United States: GAO Report On Section 232 Exclusions Signals Increased Enforcement For Steel And Aluminum Importers

On July 20, 2023, the U.S. Government Accountability Office ("GAO") released a report titled, Steel and Aluminum Tariffs: Agencies Should Ensure Section 232 Exclusion Requests are Needed and Duties are Paid. Following an investigation analyzing import entry data from March 2018 through September 2021, GAO published a 66-page report about the usage and administration of the Section 232 steel and aluminum exclusion programs. The report detailed the shortcomings of the Department of Commerce's Bureau of Industry and Security ("BIS") and the United States Customs and Border Protection ("CBP") in administering the Section 232 exclusion programs. In light of the GAO report, importers of steel and aluminum should expect BIS to conduct additional quantity certification reviews and more closely scrutinize the data points included in exclusion requests. Importers may also face increased scrutiny from CBP, who will more closely examine and deny 232 exclusion claims that are not properly filed. Because of the likely increased scrutiny by BIS and CBP, importers should be extra vigilant of the information submitted in exclusion requests, carefully monitor their quota usage and ensure proper claims are filed with CBP.

The BIS established the steel and aluminum exclusion programs in 2018 which allows organizations to submit requests which once granted permit a certain amount of steel or aluminum imports to avoid paying 25% and 10% tariffs respectively. While the steel and aluminum exclusion programs offer importers the opportunity for massive duty savings, the U.S. government has missed out on a significant amount of revenue since the inception of the program. Due to the massive administration burden on BIS and CBP to run and implement these exclusion programs, GAO identified several issues where enforcement of the exclusions is lacking. In response to their findings in the report, GAO proposed four recommendations: 1) for CBP to take additional steps to recover the duties owed by importers as a result of invalid use of Section 232 exclusions; 2) for CBP to ensure that controls are implemented to prevent importers from exceeding the approved quantities of their Section 232 exclusions; 3) for BIS to evaluate the results of the certification requirement; and, 4) for BIS to develop a more consistent data transfer process. Both BIS and CBP concurred with these recommendations.

The headline number from the report is that GAO estimates that importers may owe about $32 million in duties because of invalid use of Section 232 exclusions, as of November 10, 2021. The analysis showed that during the period of review importers properly utilized 61,243 exclusions to avoid paying Section 232 duties. However, there were 3,959 instances of invalid use related to five exclusion parameters: exclusion identification number, HTSUS code, country of origin, validity period, and quantity. Of those 3,959 instances of incorrect use, 3,884 or 98% related to quantity.

One of the reasons for the loss in revenue is that CBP lacks effective controls to prevent importers from exceeding the approved exclusion quantities. GAO estimates that of the $32 million in lost revenue, an estimated $29.4 million of the duties were caused by invalid use related to the quantity parameter. According to CBP officials, CBP only had 90 days to develop and implement a method for validating Section 232 exclusion claims and did not have the resources to update ACE programming to provide for automatic validation of exclusion quantities. CBP officials told GAO that establishing an automated quantity control would have been highly time and labor intensive because then ACE would need to be programmed to track each exclusion's quantity individually before it can automatically deactivate the exclusion when the approved quantity has been reached. Currently CBP needs to manually deactivate exclusions that have reached quota but the lag time between when importers reach approved quantities and CBP's manual deactivation allows importers to overclaim exclusions and not pay duties on the overage. GAO asserts that until CBP implements more effective controls to prevent overclaiming and to recover duties owed, the U.S. government is at risk of losing millions of dollars in revenue. In addition, GAO urged that CBP take steps to recover the lost duties to the extent possible.

The GAO report analyzed the utilization of approved Section 232 exclusions. During the period of review only 29% of steel exclusions and 38% of aluminum exclusions were used. When exclusion utilization is measured in terms of quantity importers used an even smaller fraction of what BIS approved, partially because importers often do not use the full quantity even when they use exclusions. During the period of review only 9% of steel exclusion quantity and 9% of aluminum exclusions were used. In that time these exclusions resulted in an estimated $2.2 billion in tariff savings for steel importers and $440 million for aluminum importers. The report offers several explanations for why exclusion usage is so low. First, there are many granted redundant exclusion requests where exclusions have the same HTSUS code, approval date, countries of origin, and IOR name. Another explanation is that BIS approved exclusions with exceedingly large quantities which far exceeded historical import figures.

In response to the low utilization rates of the exclusion, BIS added a quantity certification requirement for exclusions in December 2020. This quantity certification required that requestor's organization expects to "consume, sell, or otherwise use" the full quantity of product across all the requester's active and pending exclusion requests within the next calendar year. In the same Federal Register notice, BIS also recognized the inefficiencies from reviewing and approving large numbers of exclusion requests that were not needed. BIS designed the volume certification program with the goal of discouraging parties from filing requests based on anticipated need and provide a basis for BIS to introduce robust reviews of the requests by asking parties to provide documentation of their past imports and projections for the current year. However, BIS and GAO have not fully assessed the effectiveness of the certification requirements.

Another problem identified in the report is that BIS and CBP have inconsistent data on some approved exclusions due to the lack of a consistent data transfer process for approval lists and change logs. For example, the BIS approval record for each exclusion shows the relevant HTSUS code, but if an exclusion is later changed, the change log may not include that information. During the review, GAO discovered almost 10,000 exclusions (around 5% of exclusions) contained inconsistencies between BIS and CBP's data. According to the GAO, these inconsistencies create a risk that CBP would administer these exclusions in a manner that does not comport with BIS approval and recommends BIS explore the development of a data transfer process that reduces the potential for inconsistencies.

As both BIS and CBP take steps to address GAO's four recommendations for Executive Action (which can be tracked here: Status of Recommendations for Executive Action), it is clear that maintaining the Section 232 exclusion process has proved to be a tremendous burden for BIS and CBP. As BIS continues to perform quantity certification reviews, Crowell recommends that requesting organizations confirm that their Section 232 requests are in accordance with Commerce's guidelines. Importers should also track the usage of their exclusions to prevent exceeding the quotas and file any renewal exclusions in a timely manner. Failure to maintain a robust system of submitting and monitoring one's own Section 232 exclusions could end up costing importer's millions in duty savings opportunities.

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