China-U.S. Trade Law : International Trade Lawyer & Attorney : Baker Hostetler Law Firm : Trade Remedies, Customs & Export Controls

Editor's Note:  Sally Qin, the author of this article, is a law student at the University of Minnesota who was a summer associate at Baker & Hostetler LLP during the summer, 2010.

The Current State Of Consumer Product Safety Relations

The United States Consumer Product Safety Commission (“CPSC”) has adopted several measures in 2010 to increase scrutiny of imported goods and impose higher penalties for products that fail U.S. safety standards. The principal impetus for these measures has been suspect imports from China.

Backed by stronger funding and new inter-agency cooperation, the CPSC seeks better protection for American consumers primarily through more vigorous enforcement of U.S. safety laws. As Robin Harvey and Lourdes Perrino observed in a prior article on this blog , since the signing of a Memorandum of Understanding between the CPSC and Customs and Border Protection (“CBP”) in April 2010 (“MOU 2010”), the CPSC has been posting inspectors at U.S. ports to enforce consumer product safety regulations. When goods are detained and rejected at the border, destruction, rather than re-exportation, now becomes the default mechanism for U.S. Customs.

MOU 2010 followed CPSC’s release of a final interpretive rule in March 2010 to address civil penalties in the Consumer Product Safety Improvements Act (“CPSIA”). Under the CPSIA, the maximum penalty for each knowing violation of the statute increases from $8,000 to $100,000, with maximum penalities for any related series of violations increasing from $1,825,000 to $15,000,000. CPSC interprets “violator,” those subject to these penalties, to be “any person,” including sellers, distributors, manufacturers or any legally responsible party who committed a knowing violation of the statute. The CPSC does not have to prove actual knowledge of the violation to make the violation “knowing” and impose penalties: “constructive knowledge” is enough.  (Constructive knowledge is the inference that, by law, some party is aware of the circumstances, if only he were to exercise reasonable care and diligence.)

The changes in penalties for violations of consumer product safety laws arose in a political atmosphere charged with complaints about Chinese products. Although the law will not discriminate among the products of different countries, the overall heightened scrutiny will be felt most by Chinese manufacturers and exporters. It is now altogether possible that Chinese manufacturers, failing to exercise due diligence, could experience bankruptcy in the seizure and destruction of their goods and the assessment of penalties in the millions of dollars. It would not then be surprising were the Chinese Government to complain of protectionism and retaliate, triggering another round of profound misunderstanding in the bilateral trade relationship.

Memoranda Of Misunderstanding: What Might Have Been

MOU 2010 between the CPSC and CBP came some six years after another consumer product safety Memorandum of Understanding (“MOU 2004”), between China and the United States. Had MOU 2004 fulfilled any of its promise, MOU 2010 might not have been necessary. Certainly it might have taken a different form. The emphasis on enforcement has followed a period of failure in promoting promised cooperation. Both MOU have raised reasonable doubt about the meaning of “understanding.”
 

The CPSC and its Chinese counterpart, the General Administration of Quality Supervision, Inspection and Quarantine of the People’s Republic of China (“AQSIQ”) signed a Memorandum of Understanding in 2004 that lists the measures both parties could take to ensure the health and safety of consumers. Although these measures do not exclude increased national enforcement, emphasis in the MOU is on cooperation.

MOU 2004 contains a list setting out the scope of the products concerned, and establishes an information exchange mechanism for China and the United States. The MOU pledges to “address safety problems of consumer products through consultation.” Both China and the United States agreed to consider the inspection results obtained by laboratories each one was to authorize and to participate in training laboratory and inspection personnel for each other.

Had MOU 2004 been followed faithfully, the recent dynamics of bilateral consumer product safety issues likely would have been very different. The CPSC and AQSIQ could have made public a common list of recognized laboratories, encouraging manufacturers in both countries to participate in inspection and testing from these domestic laboratories. They could have organized systematic training of laboratory and inspection personnel to address emerging product safety issues. They could have moved toward common standards and expectations for consumer safety.

Conscientious implementation of MOU 2004 should have reduced bilateral mistrust and improved consumer safety in both countries. A Chinese manufacturer with doubts about whether its product would satisfy U.S. consumer product safety standards would have sought assistance from AQSIQ to request the CPSC to send inspectors to conduct on-site inspections and testing in China. MOU 2004 would have made such on-site inspections in China by American personnel at AQSIQ’s expense. The Chinese manufacturer could have shipped products to the United States confidently, without fear of detention, denial or destruction of the goods, and without fear of a harsh financial penalty. (MOU 2004 provides, “4, The participants are to address safety problems of consumer products covered in this MOU which are manufactured in the country of one Participant and sold in the country of another Participant through consultation.”) CPSC, for its part, would have been better positioned to carry out its statutory purpose, preventing substandard products from entering the United States and transferring inspection expense to the Chinese. There would have been less call for inspectors at U.S. ports because more inspections would have taken place, offshore, by CPSC inspectors.

Memoranda Of Misunderstanding: What Happened Instead

Since the signing of MOU 2004, there have been only three CPSC-AQSIQ Safety Summits. At all three, documents were signed containing only vague language expressing the intention to communicate further on product safety issues. These official documents contain no specific methodology to carry out any of the underlying purposes of the MOU.
 

There have been frequent talks between the CPSC and AQSIQ since they entered MOU 2004, but they have led to no improvements in the screening of Chinese goods for U.S. Customs clearance. Instead, both countries have become more defensive about the quality of products and inspection regimes. AQSIQ complains privately that the CPSC does not trust Chinese producers and officials, which means that the confidence-building prescribed in MOU 2004 has failed.

Credit is owed the CPSC, which has tried hard to educate Chinese manufacturers on laws and regulations in the United States through, for example, releasing multiple articles and video clips available in both English and Chinese on its website.  However, how well these messages have been received in China remains in doubt. Chinese invitations for American inspections sometimes follow the eruption of disputes, but Chinese producers have never anticipated (or admitted to) a potential problem that would benefit from a preemptive inspection. There is still no link to the CPSC’s website on AQSIQ’s, and while AQSIQ keeps a record of international communications on its website, MOU 2004 is not available online for Chinese stakeholders to reference.

MOU 2004 was to have internationalized both the CPSC and AQSIQ, making both of them more aware and sensitive to the standards and requirements of other countries. Both agencies are, of course, inherently domestic, concerned for the safety of products as they impact their own domestic populations. However, whereas the CPSC gives great attention to imports, AQSIQ still is perceived in China to be an agency addressing predominantly domestic product safety issues. Not until recently, has AQSIQ been recognized in MOFCOM’s traditional terrain, helping to resolve trade-related disputes.

What Could Yet Happen

Chinese manufacturers need to sell in the U.S. market. Safety issues are becoming an ever more important obstacle. Benefiting from MOU 2004, AQSIQ and Chinese manufacturers could take a more proactive role in protecting their interests and the interests of American consumers. Instead of having goods intercepted in American ports, they could be inviting CPSC inspectors to conduct the same testing in China. As much as AQSIQ might feel a budgetary constraint on shifting such costs away from the United States and onto China, the net savings for Chinese manufactures could be substantial and the manufacturers could be taxed by China to pay the bills for on-site inspections.
 

MOU 2004 does not provide for this cost-shifting, and requests for inspections must come from a participating government agency, not a manufacturer. Provisions of this kind, however, have not been examined or developed since the MOU was signed in 2004, to the lasting detriment of everyone concerned.

The CPSC posts online proposed new regulations and product safety standards at least two months before a final version becomes effective, and invites public comment. On many occasions, the final regulation or standard reflects modifications based on the public comments. AQSIQ could take advantage of this open-window period and communicate with CPSC to work together on reasonable and cost-efficient regulations that would ensure the safety of U.S. consumers while making the regulations feasible for Chinese manufacturers. Such interventions, plainly contemplated by U.S. law and encouraged by intentions of MOU 2004, could move the safety issue in trade relations away from confrontation and toward cooperation.

MOU 2004 was intended to ensure more efficient and secure product safety for consumers in both China and the United States. It is a great misfortune that the outcome of MOU 2004 appears to be MOU 2010, an understanding between U.S. agencies effectively supplanting an understanding between two countries. To benefit both consumers and manufacturers in both countries, private and public sectors must work together, using MOU 2004 as a platform, pursuing not more official documents of little content, but more mutual cooperation, standardization, and reciprocal inspections. The opportunity of MOU 2004 was squandered for six years for lack of imagination and mutual commitment. MOU 2010 should be more of a warning than a conclusion, that failure in enterprises such as MOU 2004 can lead to mutual suspicion and wildly greater cost.

China, in its failure to implement MOU 2004 effectively, must share the blame for MOU 2010. Instead of fighting MOU 2010, however, China could ask the United States to return to the principles of MOU 2004. It might cost China in cash to pay American inspectors, but the payoff in good will and in long-term savings for Chinese manufacturers would easily compensate.
 

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Robin E. Harvey and Lourdes Perrino

Beginning mid-June, 2010, the Consumer Product Safety Commission (“CPSC”) has been posting inspectors at U.S. ports of entry for the purpose of enforcing product safety statutes and regulations. Before, screening always had been performed by Customs inspectors, who could call in CPSC inspectors when they thought it necessary or appropriate.

Containers are being seized at both air and sea ports, requiring importers and customs brokers to produce general conformity certificates for all products and product testing compliance certificates for products specifically identified under the Consumer Product Safety Improvement Act (“CPSIA”) as requiring specialized testing for lead and phthalate content. So far, reports from the field indicate that seized goods are being released almost immediately after the proper certificates are produced. However, seized products not intended for use by children and not tested in conformity with CPSIA requirements are being detained by the CPSC as alleged non-conforming goods, until inspectors are satisfied that the seized goods should not be considered children’s products. Importers and customs brokers benefit from having on hand documentation to support the position that seized merchandise are not children’s products.

A series of problems with Chinese goods triggered this increased vigilance, leading to the posting of CPSC inspectors directly at ports of entry in the United States. Issues over lead paint in 2007 in toys, compounded by other incidents including problems with tainted pet food, galvanized Congress, which learned quickly that the CPSC was an understaffed and underfunded bureaucracy incapable of policing all the products coming in from China that might be consumed by Americans, especially children and family pets, and might contain toxic levels of ingredients. Congress increased the CPSC budget authorization from $80 million to $136 million by 2014 and ordered it to be more aggressive and more vigilant in protecting American consumers.

The move to police ports directly includes procedures for CPSC independent of Customs and increases penalties for consumer safety violations very substantially. These steps are intended to reassure Americans that the CPSC is serious about consumer protection, particularly as to imported goods. They also communicate to American trade partners, however, that increased vigilance and tougher penalties do not necessarily mean the exclusion of goods. U.S. agencies have been meticulous in establishing the new practice as an act of protection, not protectionism. Properly tested and certified goods remain welcome and free of penalties.

The posting of CPSC inspectors requires close cooperation with Customs and Border Protection (“CBP”), which began April 26, 2010 with a Memorandum of Understanding signed by CBP Commissioner Alan Bersin and CPSC Chairman Inez Tenenbaum. The MOU gave CPSC access to CBP’s Import Safety Commercial Targeting Analysis Center (“CTAC”), enabling CPSC inspectors to identify the nature of incoming products and utilize hand-held XRF (X-ray Fluorescence technology) units to immediately scan for lead content. The agreement also granted the CPSC power to contact importers directly; in the past, the CPSC could contact importers only through the CBP.

The developing collaboration between the CBP and the CPSC is part of a larger effort by U.S. administrative agencies to cooperate in enforcing the mandates of the CPSIA. That cooperation has been aided by the formation of CTAC in 2009, which initially advised President Obama on ways to improve the food safety system in the United States. Other agencies participating in CTAC include the Federal Food and Drug Administration (“FDA”) and the U.S. Department of Agriculture’s Food Safety Inspection Service.

Detention Procedures

Newly empowered, the CPSC has introduced several new procedures at U.S. ports of entry. It is issuing its own Notices of Detention, and expects to change both detention periods and conditional releases within weeks. The new notices will soon contain a description of the alleged violation, its statutory basis, and the contact information for the CPSC inspector who examined the goods.

CBP inspectors will continue to issue their own detention notices, so the same goods likely will become subject to two different notices involving different procedures whenever a reason for detention is product safety. The CPSC has announced that it will send copies of its notices to both importers and customs brokers. Anyone receiving a notice will have five business days to respond with the required certificates (general conformity and/or testing certification) showing compliance with product safety requirements. Extensions may be available on a case by case basis, and in those instances where there is a dispute over whether a product is intended for children, extensions probably will be necessary.

CPSC inspection and detention procedures are not only applicable to CPSIA, but to all statutes enforced by the CPSC, including the Consumer Product Safety Act itself (CPSA), the Federal Hazardous Substances Act (FHSA), the Flammable Fabrics Act (FFA), the Poison Prevention Packaging Act (PPPA), the Refrigerator Safety Act (RSA), the Virginia Graeme Baker Pool and Spa Safety Act, and the Children’s Gasoline Burn Prevention Act. They are all enforceable now by CPSC inspectors at ports of entry.

Penalties & Releases

Some of the changes within CPSC discretionary power include the conditional release of goods and increased monetary penalties. For products determined not to present an immediate threat to public health, the CPSC may issue a conditional release of goods requiring customs bonds during the tentative 30-day detention period in which the CPSC decides whether to release, seize, or deny altogether entry of the goods. Goods released conditionally may not be sold or distributed in the U.S. before a final determination concerning safety has been made.

The CPSC will issue a Notice of Recovery for goods granted conditional release that are determined to be in violation of product safety laws. A Notice of Recovery requires the owner to redeliver the goods to the CPSC or risk liquidated treble damages based on the value of the goods. The CPSIA gives the CPSC authority to add civil penalties when goods contain safety marks that have not been authorized for use on a product by a certified third-party testing facility. The CPSIA increases the maximum penalty for violating CPSC safety standards from $8,000 to $100,000 for each violation and from $1.8 million to $15 million for a related series of such violations.

The CPSC is utilizing its authority in enforcement to seek higher penalties, as the $2.3 million penalty assessed against Mattel in 2009 for lead in paint on children’s toys indicates. It is also examining for any unauthorized use of safety marks, such as an Underwriters Laboratories “UL” or the Canadian Standards Association’s “CSA” affixed to goods sold for use, consumption, or enjoyment in or around a permanent or temporary household or residence, a school, or in recreation. There are exceptions, but the objective is to inspect products destined for individual or personal use or consumption rather than factory or other production. CPSC, thus, is empowered to assure that foreign products destined for personal consumption do not enter the United States pretending to have been certified as safe. Products found to display such safety marks illegitimately are now subject to both CPSC and CBP detention. The CPSC may levy twice the amount of civil penalties, in these circumstances, under its detention order.

Goods not conditionally released are now detained at a CBP bonding facility during the 30-day detention period. Under the new procedure, the CPSC is not required to resolve the detention in 30 days; rather, the 30 day time frame is merely a target. Previously, when the CBP did not make a decision as to whether it would release, seize, or deny entry of goods in 30 days, the goods automatically were deemed excluded from entry and the importer was allowed to protest the result. Under the new procedure, goods are not automatically deemed to be excluded entry on the 30th day. Consequently, the importer cannot protest the detention until the CPSC makes a final determination as to the status of the goods.

Indeterminate detention could lead to constitutional disputes over takings and due process, so the immediate situation surely will not continue for long. The CPSC will have to establish time limits for their inspectors in issuing decisions. The first step toward identifying what the limit on time may be probably will appear on the CPSC website in the form of a Q and A response, ultimately to be followed by CPSC regulations. CPSC, however, will try to develop some experience with its inspectors before it fixes a time limit with a rule.

Whereas CBP historically has encouraged re-exportation of rejected goods, the CPSC’s primary mechanism is destruction rather than exportation. An importer must apply to the Secretary of the Treasury in order to get a special exemption to have the goods exported rather than destroyed. Under the CPSIA, exported non-conforming goods can be sent only to a country seeking them for the purpose of destroying the goods in conformity with hazardous material regulations.

This change in policy, making destruction of the goods the default instead of re-exportation, signals a broader change in U.S. policy. Previously, the United States was willing to reject goods, for whatever reason, but did not aggressively inhibit other countries from receiving them. Now, when the United States decides a foreign product seeking enry is not safe, it acts to protect not only Americans, but people in all other parts of the world. A foreign product found not safe for Americans no longer is to be exported as if it were safe for someone else.

Impact Of CPSC Agents At U.S. Ports

The addition of an agency charged with vigilance at U.S. ports and armed with new powers and penalties may cause concern for foreign exporters and for importers, especially in the handling of Chinese goods because goods from China triggered these developments. Certainly the general move to greater vigilance and penalties was intended to persuade exporters and importers alike to be more vigilant themselves. In addition, despite the increased budget and staffing, the CPSC remains shorthanded for its new tasks. It has been able to deploy only a small number of inspectors at each of the ten largest ports in the U.S.

Importers and exporters might deduce that consumer goods and food will be delayed at major ports. So far, that concern would be misplaced. Early reports from New York’s Kennedy International Airport and the port at Savannah GA indicate that release of detained goods generally has been prompt. The key is to have the proper documentation ready. Inspectors are proving cooperative and responsible. They are not bottling up goods unnecessarily, but they do represent a greater commitment in the United States to protect against unsafe products being imported from other countries.
 

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