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Top Story: Shrimp traders pinched

Crawfish and basa may be next on Customs' list

By Steven Hedlund
February 01, 2006

A controversial U.S. Customs and Border Protection policy adopted in mid-2004 is pulling millions of dollars out of the shrimp-supply chain.

It is forcing the shrimp-importing business to consolidate and thrusting America’s favorite seafood to the forefront of an escalating international-trade war.

The new policy in some cases has increased tenfold the continuous bond required to import the 14 aquaculture and agriculture products subject to tariffs. To add insult to injury, the new continuous-bond policy applies only to shrimp.

As of early 2005, shrimp importers must annually post a bond worth millions of dollars, a far cry from the $50,000 bond required under the old continuous-bond policy. To cover the bond, they’re either drawing from working capital that otherwise would go toward marketing and product development or reducing the amount of shrimp purchased. Or they’re abandoning the shrimp trade

Shrimp importers must post a bond this month and another in February 2007 before the bond posted in February 2005 is cleared. A bond isn’t cleared until the U.S. Department of Commerce completes an “administrative review” of the antidumping case, which begins one year after tariffs are enacted and lasts one to two years.

Shrimp from Thailand, India, Vietnam, China, Ecuador and Brazil was hit with tariffs of up to 113 percent in February 2005, the result of an antidumping petition domestic shrimp fishermen and processors filed in late 2003.

What perplexes shrimp importers is that they had no history of tariff evasion when the new continuous-bond policy was implemented. Chinese crawfish, garlic, mushrooms and honey represented 69 percent of the $130 million in unpaid tariffs in fiscal 2003 and 82 percent of the $260 million in unpaid tariffs in fiscal 2004.

Customs intends to apply its new continuous-bond policy to the 13 other products, including Chinese crawfish, Vietnamese basa and Norwegian salmon, though a timeline hasn’t been set yet.

However, the National Fisheries Institute and Seafood Exporters Association of India are challenging the legality of Customs’ policy in the U.S. Court of International Trade, and Thailand’s government is threatening to bring the fight to the World Trade Organization. Ocean Blue Products in Los Angeles imported $20 million to $30 million worth of shrimp from Asia annually for several years until 2005.

“We’re not importing much shrimp now,” says owner Spencer Young. “There’s too much risk.”

And who’s to blame him?

Under Customs’ new policy, continuous bonds are calculated by multiplying the value of a company’s imported product from the previous year by the tariff. So if Company X imported $30 million worth of shrimp subject to a 10 percent tariff in 2005, it would post a $3 million bond in 2006, in addition to the $50,000 bond required under the old policy.

Sureties, the companies that issue bonds, now require shrimp importers to fully collateralize bonds, typically through a standby letter of credit. But the minimal number of sureties willing to deal with shrimp importers has dropped even lower because a handful of importers defaulted on bonds in 2005, says Susan Kohn Ross, a partner at Rodriguez O’Donnell Ross Fuerst in Los Angeles.

“One [surety] is on the hook for $9 million,” notes Ross, who represents a number of Los Angeles-area shrimp importers.

That’s not all. Customs has the authority to raise bonds if the figures importers provide are inaccurate or insufficient. So if Company X actually imported $35 million worth of shrimp in 2005, it would post another $3.5 million bond.

The $3 million bond Company X already posted wouldn’t count toward the $3.5 million bond, tying up a total of $6.5 million in 2006.

And if Commerce increases the tariff after its administrative review, which is expected to end in mid-2007, say to 15 percent, Company X would owe an additional $1.5 million in 2006, plus interest.

“Importers are giving up cash flow or lines of credit to post bonds,” says Matthew Nicely, a special counsel in international trade at Willkie Farr & Gallagher in Washington, D.C. “It’s becoming more and more burdensome.

“Some importers are saying, ‘We don’t want to do this anymore,’ and they’re getting out of the business,” adds Ross.

“It’s ridiculous,” says Peter Huh, president of Pacific American Fish Co. in Vernon, Calif., which imports up to 200 containers of shrimp from various countries annually. “It’s another means of restricting trade.”

Market conditions aren’t working in importers’ favor, either. Despite tariffs, shrimp imports through the first 11 months of 2005 were on pace to exceed 2004’s record total of 1.14 billion pounds.

As a result, shrimp prices last month were on par with or down from a year ago.

“There’s no money to be made,” says Young of Ocean Blue Products. “Margins are too slim.”

Despite the increased bonds, not all importers are reeling from Customs’ new policy.

“Our shrimp sales are way up,” says Bill Dresser, president of Sea Port Products Corp. in Kirkland, Wash. “If you’re able to remain in the game, you’ll do more business, but at the expense of others.”

Dresser expects leveraged or high-yield companies to get pushed out of the shrimp-importing business, while low-yield companies survive. Consolidation alone, he says, shouldn’t diminish the flow of shrimp imports, which represent around 90 percent of the U.S. shrimp supply.

“If there’s a supply shortage, it’ll be only temporary,” he predicts. “The next 18 months will be very intriguing. After that [importing shrimp] will get easier.”

But Dresser says that fewer competitors may lead to higher prices.

“The end result is, consumers pay more for shrimp,” adds Huh.

Swimming in shrimp

Right now, restaurateurs and retailers are capitalizing on the affordability of shrimp by promoting it, either on its own or paired with beef, to attract new customers and boost sales.

Just last month, at least five casual-dining chains — Red Lobster, T.G.I. Friday’s, Chili’s, Sizzler and Friendly’s — launched promotions highlighting shrimp.

As part of Red Lobster’s “Jumbo Shrimp” promotion, diners combine two of five entrées — Jumbo Shrimp Scampi, Jumbo Parrot Bay Coconut Shrimp, Jumbo Crunch Fried Shrimp, Garlic Grilled Jumbo Shrimp Skewer and the new Lobster, Crab & Seafood Stuffed Shrimp — for $13.99.

T.G.I. Friday’s revisited its “Three Course Menu,” featuring nine “Guilt-Free Choices,” such as Shrimp Key West, and 13 “Indulgent Favorites,” such as Friday’s Shrimp, for $12.99.

Chili’s “Grilled Southwest Combinations” featured Garlic & Lime Grilled Shrimp for $8.99, while Sizzler offered Steak & 15 Island Shrimp for $12.99. And Friendly’s “Warm Up, Chill Out” menu introduced five new entrées, including Sirloin Steak & Shrimp.

At the retail level, Wegmans, a Rochester, N.Y.-based independent chain with more than 100 supermarkets in the Northeast, advertised 1-pound bags of 41/50-count raw, peeled and deveined shrimp for $6.99 from Jan. 15 to 21. Albertsons, a Boise, Idaho-based chain with more than 2,500 supermarkets nationwide, promoted 26/30-count raw shrimp for $4.99 to $5.99 a pound and 26/30-count cooked and peeled shrimp for $7.99 to $8.99 from Jan. 18 to 24.

Processors, fishermen pipe up

There’s yet another side to the dispute over the new continuous-bond policy: U.S. processors and fishermen.

The domestic shrimp, crawfish and catfish industries are lobbying legislators to press the Bush administration to clamp down on tariff evasion and keep another controversial measure, the Byrd Amendment, in place.

In fact, the Byrd Amendment, the 6-year-old law that allows Customs to dispense tariffs to domestic industries, brought the prevalence of tariff evasion to light and led to the implementation of Customs’ policy.

In its annual evaluation of the Byrd Amendment, the U.S. Government Accountability Office reported that Customs failed to collect $130 million and $260 million in tariffs in fiscal 2003 and 2004, respectively. Chinese crawfish was the chief culprit, representing $85 million and $170 million in unpaid tariffs in fiscal 2003 and 2004,

“Byrd made people realize that [tariff evasion] is rampant,” says Adam Johnson, president of Bayou Land Seafood in Breaux Bridge, La., and president of the Crawfish Processors Alliance. “The collection rate on Chinese crawfish is under 5 percent. That’s dismal. We’ve discussed this with anyone willing to listen.”

Customs — the government’s No. 2 revenue-generating agency — reacted by adopting its policy to prevent illegal tariff-averting practices, such as transshipping, or shipping products through a country devoid of tariffs.

Farmed seafood and produce were targeted because some of the products can take 18 months to liquidate after reaching the port of entry, giving importers ample time to disappear before paying tariffs fully.

Bruce Ingalls, chief of Customs’ revenue division in Indianapolis, says the agency plans to apply its policy to Chinese crawfish, Vietnamese basa, Norwegian salmon and the other 10 products, though he declined to say when.

“We first tested [the policy] on shrimp because the shrimp antidumping case was just coming out,” says Ingalls.

Adds Johnson, “We need Customs to apply [the policy] to Chinese crawfish. It’s not a 100 percent solution. But it’ll bring the collection rate above 5 percent.”

Shrimp importers admit that transshipping is widespread. Morton Nussbaum, president of International Marketing Specialists in Boston, says he was bombarded with calls, faxes and e-mails from exporters eager to transship shrimp immediately after tariffs were issued.

“Tariff circumvention is so prevalent,” says Matt Fass, VP of Maritime Products International in Newport News, Va., which imports Chinese crawfish and Vietnamese basa. “With Chinese crawfish, there’s almost no enforcement.”

But Customs says it’s serious about cracking down on transshipping and is reportedly in Indonesia investigating the matter. At least seven Indonesian exporters are suspected of transshipping Chinese shrimp.

Indonesia was omitted from the antidumping petition, and shrimp imports from the country jumped around 15 percent from 2004 to 2005 as a result.

NFI, India take a stand

The future of the new continuous-bond policy and the Byrd Amendment are in limbo.

NFI alleges that Customs’ policy violates U.S. and WTO antidumping laws by requiring two securities, a cash deposit and a bond, when only one security is necessary. In late December, NFI filed a lawsuit in the Court of International Trade in New York. Steptoe & Johnson in Washington, D.C., is representing NFI.

“It’s placed an unnecessary burden on companies that have been in the seafood industry a long time,” says John Connelly, NFI’s president in McLean, Va.

“NFI is doing the right thing,” says Wally Stevens, president and COO of Slade Gorton & Co. in Boston and president of the American Seafood Distributors Association. “Customs acted in too much of a draconian matter. [The policy] is changing the landscape of the shrimp-importing business dramatically.”

The hope is that the court will accelerate the suit because the plaintiffs, shrimp importers, are suffering irreparable harm.

“We hope the court will address this sooner rather than later,” says Connelly.

The court is holding up a similar suit the Seafood Exporters Association of India filed last May.

“The government is trying to delay the hearing of the case with a series of meritless procedural objections,” says Julie Mendoza, a partner at Kaye Scholer in Washington, D.C., who’s representing the SEAI. But she expects the case to move forward soon.

The SEAI’s allegation is the same as NFI’s. Both cases are assigned to the same judge and may be consolidated by the court, she notes.

“We believe our argument is very strong,” says Mendoza. “Customs has no legal authority to double the amount of security. And Customs certainly has no authority to issue a mandatory, inflexible bond-calculation formula without going through the requirements of the Administrative Procedure Act.”

The effectiveness of Customs’ policy is also being questioned, because it fails to address the root of tariff evasion, says Nicely, who represents Thai and Vietnamese shrimp exporters.

Some importers, he explains, are exploiting a loophole in U.S. antidumping laws that allows exporters to qualify as “new shippers” and post single-entry bonds instead of continuous bonds. New shippers aren’t assessed tariffs until Commerce completes a “new shipper review,” which lasts nine to 15 months.

Often new shippers go out of business before Customs issues tariffs.

Additionally, Thailand, the world’s largest shrimp exporter, revealed in early December that it plans to file a complaint with the WTO.

It’s the WTO’s opposition to the Byrd Amendment (the organization deemed the law illegal in 2002) that led the Senate to vote to revoke the law as part of the Deficit Reduction Act of 2005 it narrowly approved in mid-December.

The bill then returned to the House due to matters unrelated to the Byrd Amendment. But there was talk that the House would remove the provision abolishing the Byrd Amendment before voting on the bill again by the end of January.

The Byrd Amendment’s days may be numbered. But it may take months, perhaps years, to refute Customs’ continuous-bond policy. Some shrimp importers won’t make it that long.

Associate Editor Steven Hedlund can be e-mailed at shedlund@divcom.com

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