It is no surprise that the United States is a magnet for foreign goods as it has a prominent culture of consumerism that demands the free flow of goods across its borders. Despite that, the United States continues to be the largest user of trade remedies -- such as antidumping ("AD"), countervailing duty ("CVD") and safeguards cases -- targeting unfair trade practices by imposing duties or quotas on imports, and has recently strengthened its arsenal.

AD and CVD cases have been a surgical weapon of choice for U.S. producers for decades. These cases can be expensive and burdensome to bring, but once AD/CVD orders are in place they can be very effective in keeping competing imports from specific countries out of the U.S. market for years. China has been the target country of choice over the last decade. Before that, it was Korea and Japan. Increasingly, it has been other Southeast Asian countries, including Vietnam, Thailand, and Malaysia.

Importers have tried to stay ahead of the duties and when possible moved production to third countries. Diversifying the supply chain this way has mostly worked in lowering the risk of AD/CVD duties. By shifting sourcing to a third country, importers were usually able to buy several years' time while domestic industries that brought the cases frustratingly referred to these supply shifts as a game of "whack a mole."

But that window appears to be closing with a new wave of high-profile "circumvention" inquiries initiated by the Department of Commerce over the past year. These proceedings are intended to apply existing AD/CVD duties on imports from third countries where only minor fabrication is taking place.

The scale of recent circumvention inquiries is notable and is expected to continue rising. Thus, it is important for importers to understand what led to the rise in circumvention inquiries and what they can do to navigate the process and overcome possible challenges carefully.

To understand the reasons behind the rise of circumvention inquiries, it is crucial to contrast the reality of U.S. trade remedy laws in the past versus what it currently is. In September of 2021, Commerce published its Final Rule improving the existing AD and CVD regulations "to strengthen and improve the administration and enforcement of AD/CVD laws" and to provide "relief to domestic industries … from injurious effects of unfairly traded imports."

The Final Rule made notable changes to Commerce's scope inquiry procedures, which are used to determine if an imported product is subject to AD/CVD orders. Importantly, Commerce added a new section to flesh out and distinguish circumvention from scope inquiry rules. Circumvention inquiries are used to expand an existing AD/CVD order to cover additional countries or products not part of the original investigation. Although circumvention inquiries are not necessarily a new concept, the improved regulations clarified to foreign industries what Commerce is empowered to do.

Specifically, Commerce gave itself the power to self-initiate circumvention inquiries and apply any determination to all producers in a country based on the mere possibility of future circumvention attempts. Commerce's discretion in self-initiating inquiries took a considerable burden — and expense — off of domestic producers. Unlike initial year-long AD/CVD investigations which require an affirmative finding by two agencies — International Trade Commission needs to find injury to domestic industry, and Commerce must arrive at AD or CVD margins — circumvention inquiries do not involve the ITC and are much quicker.

Circumvention inquiries short-circuit the process and are essentially a "poor man's" AD/CVD petition.

Commerce has initiated several high-profile circumvention cases since the beginning of the year.

Perhaps the most publicized has been the petition-initiated circumvention inquiry, which means it was requested by domestic industry, on imports of crystalline silicon photovoltaic cells (solar cells and modules) completed in Cambodia, Malaysia, Thailand, or Vietnam using Chinese components. Commerce initiated this inquiry in March of 2022 to determine whether the goods circumvent existing AD/CVD orders on the same goods coming from China. An affirmative finding by Commerce on this inquiry could subject solar cells and modules imports to over $5 billion of AD/CVD duties.

The solar circumvention inquiry also had high political and policy implications that involved balancing U.S. jobs creation, trade compliance and the Biden administration's environmental goals. The White House rarely intervenes in trade proceedings conducted by federal agencies. But in this case in a highly unusual move President Joe Biden issued a proclamation that placed a two-year moratorium on AD/CVD duties on cells imports from the four listed Southeast Asian countries. Empowered by Section 318(a) of the Tariff Act, President Biden proclaimed it an emergency: "the threat to the availability of sufficient electricity generation capacity to meet expected customer demand."

President Biden's proclamation highlighted the troubling timing of the inquiry during the Russian invasion of Ukraine that is contributing to critical supply interruption. Biden's reliance on this rarely used emergency power under the Tariff Act emphasizes the significance of solar cells imports in the United States, a supply rate that reaches a total of roughly 80%. This presidential power was used only once in 1946 when President Harry Truman suspended import duties on lumber due to "an emergency shortage of housing."

Although the presidential proclamation was a relief to foreign producers, it is nonetheless a short-term relief. Following the proclamation, Commerce issued a statement stating that its circumvention proceeding "continues uninterrupted, and whatever conclusion Commerce reaches when the investigation concludes will apply once this short-term emergency period is over." The U.S. solar industry, which petitioned for the circumvention inquiry, also voiced its intention to challenge the proclamation in U.S. court as "potentially illegal."

Another petition-initiated circumvention inquiry has involved wooden cabinets and vanities that are further processed in Malaysia and Vietnam using components from China that are subject to AD/CVD orders on the same product coming from China. The inquiry was initiated on June 1, 2022, due to the "significant processing in third countries" of wooden cabinets. The inquiry, if affirmatively determined by Commerce, would affect more than $4 billion in imports from Malaysia and Vietnam, possibly subjecting the product to AD/CVD duties of more than 270 percent.

Commerce has also self-initiated circumvention inquiries on aluminum foil from Korea and Thailand, as well as quartz surface products from Malaysia, all of which are covered by AD/CVD orders on similar products from China.

Initiating these inquiries is consistent with Commerce's trend of tightening the enforcement of AD/CVD laws. With the burden of requesting such inquiries being significantly lower than before, Commerce is now utilizing its improved regulation to self-initiate more inquiries easier and faster. This is further evidenced by the lower burden required to support an allegation of circumvention, which only requires factual support to the extent that "the information is readily available to the requester." It is also supported by the fact that there is no standing requirement to petition Commerce for an anti-circumvention inquiry.

Another factor that contributed, although less drastically, to the rise of circumvention cases is the occurrence of technological advancements. In 2020, a comprehensive web-based steel import licensing and monitoring program called the Steel Import Monitory and Analysis system (SIMA) was extensively modernized to address concerns about potential circumventions of imports with a new dashboard added to show the origin and melting/pouring locations of steel entering the country.

A similar program was launched in the following year for aluminum, called the Aluminum Import Monitoring system (AIM), to address similar circumvention concerns from the aluminum industry. Commerce's International Trade Administration (ITA), which administers AD/CVD cases, budgeted "approximately [$800,000 to spend] on this program," according to its 2022 fiscal year budget estimate report. Both programs reflect Commerce's continued intent of preventing any direct and indirect alleged harm foreign producers impose on domestic industries.

The new wave of circumvention inquires is expected to continue as supply chains diversify as long as they are seen as an effective tool against unfairly traded imports. In its 2022 fiscal year budget estimate report, Commerce's ITA stated that it "anticipates a continued significant number of new AD/CVD investigation and anti-circumvention inquires." ITA added that trade enforcement activities, including anti-circumvention activities, "is at historic high, consistent with the Administration's goal to make trade free, fair, and reciprocal."

An increase in circumvention findings by Commerce means changing countries of origin is not a surefire way to avoid AD/CVD duty exposure. Importers now need to pay more attention to the extent of production done by their suppliers in the third country.

This due diligence should consider what records are kept, what components from other countries are used to make the finished product, what are the corporate affiliations, what quality and shipment compliance controls are in place at a particular manufacturing facility. If a circumvention case is initiated, importers and suppliers that go through such a collaborative due diligence process will be much better equipped to certify that they are not circumventing and avoid potential AD/CVD duty liability.