CIT Questions Use of First Sale Valuation for Non-Market Economies; Immediate Impact Unclear

First sale treatment may not be applicable to transactions involving non-market economies, including China, Court of International Trade Senior Judge Thomas Aquilino said in a March 1 decision. In a ruling on cookware imported by Meyer from Thailand and China through a Chinese middleman, the trade court found the involvement of Chinese companies made it difficult to determine whether the transaction was at arm's length and undistorted by non-market influences, as required for first sale valuation. Though he stopped short of saying imports originating in non-market economies could never receive first sale valuation, he called on the U.S. Court of Appeals for the Federal Circuit to clarify.

Under a 1992 Federal Circuit decision involving Nissho Iwai, companies seeking first sale treatment must prove that the goods were 1) purchased via bona fide sales that 2) are clearly destined for the U.S., 3) transacted at arm's length and 4) are “absent any distortive non-market influences.” While CIT agreed Meyer's cookware passed the first two hurdles of the Nissho Iwai first sale test, it disagreed that the imports were bought at arm's length and devoid of non-market influences.

At the outset, Aquilino gravitated toward a definition of “non-market” economies taken from antidumping duty proceedings. He noted China is a non-market economy for antidumping duty purposes. He also said that companies can “establish the absence of [China] non-market influence” by way of the Commerce Department's tests for establishing a non-China wide “separate rate” in AD duty cases, which mainly demonstrate independence from Chinese government control.

Central to the issue was testimony at trial from Kan Ming Kam, a production manager of the stainless steel department at Meyer's Chinese manufacturing plant, and other Meyer employees. “The most that [Meyer's] witnesses could testify to was that they were unaware of any such [government] assistance, and to a person they flatly denied that the [Chinese] government provided any assistance or influence whatsoever, arguably a dubious proposition,” Aquilino said. For his part, after initially denying any knowledge, Kam admitted that he was aware of assistance from the Chinese government and that it would in any case be the general manager, not Kam, who would coordinate government subsidies, he noted in the decision.

The government also demonstrated other non-market forces at play, pointing out that the manufacturer does not own the land it operates on, but rather that it has the right to use the land for a certain amount of time. And Kam testified he did not know whether any of the Chinese companies that provide water, electricity or other materials used in the production of the Meyer's Chinese manufacturer's goods receive subsidies from China at the national, regional or local levels, Aquilino noted.

These potential non-market distortions also affected consideration of whether the sales at issue were at arm's length, CIT said. One consideration in whether a sale is arm's length is whether the price was “adequate to ensure recovery of all costs plus a profit that is equivalent to the firm’s overall profit realized over a representative period of time in sales of merchandise of the same class or kind.” Holding that accurate cost data was lacking, especially given financial statements Meyer failed to submit as evidence, Aquilino said “real costs of inputs from [China] are suspect, given its status as a nonmarket economy country.”

“All of the foregoing leads the court to doubt that accurate ascertainment of the 'true' value of the 'price paid or payable' at the first sale level in the customs duty sense has been demonstrated in this case,” Aquilino said in the coda to his decision. “Second, and more broadly, as a result of its consideration of the issues presented here, this court has doubts over the extent to which, if any, the 'first sale' test of Nissho Iwai was intended to be applied to transactions involving non-market economy participants or inputs,” he said. “In that regard, the Court of Appeals for the Federal Circuit could provide clarification.”

The immediate effects aren't yet clear. "It remains to be seen whether CBP will be emboldened to deny or reject first sale valuation methods when the first sale involves China -- whether the sale is one from a Chinese producer to a middleman or even where there is a non-Chinese producer who uses Chinese inputs to make the imported goods," said law firm Roll & Harris in an email. Meyer has 60 days to file an appeal, which would "likely take another 12-18 months to complete," said the firm. "Until then, yesterday's decision puts many importer Section 301 tariff mitigation strategies in jeopardy."

Law firm Sandler Travis said the ruling is unlikely to have broad application. "While the decision is disappointing for the particular plaintiff before the court, it does nothing to the more than 30-year-old precedent that permits importers to lawfully appraise merchandise at the earlier (or first) sale in multi-tiered transactions," it said. "The ruling relates only to the facts before the court that were determined to be insufficient to grant the requested relief."