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ITC Now Against CBP's Proposal for Duty-Free Festive Apparel, Etc.

June 2, 2011 by Barbara Chaves|Top News

The International Trade Commission has reversed its views and is no longer recommending the addition of a new Chapter 98 U.S. note and amended tariff numbers that would provide duty-free treatment to certain utilitarian textile and other articles that incorporate a festive design, decoration, emblem or motif. U.S. Customs and Border Protection had recommended these changes in light of a 2007 note added to Chapter 95 and an earlier court decision, Michael Simon Design.

Certain Utilitarian Festive Articles Are Excluded from Ch. 95 Duty-Free Treatment

Proclamation 8097 amended the HTS for a number of World Customs Organization-recommended changes, effective February 3, 2007. One of the amendments added a new Note 1(v) to HTS Chapter 95, to exclude tableware, kitchenware, toilet articles, carpets, and other textile floor coverings, apparel, bed linen, table linen, toilet linen, kitchen linen and similar articles having a utilitarian function, from classification in Chapter 95 as duty-free festive articles.

However, in an earlier court ruling, Michael Simon Design, Inc. v. United States, the Court of International Trade ruled that certain imports of sweaters, blouses, and shirts decorated with certain Christmas or Halloween motifs were classified as "festive articles" under HTS heading 9505 and the Court of Appeals for the Federal Circuit affirmed that decision.1

CBP Sought Chapter 98 Provisions to Make Such Articles Duty-Free

CBP had requested that the ITC recommend to the President that certain amendments be made by proclamation to HTS Chapter 98, Subchapter XVII, in order to provide duty-free treatment to certain utilitarian articles with festive designs and/or motifs in adherence with the judicial decision of Michael Simon Design, Inc. v. United States.

Based on CBP's proposal, the ITC preliminarily recommended the following amendments in September 2010:

ITC Reversed Sept 2010 Proposal to Adopt CBP’s Suggested Modifications

The ITC acknowledges that in September 2010, it proposed to adopt CBP’s suggested modifications to the HTS with one clarifying change. However, after considering the statutory requirements, the comments submitted by interested parties and agencies, and other relevant information, and upon further consideration of CBP’s proposed modifications, ITC now recommends that the President proclaim no modifications to the HTS in response to CBP’s request.

Now Says Modifications not Rate Neutral or Necessary, May Hurt Domestics

The ITC has now concluded that the modifications proposed by CBP are neither necessary nor appropriate under statutory requirements, would violate the substantial rate neutrality requirement, and would likely alter existing conditions of competition for the affected U.S. industry. In particular, ITC states that the proposed modifications:

Are not necessary or appropriate under 1205(a). ITC states that CBP did not claim that the modifications it was proposing were necessary or appropriate to meet any of the required objectives of section 1205(a) of the Omnibus Trade and Competitiveness Act of 1988 (1988 Act), and its request did not even refer to section 1205(a). Based on its review, ITC concludes that the modifications proposed by CBP do not meet any of the five objectives set out in section 1205(a) (e.g, conform the HTS with amendments to the Harmonized System, alleviate unnecessary administrative burdens, etc.3)

Are not substantially rate neutral. The ITC also disagrees with CBP’s claim that its proposed modifications would be rate neutral as required by section 1205(d)4 of the 1988 Act. Instead, the ITC finds that the proposed modifications would violate the substantial rate neutrality requirement because CBP’s proposed modifications would eliminate the tariff rates that are currently applicable to utilitarian articles with festive designs and/or motifs.

Would likely harm domestic industry. The ITC adds that comments it received from five interested domestic parties argued that the proposal, if implemented, would have a significant adverse effect on the conditions of competition confronting the affected U.S. industry. ITC did not make a finding on this issue as it had already determined that the rate neutrality requirement had not been met, but states that comments from these parties offer support to this argument. Further support can be found in information relating to the rates of duty on imports of festive-theme textile and apparel articles that would be eliminated - rates reportedly as high as 32%.

Michael Simon addressed Chapter 95 as existed in 2003. The ITC adds that the Federal Circuit decision in Michael Simon on which CBP based its arguments was expressly predicated on chapter 95 as it existed in 2003. Therefore, it does not view that decision as dispositive of its analysis of the HTS as it exists today, including note 1(v) to chapter 95 which did not exist in 2003.

Those Still Seeking Change Should Consult Congress

Trade sources state that as the ITC’s view is likely in line with the Administration’s position, any such change would probably now have to be dealt with legislatively.

1The United States appealed and argued that the new Note 1(v) to Chapter 95 excluded utilitarian articles. CIT rejected the U.S.’ reliance on the addition of the note, as it was inconsistent with its previous interpretation of the scope of HTS heading 9505 in earlier cases. The CAFC later affirmed the CIT’s ruling on determining whether articles are classified as festive articles under HTS heading 9505.

2Section 1205(a) directs ITC to keep the HTS under continuous review and periodically to recommend to the President such modifications in the HTS as the ITC considers necessary or appropriate: (1) to conform the HTS with amendments to the Harmonized System (HS) Convention; (2) to promote the uniform application of the HS Convention and the Annex thereto; (3) to ensure that the HTS is kept up to date in light of changes in technology or patterns of trade; (4) to alleviate unnecessary administrative burdens; and (5) to make technical rectifications.

3Pending litigation in the CIT, CBP’s position was that the utilitarian or functional articles described as baking pans, cookie cutters, cookie stamps and presses, that are used in preparation for a festive occasion and not used or displayed during a festive occasion, are not festive articles within the scope of heading 9505.

4Section 1205(d) states that the ITC may not recommend a modification unless (1) the modification is consistent with the HS Convention or any amendment thereto, is consistent with sound nomenclature principles, and ensures substantial rate neutrality; (2) any change to a rate of duty is consequent to, or necessitated by, nomenclature modifications that are recommended under section 1205; and (3) the modification does not alter existing conditions of competition for the affected U.S. industry, labor, or trade.

5Fruit of the Loom, the Hosiery Association, the American Manufacturing Trade Action Coalition and others, Gildan Activewear, and the Specialty Graphic Imaging Association

(See ITT’s Online Archives or 03/21/11 and 12/02/10 news, 11032125, and 10120214, for BP summaries of ITC twice delaying the issuance of this report.

See ITT’s Online Archives or 08/05/10 news, 10080513, for BP summary of CBP’s proposal.

See ITT’s Online Archives or 09/19/10 news, 10091902, for BP summary of ITC’s proposal and initiation of the investigation.

See ITT's Online Archives or 12/12/08 news, 08121205, for BP summary of CBP's guidance on classification of certain festive articles in response to the Michael Simon court decision.)