Substantial Transformation and Circumvention in AD and CVD Investigations

A recent Court of Appeals decision, Bell Supply Co. LLC v. United States (April 25, 2018), has held that the Department of Commerce can use either the “substantial transformation” test or an anti-circumvention proceeding to determine whether goods processed in third countries are included in the scope of an antidumping or countervailing duty Order. The decision reversed a Court of International Trade ruling that had limited Commerce to anti-circumvention proceedings when the Order did not expressly address goods processed in other countries.

Anti-circumvention proceedings apply to “merchandise imported into the United States [that] is of the same class or kind as any merchandise produced in a foreign country that is the subject of” an AD or CVD order, but is assembled or completed in a third country not subject to the order. To include such merchandise within the scope of an order, Commerce must determine that (1) “the process of assembly or completion in the foreign country . . . is minor or insignificant,” (2) the value added in the country subject to the AD and CVD order is a significant portion of the total value of the merchandise, and (3) “ action is appropriate under this paragraph to prevent evasion of such order or finding.”
Use of the substantial transformation test provides Commerce with a second set of criteria to use in determining if goods further processed in a third country are covered by an Order. A substantial transformation occurs where, “as a result of manufacturing or processing steps . . . [,] the [product] loses its identity and is transformed into a new product having a new name, character and use.” To determine whether there has been a substantial transformation, Commerce looks to factors such as (1) the class or kind of merchandise; (2) the nature and sophistication of processing in the country of exportation; (3) the product properties, essential component of the merchandise, and intended end-use; (4) the cost of production/value added; and (5) level of investment.

If such goods are found not to have been substantially transformed, they retain the country of origin where they were originally produced. Unlike goods found to have circumvented an Order, which are only covered after the anti-circumvention investigation takes place, goods that have not been substantially transformed are considered to have been covered by the Order from its initiation. It seems likely that Commerce would apply this criteria first; an anti-circumvention investigation would only be necessary if there is a substantial tranforamtion.

There is also a concern with the substantial transformation test used by Commerce. Although phrased in the same manner as the test used by Customs and Border Protection (CBP), Commerce does not always reach the same result. For example, in the Bell Supply case, Bell cited a previous CBP ruling that heat treatment (annealing), cold drawing, straitening and pickling constituted a substantial transformation of “green tube” into ASTM specification cold finished pipe. HQ H242034. Commerce, however, held that heat treatment, threading, coating and other working to turn the green tube into finished OCTG did not constitute a substantial transformation.

Bell Supply has been remanded for further consideration. It will be interesting to see how this difference in making the substantial transformation determination is treated by the Court. If different determinations by Commerce and CBP on the same facts are allowed, it is possible that there may be different countries of origin applied for conventional duty and for AD/CVD purposes.

The overlapping coverage of anti-circumvention investigations and the use of the substantial transformation test to determine country of origin for AD and CVD purposes gives Commerce, and domestic petitioners, two different ways to seek AD and CVD coverage of goods further processed in countries other than the country of the Order. While these provisions involve similar criteria, and either or both can apply is certain circumstances, they do not always overlap; sometimes circumvention may be found even though there is no substantial transformation, or vice versa. Producers and importers will have to consider both possibilities in evaluating product sources and potential AD/CVD coverage.

Steven W. Baker

AIIS Customs Committee Chair

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