There have been few revisions since the program started in 1789; 2018 marks the biggest transformation in its long history.
Drawback is a refund of customs duties paid on imported materials that are either exported or used in the manufacture of exported articles. With appropriate documentation, an exporter can receive up to 99 percent of duties paid. Given that it’s one of the oldest U.S. Customs regulations on the books, it’s one that many should take advantage of.
Since the start of the program in 1789, duty drawback has had only a few major changes, such as the 1930 Tariff Act, the introduction of unused merchandise in the 1980s, NAFTA drawback restrictions and the 1993 Customs Modernization Act. While all that sounds significant, the duty drawback program currently is undergoing the biggest transformation in its long history. In 2018, the duty drawback program changes include:
• Transitioning to the Automated Commercial Environment (ACE);
• Experiencing a change in the law with the introduction of the 2015 Trade Facilitation and Trade Enforcement Act (TFTEA) and waiting for final regulations to be published to enact these legislative changes;
• Balancing the assessment of Section 232 and Section 301 duties;
• And bracing for the impacts related to the Office of the U.S. Trade Representative’s strategy for future free trade agreements, such as the new U.S. Mexico Canada Agreement (USMCA).
The transition to ACE has been a little bumpy. A Drawback Working Group was assembled by the industry to work hand in hand with Customs and Border Protection (CBP) to transition the intricacies of duty drawback from the former Automated Commercial System (ACS) to ACE.
From the working group sessions, we were able to work through the layout of the new drawback program, discuss the details of how the validations would work for the current drawback law and for the transition to TFTEA, and to review and analyze expected problems that CBP and the trade might expect with a transition to a new system of this magnitude. After a few delays — and a sizable amount of work from CBP and the trade — drawback in ACE went live Feb. 24.
There are still problems and concerns that the trade has, but the transition to ACE is getting easier the more duty drawback filers become acquainted with the details. And the Drawback Working Group will continue to address those concerns the trade has in order that ACE works as efficiently and effectively as possible.
Coinciding with the ACE transition is the introduction of a major legislative package. TFTEA has significant conceptual changes, including but certainly not limited to the calculation of drawback; how drawback can be claimed for substitution; streamlined timelines; and further clarity for record retention.
With any legislative changes, regulations are necessary to promulgate the law and, according to CBP, final regulations are required to allow for accelerated payment for TFTEA drawback claims. In this case, TFTEA mandated that regulations be effective on Feb. 24 or two years after TFTEA was signed into law by President Obama. When CBP and Treasury did not finalize regulations by this date, a group of plaintiffs (our company included) filed suit to push the regulations forward by the court. After months of discussion and deliberation, the judge for the Court of International Trade ruled in favor of the trade that certain regulations had to be finalized as Congress intended. If CBP does not appeal the decision, final drawback regulations will be released to the trade by the end of 2018 and accelerated payment can be introduced for TFTEA claims for the first time.
As the trade has delicately navigated our way through these issues, President Trump introduced new duties through proclamations on Section 232 of the 1962 Trade Expansion Act and on Section 301 of the 1974 Trade Act.
It was determined that Section 232 duties were not available on any aluminum or steel article that would otherwise be allowable for drawback. We believe that once the exemption process has concluded on Section 232, there will be parties that seek to pursue these duties through a court action. When Section 301 duties were introduced, there was speculation in the trade on whether or not these would be eligible for drawback and everyone was relieved when the CSMS was released stating it was allowed. Now that there are three separate Section 301 tariff lists (and another currently in discussion at the time of the writing of this article), companies are realizing that they can obtain these refunds from drawback and they can be significant for them.
While some of the changes to the drawback program are linked, a separate focus has been made on free trade agreements. When the North American Free Trade Agreement (NAFTA) was finalized in 1994, and subsequently the U.S.-Chile Free Trade Agreement in 2004, language was introduced in both agreements that heavily restricted drawback. The trade has been working with the USTR’s office since that time to ensure that restrictive language is omitted from future free trade agreements. Since free trade agreements typically eliminate duty on imported merchandise, it is unnecessary to include restrictions on drawback, as it is only claimable if duty is paid.
While there has been some success in our efforts, the new USMCA still includes the same drawback restrictions that NAFTA contained. Much time has been spent with the USTR’s office and members of the House and Senate to explain why drawback is important to American industry. Our strategy will continue to be that restrictive language should not be incorporated into new free trade agreements and more will be needed from the trade to push against restrictive language as discussions about free trade agreements with the EU, U.K., Japan and others come into focus with the Trump administration.
Duty drawback is simple in theory but complicated in practice. Sure, it’s not rocket science, but I’ve always thought that rocket scientists must say, “Sure, but it’s not duty drawback.” It’s all a matter of perspective. While there have been difficult challenges and significant historical changes to this export promotion program in the past year, there are many opportunities within the duty drawback program for companies to take advantage of.
This has been a big year for duty drawback. Maybe that’s an understatement or maybe it’s been the biggest year in the history of the program. Only time will tell.
Corn is vice president of one of the nation’s oldest drawback specialists, Comstock and Holt, and serves as co-chairman of the Association of American Exporters and Importers’ Drawback and Duty Deferral Committee and vice chairman of the National Customs Brokers and Forwarders Association of America’s Drawback Committee.