countries, there will be no 10 percent threshold for countries subject to arms embargoes as referenced in a new country group D:5; for those countries, it is a 0 percent de minimis threshold. Part in the 600 series which are incorporated in a foreign-made item cannot be exported, re-exported or transferred to those countries in any amount without a license. All 600 series items are subject to the China Military End Use provision, which prohibits exports to China of these items without a license. Because the items were previously defense articles on the USML, they were presumptively for military use. There is, as yet, no change in that presumption. Other Changes The movement of these items to the CCL, and the revision of the USML Categories, triggered corresponding revisions throughout both the EAR and ITAR. BIS, in particular, used the opportunity for a major retrospective regulatory re-

In order to harmonize the EAR with the ITAR, the validity period of BIS licenses was extended from two to four years, with some exceptions.

view, streamlining and amending its regulations, in ways only tangentially related to the Export Control Reforms. For example, BIS added new red flags and expanded its Know Your Customer Guidance, and amended the Country Groups list to, among other changes, add a new column to Country Group A to address the intracompany license exception applicable to only 36 countries and a new column to Country Group D to incorporate the list of countries subject to a U.S. arms embargo. BIS also removed obsolete references to Shippers Export Declarations (SEDs) at last. New Definition of Specially Designed Of particular note is the revision by joint agency action of the definition of specially designed for military use. The former definition had caught and covered --to great industry consternationsimple or multi-use parts, militarily obsolete items, and items for which the design intent was in dispute. As opposed to a catch-all effect, it is now based on an objective catch and release principle. It is a two paragraph rule: (a) identifying which commodities and software are
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specially designed and (b) identifying which parts, components, accessories, attachments and software are excluded. An item is caught if one of the subparagraphs of (a) applies and released if they do not, or if one of the (b) exclusions applies. To determine whether a commodity is specially designed, three questions should be asked 1) does the commodity, as a result of development, have properties peculiarly responsible for achieving or exceeding controlled performance levels, characteristics or functions described in the relevant USML category, (2) is the part or component, as a result of development, necessary for an enumerated defense article to function as designed, and (3) is the accessory or attachment, as a result of development, used with an enumerated defense article to enhance its usefulness or effectiveness. Including the qualifying phrase as a result of development means that there must be an objective nexus between the commoditys development and its ultimate use. Development means all of the stages prior to serial production such as design (including research, analyses, concepts, data and the process of transforming design data into a product), assembly and testing of prototypes, pilot production schemes, configuration and integration design, and layouts, with respect to the item. Thus, even if an item is used in a defense article, it is not specially designed and thus, covered by ITAR, unless someone did something during its development to ensure that one of the answers to the above questions is yes. If the answer to the questions above is no, the item is not specially designed. If one of the (a) subparagraphs does apply, then, the applicability of the (b) exclusions must be determined. The exclusions boil down to the principle that an item should not be ITAR controlled if it is for a predominantly civilian application or has performance equivalent to a commodity used for civilian application. If an item provides the United States with a critical military or intelligence advantage, it should be enumerated to be covered by the ITAR. BIS created a new process for confirming whether an item is specially designed by consensus of the Departments of Commerce, State, and Defense, which replicates the process used formerly by the latter two agencies. Moreover, BIS affirmatively stated that if State issued a determination that an item was not subject to a catch-all provision of ITAR, i.e. not specially designed, then, Commerce would issue a similar classification that the item was not within the scope of the 600 series as being specially designed, after interagency consultation.

May 31, 2013

Export Controls
Licensing Changes In order to harmonize the EAR with the ITAR, the validity period of BIS licenses was extended from two to four years, with some exceptions. During the transition, license applications should be submitted to DDTC until the effective date of the move from the USML to the CCL (October 15, 2013, for this rule). Licenses issued by DDTC during the 180-day transition period will be valid for two years unless otherwise indicated on the license. Finally, if an item has both ITAR and EAR components, a DDTC license will be sufficient to cover the entire product. Transition Recommendations During the 180-day transition period, companies are advised to begin the process of revising their compliance programs and systems. In some instances, it will be clear that an item has moved from the USML to the CCL, in which case the process can begin. But in other cases, it will not be clear and a mistake is deadly. Commodity jurisdictions and licensing determinations take time, 30-60 days at a minimum and over a year for a complicated situation. Those who are first in the door at the relevant agency with a complete application requesting clarity will not face the delays that other applicants will see as more companies join in seeking help from the agencies. The process of re-classifying and marking controlled products takes time. New licenses must be obtained, although valid licenses remain so for a specified period. Internal procedures will need to be evaluated and adjusted, and training on the new regime must be implemented. And as each new final rule is published--72 are expected by the end of the year--the process will need to be repeated.The State Department characterized the publication of the first set of rules as a major milestone in the U.S. governments efforts to overhaul and redefine the U.S. export control system. Companies should not look at this as a minor tweak, but should adopt a process now to address the fuller transition over the coming year. o
1 An earlier version of this article was published in Corporate Compliance Insights. 2 The final rule by the Department of Commerce can be found at http://www.gpo.gov/fdsys/pkg/FR2013-04-16/html/2013-08352.htm. 3 The final rule by the Department of State can be found at http://www.gpo.gov/fdsys/pkg/FR-201304-16/html/2013-08351.htm.

Wendy L. Wysong (wendy.wysong@cliffordchance. com), a litigation partner with Clifford Chance, maintains offices in Hong Kong and Washington D.C. She offers clients advice and representation on compliance and enforcement under the Arms Export Control Act, International Traffic in Arms Regulations, Export Administration Regulations, and OFAC Economic Sanctions, as well as theForeign Corrupt Practices Act.

Trade Partnerships Pacific Alliance Members Hold Tenth Negotiating Round; Vice Ministers Meet to Push Initiative Forward
By Justin S. Miller (White & Case LLP) 1 Trade Officials from Mexico, Colombia, Peru and Chile held from May 6-10, 2013 the tenth round of negotiations toward the Pacific Alliance (PA). The Pacific Alliance members Vice Ministers of Foreign Trade and Commerce subsequently held in Santiago from May 8-10 the XV Meeting of the Pacific Alliance High-Level Group. During the tenth PA negotiating round, members groups, technical subgroups and expert committees made progress in the following areas: (i) market access; (ii) rules of origin (ROOs); (iii) technical barriers to trade (TBTs); (iv) regulatory improvement; (v) intellectual property rights (IPR); (vi) government procurement; (vii) sanitary and phytosanitary (SPS) measures; (viii) cross-border investment and trade in services; (ix) movement of persons; (x) cooperation; (xi) institutional issues; and (xii) the blocs unified communication strategy. In regard to (xii), PA members aim to form a common trading position among its members toward the world, particularly toward the AsiaPacific region. The XV Meeting of the Pacific Alliance HighLevel Group allowed the Vice Ministers to take stock of progress made in areas identified during the January 27, 2013 VI Pacific Alliance Presidential Summit, namely (i) market access; (ii) TBTs;
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Practical Trade & Customs Strategies

Trade Partnerships
and (iii) customs cooperation and trade facilitation, which are disciplines in which PA members aim to have reached agreement by mid-2013. The Vice Ministers also finalized work needed for the May 21-23 VII Pacific Alliance Presidential Summit, which is the first Summit observer countries Panama, Costa Rica, Canada, Guatemala, Uruguay, Spain, Australia, New Zealand and Japan will be allowed to attend. Panama and Costa Rica have also requested full PA membership, although it is unclear whether current PA members will grant these requests at the VII Presidential Summit. PA negotiating members launched efforts toward concluding the Agreement in August 2011. The PA aims to promote the free circulation of goods, services, capital and people between its
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members, and to be a platform for regional political and economic integration. According to a Mexican Secretary of Economy (Secretara de Economa (SE)) press release, the PA countries together constitute the tenth largest economy in the world, and the seventh largest in regard to export volume. The SE press release also notes that PA countries represent 35 percent of Latin American GDP. o
1 Due to the general nature of its content, this information is not and should not be regarded as legal advice. No specific action is to be taken on the information provided without prior consultation with White & Case LLP.

Justin Miller (justin.miller@whitecase.com) is a Senior International Trade Analyst with White & Case LLP, in Washington, DC.

Import Tariffs CAMEX Reduces Import Tariffs on Several Information Technology and Capital Goods
By Justin S. Miller and Staff (White & Case) 1 On May 14, 2013, the Brazilian Chamber of Foreign Trade (Cmara de Comrcio Exterior (CAMEX)) published Resolutions No. 33 and 34, reducing the import duty levied on certain imports into Brazil of information technology, telecommunications and capital goods under the ex-tarifrio mechanism. The ex-tarifrio mechanism aims to lower investment costs and foster infrastructure improvements through a temporary reduction in import tariffs - provided there is no domestic production of the goods for which the import tariffs are reduced - in response to specific requests by interested parties. With Resolutions No. 33 and 34, the number of ex-tarifrios granted in 2013 rises to 1,282. According to a Brazilian Ministry of Development, Industry and Foreign Trade (Ministrio do Desenvolvimento, Indstria e Comrcio (MDIC)) press release, the reduction in import duties contemplated in CAMEX Resolutions Nos. 33 and 34 will principally benefit the automobile parts, railway, services, oil, telecommunications, paper and pulp sectors. Specifically, these measures aim to benefit major projects, such as (i) the expansion of a factory that produces tires for both passenger cars and commercial vehicles, with investments of approximately $314 million; (ii) the improvement of railway infrastructure to better transport agricultural products, with investments of approximately $276 million; and (iii) the reduction of sulfur in gasoline and diesel produced in Brazil, with investments of approximately $250 million. The ex-tarifrios created will principally benefit goods imported from the United States (28.81 percent), China (18.95 percent), Singapore (11.37 percent), Germany (10.25 percent) and Italy (6.49 percent). o
1 Due to the general nature of its content, this information is not and should not be regarded as legal advice. No specific action is to be taken on the information provided without prior consultation with White & Case LLP.

Justin Miller (justin.miller@whitecase.com) is a Senior International Trade Analyst with White & Case LLP, in Washington, DC.

Thomson Reuters/WorldTrade Executive

May 31, 2013

Round Up Trade & Customs Round Up


By Linda Zhang (Thomson Reuters)

France Secures Support to Limit Scope of EU-U.S. Trade Talks In mid-May, about a dozen EU member states backed Frances call for a cultural exception of its movie and television industries from the proposed EU-U.S. free trade pact talks in fear that the deal could threaten European culture, according to Reuters. Other EU member states worry that the exception may spark the U.S. to impose other restrictions in retaliation which may delay and worse, dampen, an otherwise powerful free trade pact. France originally brought up the demand in April; trade negotiations are expected to start in July. UKs Cameron Urges Everything on Table in U.S.-EU Trade Talks In contrast to Frances plea to exempt sensitive cultural industries, British Prime Minister David Cameron urged that talks on the U.S.-EU free trade pact cover all sectors, according to Reuters. The European Parliament has voted to grant Frances request, but, in comments to the USTR, the Motion Picture Association of America advised the United States not to agree to up-front, blanket sectoral exclusions. In June, Britain will host the annual G8 summit, allowing Cameron an opportunity to shape how transatlantic free trade talks will proceed. Trade in Services Agreement on U.S. Congressional Agenda By late May, the U.S. Senate Finance Committee will hold a roundtable on international trade in services, according to the Sandler, Travis & Rosenberg Trade Report. The United States along with 20 trading partners have proposed an International Services Agreement which would eliminate or reduce trade barriers in services. The U.S. hopes that the agreement will help ensure that U.S. service suppliers can fare better in international markets based on quality, not nationality, and also want to improve regulatory transparency of trading partners. Turkey Seeks Seat at U.S.-EU Trade Table While the European Union and the United States prepare for upcoming free trade pact talks,

Turkey is seeking ways to get involved, according to Reuters. U.S. President Barack Obama and Turkish Prime Minister Tayyip Erdogan met in mid-May to discuss the issue. Various options exist to quell concerns, including a bilateral agreement with the U.S. or allowing Turkey to join U.S.-EU negotiations. To date, the U.S. and Turkey have created a new high-level committee to focus on increasing mutual trade and investment between the two trading partners. In addition, the nation already has a customs agreement with the EU which states that a third country forming a trade deal with the EU would automatically gain access to Turkish markets; however, Turkey does not receive the same benefits for its own exports. U.S. Ends Freeze on New Natural Gas Exports In mid-May, the Obama administration approved the first liquefied natural gas project since the contentions over how to deal with the shale energy boom, lifting a two-year freeze on new natural gas exports, according to Reuters. During the freeze, no export applications were reviewed while the administration remained concerned about the negative effect on domestic manufacturers of exporting unlimited amounts of domestic gas out of the country. The first phase of the approval will allow about two percent of current U.S. gas production to go abroad, yet the fate of other projects are still unclear and awaiting direction from the Department of Energy. Canada Prepares to Target U.S. Goods in Meat-label Spat In response to the U.S. country-of-origin labeling requirements which have allegedly caused a decline in Canadian imports of cattle and pigs, Canada will release a retaliatory list of U.S. products that it will target if satisfactory changes are not made, according to Reuters. The list is expected to extend beyond U.S. beef and pork products. In addition to Mexico, Canada has complained the rules led to a slowdown of imports of their cattle and pigs. The complaints have caused the World Trade Organization to order the U.S. to
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Round Up
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make changes by the end of the May. If the changes do not suffice, Canada has threatened to submit the list to the WTO; however, a representative from the USTR has said the U.S. expects to make sufficient changes so that the retaliatory actions are not needed. China Says EU Solar Duties to Seriously Harm Trade Ties China has warned the European Union that the move to enact punitive import duties on solar panels will result in serious harm to China-E.U trade ties, intensifying its tone of criticism after hearing of the news, according to Reuters. To date, the EU has 31 trade investigations, nearly two-thirds of them involving China. The European Commission also planned to start another investigation into the dumping behavior of Chinese manufacturers of mobile telecoms products. By June, China will likely decide whether to impose its own duties on European, U.S. and South Korean solar-grade polysilicon, a material used in producing solar panels. China Probes Dumping of Steel Pipes by U.S., EU, Japan In May, China began an investigation into the dumping of seamless steel tubes and pipers in the country from the U.S., Europe and Japan, stemming from a complaint from a Chinese company, according to Reuters. The statement, listed on the Chinese Ministry of Commerces website, did not name which companies will be targeted. Previously, the European Commission launched an investigation of alleged dumping by Chinese manufacturers of solar panels, the largest case of its kind. The EU has since agreed to impose import duties of 47 percent on solar panels from China. EU Imposes Punitive Duties to Prevent Chinese Ceramics Dumping In ongoing dumping disputes, the European Union has agreed to impose punitive duties on ceramic tableware and kitchenware from China, which it claims is priced artificially low to threaten local counterparts, according to Reuters. The Chinese manufacturers will face tariffs of between 13.1 and 36.1 percent starting in late May. These tariffs are usually valid for five years, and subject to extension.

U.S. Urged to Take Tougher Line on Indian Trade Practices In the latest fight against Indian policies that block U.S. exports and violate intellectual property, a U.S. think tank in May urged the U.S. to suspend trade benefits for India, according to Reuters. One of the proposals is to remove India from the U.S. Generalized System of Preferences (GSP) program, which allows for most goods from developing countries to enter the U.S. duty-free. India currently benefits from about $4.5 billion worth of imports into the U.S. without duties. The program as a whole is scheduled to end in July, subject to renewal, allowing lawmakers in the U.S. to reconsider Indias membership and adjust the program as they see is appropriate to influence Indian policies. CBP Clarifies Policy Change Easing Claims for Drawback on Unused Merchandise In late May, the U.S. Customs and Border Protection clarified an April policy adjustment regarding waivers of prior notice requirement for unused merchandise drawback, confirming that the policy change is applicable to both retroactive and future waivers, according to the Sandler, Travis & Rosenberg Trade Report. Applicants for waivers must also comply with the three-year statutory time period for exports, and no claims can be submitted once this time period has passed. New U.S. Legislation on Cybertheft, Foreign Manufacturers, Outsourcing, Exports, Agriculture Several bills affecting international trade have been introduced recently in the U.S. House and/or Senate, according to the Sandler, Travis & Rosenberg Trade Report. The Deter Cyber Theft Act (S. 884) would require that national intelligence write an annual report to monitor foreign countries and companies engaging in economic or industrial espionage in cyberspace against U.S. firms or individuals. The Foreign Manufacturers Legal Accountability Act (H.R. 1910) would require foreign manufacturers of imports into the U.S. to secure registered agents in the U.S. who are approved to accept services of process on behalf of foreign companies. The Export Coordination Act (H.R. 1909) would adjust an existing Act to improve federal trade promotion policies and programs. o

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May 31, 2013

Trade Promotion Authority Amid Rancor, A Chance for U.S. Action on Trade Bill
By Doug Palmer (Reuters) Major trade legislation appears increasingly likely to clear Congress in 2013 despite an intensely partisan atmosphere made worse by scandals plaguing President Barack Obamas administration. Business groups are preparing to push for the bill, which would give the White House enhanced ability to negotiate trade deals and set out U.S. negotiating goals on issues ranging from cross-border electronic data flows to global supply chains and potentially even foreign currency practices. I really think Congress is about ready to do something on trade, said Scott Miller, a trade policy specialist at the Center for Strategic and International Studies, referring to a bill known as trade promotion authority, or TPA. Bill Reinsch, president of the National Foreign Trade Council, which represents major exporters like Boeing and Caterpillar, said he was optimistic that Congress could pass a bipartisan TPA bill by the end of 2013. They all know they have to do it. You cant be a modern country in todays trading system and not have authority to negotiate these things, Reinsch said. Bipartisan legislation could emerge soon from talks between the top Democrats and Republicans on the Senate Finance Committee and the House of Representatives Ways and Means Committee, which have jurisdiction over trade laws. The action is driven by White House efforts to strike major trade deals with 11 other countries in the Asia-Pacific region and the 27 nations of the European Union. The legislation would allow Obama to submit trade agreements to Congress for straight up-ordown votes without amendments, giving other countries the assurance that any deal they reach with the United States will not be changed by the House or Senate. (Countries) dont want to make the hard and final decisions, where they put their best offers on the line, if they think theyre going to be undermined by an amendment, said former Representative Jim Kolbe, a Republican. A TPA bill would also give lawmakers a chance to shape U.S. trade policy by setting negotiating objectives for trade deals. Those instructions are expected to include how to address issues such as state-owned enterprises, digital data flows, supply chains, investment, labor, the environment and intellectual property in trade agreements. Negotiating Points Senate Finance Committee Chairman Max Baucus, a Montana Democrat, hopes to unveil a bipartisan bill by June. His team is in talks with staff for Senator Orrin Hatch, the top Republican on the Finance Committee, and Representatives Dave Camp and

A TPA bill would give lawmakers a chance to shape U.S. trade policy by setting negotiating objectives for trade deals.

Sander Levin, the Republican chairman and top Democrat, respectively, on the House Ways and Means Committee. A bill backed by all four lawmakers would have a good chance of becoming law, although opposition from labor groups that see trade protection authority as a license to move jobs overseas could make the job tough. The four also have differences on trade that could snarl their efforts. Levin, a Michigan Democrat closely aligned with Detroit-based auto producers, is pushing for a broad bill to address the overall issue of U.S. competitiveness and wants future trade deals to include rules against currency manipulation, a controversial area not included in prior trade deals. Hatch, a Utah Republican, has been critical of a retraining program for workers who have lost their jobs because of foreign competition. Democrats insist the provision must be renewed. With the White House looking to clinch deals on two trade agreements covering about 60 percent of world economic output, U.S. lawmakers have plenty of incentive to craft the legislation and lay out their negotiating priorities, even if Obama is reluctant to lead the fight for the bill. Those deals include the proposed TransPacific Partnership agreement, which the White
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House hopes to reach by the end of 2013. Many trade experts doubt that the deal can be closed unless Congress passes the TPA bill. The Obama administration also plans to begin free trade negotiations in July with European Union, providing another motivation for Congress to act. But one question is how forcefully Obama will push for the trade bill, given Democratic divisions on the issue. During the 2002 battle over trade promotion authority, many House Democrats did not want to give Republican President George W. Bush the authority and voted 183 to 25 against the bill, which barely passed by a 215 to 212 margin. Now that Obama is in the White House, the politics appear to have changed, with Democrats less inclined to fight a president from their own party and most Republicans eager to pass the bill even if they oppose Obama on other issues.

While Republicans are attacking Obama on the Internal Revenue Services scrutiny of conservative groups seeking tax-exempt status and the administrations explanation of 2012s Benghazi attack, they are likely to be his allies on TPA, which many see as a tool all presidents should have. Representative Devin Nunes, Republican chairman of a House trade subcommittee, called on the White House to intensify its efforts to pass TPA, which expired in 2007. If you had told me 10 years ago that one of the few things that could get done in Washington is trade policy, my head would have exploded. But it seems to be the case that trade is actually something we can get done, said Edward Gerwin, a senior fellow at Third Way, a Democratic policy think tank. TPA legislation, which typically is extended for five years at time, could also cover additional pacts, such as an international services trade agreement being negotiated in Geneva and new negotiations not yet contemplated. o

Trade Partnerships EU Wants to Exclude Utilities from U.S. Trade Talks


By Ethan Bilby (Reuters) The European Union wants to exempt state control of utilities and support for creative industries from free trade talks with the United States due to start in June, the latest draft of Brussels negotiating mandate showed in late May. The draft outlines several exceptions that preserve EU states control over sensitive sectors, including the power and water industries and government controlled infrastructure and are likely to be the main areas it seeks to cordon off from negotiations. Senior officials including EU trade chief Karel De Gucht and British Prime Minister David Cameron have called for the bloc to come to the table with a completely open mind and officials say it is unlikely further substantial exemptions will be added. Unlike in the United States, many national European electricity grids and power generators are state-controlled, and governments fear that a deal supporting the free flow of U.S. companies and money into the sector would erode their influence over assets seen as vital to national infrastructure. The high quality of the EUs public utilities should be preserved, said the draft, seen by Reuters, which sought in particular to exclude services supplied in exercise of government authorities. An EU official familiar with the documents said the documents language was intended to ensure member states were able to regulate utilities and maintain their ability to control investment in these sectors. Another EU source confirmed this. Francehad also threatened to block the start of the talks unless the audio-visual industry is excluded. The agreement shall not contain provisions that would risk prejudicing the Unions or its member states cultural and linguistic diversity, namely in the audio-visual sector, nor limit those member states from maintaining existing policies and measures in support of the audio-visual sector

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Trade Partnerships
given its special status within EU law, the draft mandate said. EU sources said that France has been fighting for a stronger text that not only commits to maintaining the status quo but also giving states the ability to strengthen such policies. Decades of Waiting After the long drawn-out failure of the Doha talks on a world trade deal, officials have turned back to bilateral agreements in a bid to boost growth. Brussels estimates a U.S. deal could increase Europes economic output by 86 billion euros a year, or 0.5 percent of gross domestic product, and the U.S. economy by 65 billion euros or 0.4 percent by 2027. Trade barriers between the two sides are already quite limited and the talks are expected to focus on harmonizing regulations, so that a product or service approved in Europe can be readily sold in the United States and vice versa. The latest draft follows talks with member states after the European Commission proposed a negotiating mandate in March. Some EU member states are also concerned about a procedure included in the mandate to allow for resolving disputes between investors and states. While such dispute mechanisms are increasingly common in free trade agreements, some EU diplomats say they are not necessary for two parties with strong legal systems already. Campaigners warn creating a dispute mechanism would open EU members to lawsuits from firms seeking to weaken environmental and public health provisions and that the mere threat of a dispute could force states to give in to big business. The updated draft includes language designed to calm such fears. Investor-to-state dispute settlement mechanism should contain safeguards against frivolous claims, the draft said. The inclusion of investment protection and investor-to-state dispute settlement will depend on whether a satisfactory solution meeting EU interests... is achieved. o

Anti-Dumping
Anti-Dumping from page 2

profitable.8 In concrete terms, the profitability analysis is normally carried out both on a global basis (all domestic sales compared to total cost) and on a per-type basis (domestic sales of a particular type compared to the cost attributable to such type). Normally, investigating authorities will disregard all domestic sales when they are not profitable on a global basis. They will only disregard specific sales if they do not meet the per-type profitability test.9 The AD Agreement provides for other cases when domestic sales should be disregarded, namely when the domestic sales do not permit a proper comparison because the volume of domestic sales is too low because of a particular market situation.10 The key element is that such domestic sales do not permit a proper comparison and are, therefore, not normal. Among the two cases of sales that do not permit a proper comparison, the case most commonly faced by investigating authorities is when the volume of domestic sales is too low. The AD Agreement specifies that normally domestic sales should be considered representative if

they amount to at least 5 percent of export sales. A lower ratio can however be acceptable when the evidence demonstrates that domestic sales

In order to adopt anti-dumping measures, investigating authorities must conclude, inter alia, that sales are made at dumped prices.

at such lower ratio are nonetheless of sufficient magnitude to provide for a proper comparison.11 The rule established by the AD Agreement is therefore that investigating authorities should use domestic sales when the volume is equal or above 5 percent of export sales and disregard domestic sales when this threshold is not met. However, sales below 5 percent can still be used
Anti-Dumping continued on page 12

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Anti-Dumping
Anti-Dumping from page 11

if they are sufficient to provide for a proper comparison. The (Ab)normal Value In recent anti-dumping investigations, the EU investigating authority applied a quite unusual, and in the authors view illegal, methodology in cases were domestic sales were found to be not representative (that is, not made in sufficient quantities). In a nutshell, the EU investigating authority concluded, on the one hand, that the volume of domestic sales was not sufficient to permit a proper comparison and, on the other hand, that the profit generated by such sales could be used as a reasonable domestic profit to compute the constructed normal value. In other words, what the EU investigating authority

When low-volume domestic sales do not permit a proper comparison, WTO law prohibits investigating authorities from using these domestic sales to compute normal value.

pushed out through the door was eventually let in through the window. The methodology in question was used, for instance, in two EU anti-dumping investigations carried out in 2011. In the first investigation, Glass Fibers from China12, domestic sales of certain product types were found to be not representative and were therefore disregarded (pertype analysis). In the second investigation, Zeolite from Bosnia and Erzegovina,13 since the total volume of domestic sales was only 1.9 percent of the export sales to the EU, all domestic sales were disregarded (global analysis). 14 In both cases, the EU investigating authority resorted to the determination of a constructed normal value. Normal value was thus computed on the basis of the cost of production of the product in the country of origin plus an addition for domestic administrative, selling and general costs and profit. However, the profit used by the EU investigating authority to compute the normal value was the profit generated by the nonrepresentative domestic sales (the prices of which were, therefore, not used as normal value). 15 Math tells us that the domestic price amounts to domestic costs plus domestic profit. This

means that if an investigating authority uses the profit generated by non-representative sales, the result will be identical to the domestic price of the non-representative sales. In other words, the EU investigating authority concluded that the domestic price could not be used because the volume of domestic sales was not sufficient but at the same time, on the basis of a different legal ground, the EU investigating authority actually used such domestic prices to compute normal value. The author considers that this approach is manifestly contradictory and, more importantly, contrary to WTO law. The legal ground relied upon by the EU investigating authority is that the amounts for profits should be based on actual data pertaining to production and sales in the ordinary course of trade of the like product by the exporter or producer under investigation.16 The EU investigating authority concluded that, since the domestic non-representative sales of the like product were made in the ordinary course of trade, the profits generated by such sales could be validly used to compute constructed normal value. While it is true that Article 2.2.2 of the AD Agreement allows the use of profits generated by domestic sales in the ordinary course of trade, it cannot be overlooked that low-volume non-representative domestic sales ought to be excluded from the dumping assessment because they do not permit a proper comparison. As discussed, the methodology used by the EU investigating authority is tantamount to using non-representative domestic sales prices. This approach is manifestly contrary to the principle of fair comparison. In accordance with Article 2.4 of the AD Agreement, [a] fair comparison shall be made between the export price and the normal value. This comparison shall be made at the same level of trade, normally at the ex-factory level, and in respect of sales made at as nearly as possible the same time. Due allowance shall be made in each case, on its merits, for differences which affect price comparability, including differences in conditions and terms of sale, taxation, levels of trade, quantities, physical characteristics, and any other differences which are also demonstrated to affect price comparability. A methodology which uses profits from domestic sales which, although made in the ordinary course of sales, were excluded from the dumping analysis because they, in view of the low volume of sales, do not permit a proper comparison manifestly violates Article 2.4 of

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Anti-Dumping
the AD Agreement. Investigating authorities can only validly use profits from non-representative domestic sales (which are considered not to allow a proper comparison) if they make appropriate adjustments to ensure a fair comparison. In particular, if the profits of such sales are unreasonably high (or low), appropriate adjustments to the profit margin should be made. 17 Conclusion When low-volume domestic sales do not permit a proper comparison, WTO law prohibits investigating authorities from using these domestic sales to compute normal value. The author considers that, by the same token, WTO law does not allow investigating authorities to use the profits generated by such sales to compute constructed normal value, unless appropriate adjustments to the level of profit are made. Indeed, without such adjustments, using the profits from non-representative sales would be tantamount to using the prices of such sales, which do not permit a proper comparison and would therefore violate the principle of fair comparison. o
1 Any views adopted in the present article represent the personal opinions of the author and not necessarily the position of Jones Day. 2 Different methodologies can apply in case of nonmarket economy countries. 3 See Article VI(1) of the General Agreement on Tariffs and Trade 1994 (GATT 1994) and Article 2.1 and 2.2 of the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 (the AD Agreement) of the World Trade Organization (WTO). 4 See Case C-178/87 Judgment of the Court of Justice (Fifth Chamber) of 10 March 1992, Minolta Camera v Council. 5 Appellate Body Report, US -Hot -Rolled Steel, para. 140. 6 In the present article the methodology will be analysed exclusively from a WTO viewpoint. 7 Art. 2.1 of the AD Agreement. 8 The profitability test will generally be carried out on a global basis and on a per-type basis. 9 Footnote 5 of the AD Agreement specifies that: sales below per unit costs are made in substantial quantities when the authorities establish that the weighted average selling price of the transactions under consideration for the determination of the normal value is below the weighted average per unit costs, or that the volume of sales below per unit costs represents not less than 20 per cent of the volume sold in transactions under consideration for the determination of the normal value. 10 Art. 2.2 of the AD Agreement. 11 Footnote 2 of the AD Agreement. 12 Council Implementing Regulation (EU) No 248/2011 of 9 March 2011imposing a definitive anti-dumping duty and collecting definitively the provisional duty imposed on imports of certain continuous filament glass fibre products originating in the Peoples Republic of China, OJEU L 67/1 (the Glass Fibre Regulation). 13 Council Implementing Regulation (EU) No 464/2011 of 11 May 2011imposing a definitive anti-dumping duty and collecting definitively the provisional duty imposed on imports of zeolite A powder originating in Bosnia and Herzegovina, OJEU L 125/1 (the Zeolite Regulation). 14 The Zeolite Regulation was recently annulled by the EU Courts in Case C-178/87 Judgment of the General Court (Second Chamber) of 30 April 2013, Alumina v Council. In the Zeolite investigation, the profit margin of non-representative sales was 58.89% in relation to cost of production. This exceptionally high profit margin was due to the fact that the only customer in the country of origin had financial problems and, for this reason, domestic sales included a premium of 25%. The Court annulled the Regulation since the EU investigating authority used the profit margin without making any adjustment to reflect the fact that it included a special premium. 15 In the Glass Fibre investigation, the profit margin used was higher than the average profit margin for the like product. In the Zeolite investigation, the profit margin was exceptionally high due to the specific financial situation of the only customer in the country of origin. 16 Article 2.2.2 of the AD Agreement, as implemented in the EU legal system (Article 2.6 of the EU antiDumping Regulation, Council Regulation (EC) No 1225/2009 of 30 November 2009 on protection against dumped imports from countries not members of the European Community, OJEC L 343/51). See recital 46 of the Glass Fibre Regulation and recital 19 of the Zeolite Regulation. 17 A similar reasoning can be developed on the basis of the fair comparison requirement laid down in EU law (Article 2(10) of the EU Anti-Dumping Regulation, which corresponds to Article 2.4 of the AD Agreement).

Renato Antonini (rantonini@jonesday.com) is a Partner in the Brussels office of Jones Day. Mr. Antonini focuses on EU trade and WTO laws relating to trade protection measures and dispute settlements. He has extensive experience in EU and Italian customs and export control law, including tariff classification, customs valuation, dual-use goods, and sanctions.

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FTA
FTA from page 1

Origin Qualification Reviews Since the entry into force of NAFTA in 1994, the SAT has performed audits on origin qualification procedures applied by importers, exporters and producers to determine whether their products qualify as originating. While NAFTA was the initial focus, today, SAT has expanded focus to include each FTA in the broad network of Mexican FTAs, which now involve more than 40 countries. During 2013, the SAT will increase their audit efforts related to FTA origin qualification. Historically, they have focused on sensitive industries such as steel, textile, electronics and footwear, which usually entail high duties and complex rules of origin. Although it is unlikely that the industry focus will change, the most recent audit effort is likely to expand to include

ferral programs (e.g. NAFTAs Article 303 and EU-Mexico FTA Annex III, article 14), explained below. Direct Shipment Requirement As stated above, FTAs provide preferential duty treatment to imported goods that meet the requirements established by the rules of origin of each FTA and which are directly shipped between the country of origin and the destination market. Originating goods that are not directly shipped to the destination markets may lose their duty preference if they are transshipped or temporarily warehoused in a third country. Nevertheless, most FTAs usually include an exception for goods transported through other territories with transshipment or temporary warehousing in a third country as long as the goods remain under the supervision of the customs authorities, and do not undergo operations other than unloading, reloading or any operation designed to preserve them in good condition. Additionally, strict adherence to the exception permitted under a particular FTA must also be properly documented. If met, the FTAs direct shipment exception will allow the goods to maintain their originating status, making them eligible for the corresponding tariff preference negotiated under each FTA. Compliance with the direct shipment requirement has not been an area regularly reviewed by the SAT. However, as part of recent audit efforts, SAT will begin to review importers supporting documentation to confirm that goods that are being imported into Mexico have not lost their FTA tariff preference eligibility due to transshipment or temporary warehousing in a third country. For example, the SAT may review whether imports applying preferential duties under the Mexico-European Union FTA that have been shipped via the US through a Foreign Trade Zone (FTZ) are supported by the appropriate documentation showing that the goods remained under the supervision of the US customs authorities and no further processing took place. In rulings previously issued on the topic by SAT, detailed supporting documentation has been required beyond simple FTZ admission documentation. In light of this new audit approach to import operations, importers may need to review or develop internal controls and processes to ensure that the necessary supporting documentation is in place to show compliance with the direct shipment exception.

Pursuant to article 303, importers may pay the applicable import duty on non-NAFTA originating goods under a duty deferral program in Mexico.

other products from industries that may follow a similar pattern, high duties with complex rules of origin. Importers may also experience a different audit approach, as auditors from the SAT are developing new sampling procedures which will try to minimize the impact and workload for importers, exporters and producers that are being audited while at the same time allowing the authorities to increase the number of audits. Because the new approach is expected to produce a record number of audits in 2013 and 2014, it is important for importers in Mexico, and exporters and producers in the US and Canada (which are subject to NAFTA extraterritorial audit rules), to be aware of these new procedures. With proper preparation, the new processes will be substantially less burdensome on prepared, compliant businesses. In addition to the new methodology exercised by the Mexican authorities; the scope of the audits is also changing. Unlike the traditional approach which primarily focused on questioning preferential duty claims on imported products, the SAT is now also looking at non-traditional audit areas such as compliance with direct shipment requirements and restrictions to duty de-

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NAFTA 303 Audits The IMMEX or Maquila program in Mexico is a special customs program which allows for the importation of materials and components, as well as machinery and equipment, under a temporary importation regime in order to assemble and/or manufacture goods for their subsequent export. Goods imported into Mexico under the temporary importation regime may be subject to a duty deferral or waiver. After the entry into force of NAFTAs article 303 on January 1, 2001, raw materials and components imported on a temporary basis under an IMMEX Program which are not originating from the NAFTA region are subject to payment of duties in Mexico when exported or incorporated into a product that is subsequently exported to Canada or the US. In order to reduce or eliminate the duty impact of NAFTAs article 303 on non-NAFTA originating raw materials and components, importers usually apply for preferential duty treatment via any of the applicable FTAs implemented by Mexico or via preferential PROSEC duty rates. These special programs apply to many, but not all imports of into Mexico of components needed for manufacturing. In those cases where FTAs and PROSEC programs do not provide for preferential duty benefits, however, importers must comply with NAFTAs article 303 provisions through any of the mechanisms established under the NAFTA Uniform Regulations. Pursuant to article 303, importers may pay the applicable import duty on non-NAFTA originating goods under a duty deferral program in Mexico. The corresponding import entry or pedimento will reflect the payment of duties upon entry and compliance with NAFTAs article 303. Alternatively, the importer may pay through a complementary entry or pedimento the applicable duties on non-NAFTA originating goods which were exported to Canada or the US. Under this mechanism, the importer must file the complementary entry or pedimento no later than
FTA, continued on page 16

In This Issue

Anti-Dumping (Ab)normal Values in EU Anti-dumping Investigations By Renato Antonini (Jones Day) ........................................................................................................................page 1 FTA Mexico Launches Audits on FTA Origin Qualification By Armando Beteta and Sergio Moreno (Ernst & Young)..................................................................................page 1 Export Controls Publication of the First Final U.S. Export Control Reform Rules: Dont Be Surprised, Be Prepared By Wendy Wysong (Clifford Chance).................................................................................................................page 3 Trade Partnerships Pacific Alliance Members Hold Tenth Negotiating Round; Vice Ministers Meet to Push Initiative Forward By Justin S. Miller (White & Case LLP).............................................................................................................page 5 EU Wants to Exclude Utilities from U.S. Trade Talks By Ethan Bilby (Reuters)...................................................................................................................................page 10 Import Tariffs CAMEX Reduces Import Tariffs on Several Information Technology and Capital Goods By Justin S. Miller and Staff (White & Case LLP)..............................................................................................page 6 Round Up Trade & Customs Round Up By Linda Zhang (Thomson Reuters)....................................................................................................................page 7 Trade Promotion Authority Amid Rancor, A Chance for U.S. Action on Trade Bill By Doug Palmer (Reuters)...................................................................................................................................page 9

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FTA
FTA from page 15

60 days after the exportation took place. If the importer does not pay the duties on non-NAFTA originating goods upon entry or outside the 60 day term, penalties and fines may be assessed by the Mexican customs authorities. While compliance with NAFTAs article 303 has not generally been an area that has received much attention from the SAT, earlier this year SAT initiated a vigorous audit program to review importers compliance with NAFTAs article 303 provisions. As such, it is important for Maquilas and other Mexican producers to review their processes in order to ensure compliance with NAFTAs article 303 prior to being audited and avoid fines and penalties. Based on the ambitious audit approach outlined by the SAT, any importer, producer or exporter who is taking advantage of any Mexican FTA should expect increased scrutiny by SAT. In this regard, companies should not de-

lay in reviewing whether their current FTA controls and processes comply with minimum requirements. If already under audit, companies should understand the processes being questioned and take timely action to respond to the SAT with proper arguments. o Armando Beteta (armando.beteta@ey.com) is the executive director in Ernst & Youngs National Indirect Tax practice based in Dallas, Texas. He provides services to clients with a focus on Latin American customs issues. Sergio Moreno (Sergio. Moreno@ey.com) is a member of Ernst & Youngs Indirect Tax Services practice based in Dallas, Texas. He practices in the area of customs and international trade, providing solutions regarding customs valuation, tariff classification, compliance and processes reviews, and customs and duty saving strategies, with a particular emphasis on Mexican and Latin American customs issues.

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