In a surprise September 10, 2019 preliminary decision, the U.S. Department of Commerce (DOC) established that it will instruct the U.S. Customs and Border Protection to require cash deposits on certain types of structural steel imports from Mexico due to its finding that the so-called Mexican “Eighth Rule” provides a financial contribution and a benefit to a specific group of industries, thus constituting a countervailing subsidy.
As announced, the DOC´s findings are applicable to the program itself and not exclusively to the relevant steel products. Therefore, this finding could be extended to other Mexican exports through separate subsidy investigations, which would subject any product that benefits from this program to countervailing duties. This could also increase the calculated countervailing duty rate for any products that benefit from this program that are covered by existing countervailing duty orders (i.e., through the annual administrative review process) and could also encourage U.S. producers to bring countervailing duty actions in cases where they otherwise would only have brought antidumping duty petitions. This ruling by the Department of Commerce, if upheld in its final determination, could dramatically curtail the use of this popular and widely used Mexican export program, at least for companies that have significant exports to the United States.
Under the Eighth Rule permit process, developed in 1972, the Mexican Secretariat of Economy authorizes companies to temporarily or permanently import materials, inputs, machinery and other production-process items without the payment of duties; companies that receive the permit may subsequently export the finished products. In other words, this is a variation of duty drawback schemes used by many countries, including the United States.
To qualify for temporary duty-free importation under the Eighth Rule permit, companies must have valid authorizations either under the popular IMMEX and PROSEC export-programs (respectively, Manufacturing Industry, Maquiladora and Export Services Program, or Sectoral Promotion Program). These authorizations are commonly held by manufacturers in Mexico, who are using the permit to facilitate their export of products.
In reaching its conclusion, the DOC found that the Government of Mexico lacks a system to confirm which duty-free inputs are consumed in the production of the exported products, and in what reasonable amounts. Therefore, the DOC found that duty exemptions provide a financial contribution in the form of revenue foregone by the Mexican Government – that is, the duties that would otherwise be collected on imported raw materials – and therefore found the permit to be a countervailing subsidy. The result of this finding is that imports that after an investigation are found to benefit from the Eighth Rule permit – now considered a countervailing subsidy - would be subject to additional duties; in the case of the relevant structural steel imports, an additional duty of 13.62% (though this percentage cannot be automatically extended to other type of products).
These preliminary DOC findings are relevant beyond steel, as the Eighth Rule Permit is very popular among for-export manufacturers (roughly, over 50,000 per-product permits are granted on a yearly basis as per latest publicly available data). Also, it can be assumed that the same shortcomings – the lack of its usage-verification on behalf of the Government of Mexico, the reliance of user assertions regarding their consumptions of imported raw materials, and the fact that there is no output-input formula in place to confirm that all imported materials are consumed when exporting – could be asserted against other Mexican exports.
At this time, it is uncertain how the Mexican Government will respond to this ruling. One option would be for it to modify its program in a way to address the issues identified by the DOC. Nonetheless, this unexpected ruling on a program that has been in effect for decades creates a potential risk exposure that all Mexican users of this program, including subsidiaries of U.S. companies, need to take into account when determining the potential impact on their exports to the United States.
With international-trade specialized offices in Washington D.C. and Mexico City, Foley & Lardner LLP is positioned to advise manufacturing companies with Mexico operations on how these changes may impact their businesses, and in managing the risks described above.