Papers Relating to the Foreign Relations of the United States, 1925, Volume I

142.15/2326

The Secretary of State to Certain Diplomatic and Consular Officers³⁶

Washington, April 2, 1925.

Sirs: There have arisen from time to time in certain foreign countries misunderstandings concerning the purpose and the nature of the activities abroad of Customs Attachés (formerly called Customs representatives) of the United States Treasury and of representatives and investigators of the United States Tariff Commission. The following data are presented for your more complete information and for your guidance in this matter and in order that you may communicate this information to the government to which you are accredited in case the activities of these agents are questioned by it and the Department specifically instructs you to take up the matter.

Customs Attachés

You will observe by reference to Section 402 (a) of the Tariff Act of 1922³⁷ that the value of merchandise imported into the United States is defined as:

(1) The foreign value or the export value, whichever is higher;

(2) If neither the foreign value nor the export value can be ascertained to the satisfaction of the appraising officers, then the United States value;

(3) If neither the foreign value, the export value, nor the United States value can be ascertained to the satisfaction of the appraising officers, then the cost of production.

In the ordinary course, the declaration of value made by the importer for purposes of entering goods at the customs, together with the consular invoice of the shipment and comparative values of such or similar merchandise, affords sufficient information to enable the appraiser to make a satisfactory valuation of the goods. However, it sometimes occurs that the appraiser has reason to believe that the valuation at which the goods are entered is less than the current foreign value or export value of the goods as defined in the Tariff Act. In this connection it is important to observe that the dutiable value of a particular consignment of goods is not necessarily the price at which they were bought abroad for importation into the United States, but is the current foreign value or export value of such or similar goods at the time of exportation.

In cases where the customs appraiser is not satisfied as to the valuation entered and has not available data upon which he can base a valuation, he will find it necessary to cause an investigation to be made abroad to ascertain these data. For the purpose of this instruction, these will be divided into ordinary “market value” and “cost-of-production” investigations, numbered 1 and 2 herein. To make such investigations, the United States Treasury Department has assigned a number of customs attachés to foreign posts. These customs attachés in the foreign field are the authorized representatives of the Secretary of the Treasury and function as instrumentalities of the appraising operation, and make particular investigations upon the request of the customs authorities of the United States Treasury and in connection with the admission of goods which have been entered at the United States customs. These officials also make original investigations of “market” value when they have any reason to believe, from information lodged with them or from their own observations, that undervaluation exists in any particular instance or industry. If such an inquiry should extend to cost of production, it will be governed by the special instructions from the Treasury Department referred to herein.

An extract from a memorandum submitted by the Treasury Department on this subject follows: “In making these investigations, the customs attachés of the United States Treasury Department abroad are always disposed to give to manufacturers and shippers the fullest information as to correct invoicing of their merchandise or anything else about which they may make inquiry or request assistance.”

1. The customs attachés abroad, when it is necessary to investigate the foreign value or export value of certain goods, customarily call upon the firm which has made the shipment and request data as to sales price for home consumption and/or exportation to the United States. In the course of this investigation it is usually necessary to request the shipper to exhibit his records of other sales of the same or similar goods on approximately the date when the consignment in question was exported. Such records tend to establish the actual foreign value or export value at the time of exportation, which is the valuation prescribed by the Tariff Act of 1922 as the valuation to be considered in the application of the tariff. (Sec. 402–b and c).

A foreign shipper presumably would not refuse to make available to the customs attaché the above-mentioned information unless he misunderstood the terms of the Tariff Act of 1922. It may be emphasized here that in the “market value” investigation the Customs Attaché does not usually request data as to the cost of production; he merely requests the exhibition of documentary evidence that the valuation declared in a particular consular invoice upon a shipment of goods to the United States is not lower than upon sales in the exporting country for home consumption or for export to the United States. In case the valuation declared by the shipper with respect to the shipment to the United States has been made in good faith, there would seem to be no valid reason for the shipper’s refusing to demonstrate the existence of such good faith by exhibiting a record of sales in his home market.

If, however, the shipper refuses to make such documentary proof available to the Customs Attaché there are only two courses open to the appraiser at the port of entry. He may resort to the United States value, which in almost every case, will be higher than the export or the foreign value, and, in some cases, will be difficult of ascertainment. In case there were an appeal from the appraiser’s valuation, the case would come before the Board of General Appraisers for review. This Board sits as a court and its records and proceedings are public. This court would normally require affirmative proof of the foreign value or export value, which would necessitate the production of the exporter’s books and records or of extracts therefrom in court. In such a case the data to which the shipper had denied the Customs Attaché confidential access would be made available to the public and would lose their confidential character.

The other alternative, in case of a refusal or failure of a shipper to allow an examination of his books to determine the foreign value or export value, is for the Secretary of the Treasury to prohibit the importation into the United States of merchandise manufactured, produced, sold, shipped or consigned by the foreign shipper.

Section 510 of the Tariff Act of 1922 is as follows:

Inspection of Exporter’s Books.—

“If any person manufacturing, producing, selling, shipping, or consigning merchandise exported to the United States fails, at the request of the Secretary of the Treasury, or an appraiser, or person acting as appraiser, or a collector, or a general appraiser, or the Board of General Appraisers, as the case may be, to permit a duly accredited officer of the United States to inspect his books, papers, records, accounts, documents, or correspondence, pertaining to the market value or classification of such merchandise, then while such failure continues the Secretary of the Treasury, under regulations prescribed by him, (1) shall prohibit the importation into the United States of merchandise manufactured, produced, sold, shipped or consigned by such person, and (2) may instruct the collectors to withhold delivery of merchandise manufactured, produced, sold, shipped or consigned by such person. If such failure continues for a period of one year from the date of such instructions the collector shall cause the merchandise, unless previously exported, to be sold at public auction as in the case of forfeited merchandise.”

Under an opinion of the Attorney General of the United States the Treasury Department considers that the provisions of this section of the Tariff Act of 1922 are mandatory upon the Secretary of the Treasury and the prohibition of further importation has been to put it into effect after the Customs Attaché has reported a refusal on the part of the foreign shipper to make the necessary data available.

In addition to the above specific provision of law, there is a general principle that, if, for any reason, a legal basis for the appraisement of imported merchandise can not be ascertained to the satisfaction of the appraising officers, such merchandise shall not be appraised and delivered until a legal basis of appraisement can be ascertained.

2. There sometimes arise, however, cases in which it is impossible for either the foreign value, the export value, or the United States value of goods to be ascertained, notwithstanding the apparent good faith of the shipper in attempting to furnish data to substantiate the value as declared for United States customs entry. Such cases usually involve goods which are shipped in a partly manufactured state to the United States for further manufacture and incorporation into a finished machine or product in this country, and which are not sold for home consumption in the country of exportation.

In these cases it is necessary, under Section 402 (a) (3) of the Tariff Act of 1922 for the United States customs authorities to endeavor to obtain information regarding the cost of production of the goods in question in order that a valuation for customs purposes may be arrived at. The Customs Attaché stationed abroad is in such an event instructed to make an investigation in this sense. Section 402 (e) defines the cost of production as follows:

(1) The cost of materials of, and of fabrication, manipulation, or other process employed in manufacturing or producing such or similar merchandise, at a time preceding the date of exportation of the particular merchandise under consideration which would ordinarily permit the manufacture or production of the particular merchandise under consideration in the usual course of business;

(2) The usual general expenses (not less than 10 per centum of such cost) in the case of such or similar merchandise;

(3) The cost of all containers and coverings of whatever nature, and all other costs, charges, and expenses incident to placing the particular merchandise under consideration in condition, packed ready for shipment to the United States; and

(4) An addition for profit (not less than 8 per centum of the sum of the amounts found under paragraphs (1) and (2) of this subdivision) equal to the profit which ordinarily is added, in the case of merchandise of the same general character as the particular merchandise under consideration, by manufacturers or producers in the country of manufacture or production who are engaged in the production or manufacture of merchandise of the same class or kind.

A number of foreign governments have formally and informally intimated that the investigations carried on by Customs Attachés into the cost of production of foreign merchandise constitute an invasion of the sovereignty of the country in which they are attempted, unless prior permission has been accorded for such an investigation by the government concerned. The Department is not prepared to insist as a matter of right that the United States Customs Attachés be accorded facilities for such investigations into the cost of production. However, it is believed that foreign governments will appreciate the practical advisability of furthering the proper activities of Customs Attachés in this connection in view of the clear provisions of Section 510 of the Tariff Act of 1922 which, as has been noted before, are considered to be mandatory upon the Secretary of the Treasury. In other words, if it is impossible for the appraising officers of the United States Customs Service to arrive at one of the four kinds of valuation enumerated in Section 402 (a), it becomes necessary for the Secretary of the Treasury to exclude the goods in question. However, in order that no misunderstanding may arise on the part of any foreign government to the effect that an American Customs Attaché is attempting to carry out provisions of American law on the territory of a foreign state without the permission of the government thereof, it has been arranged that in future no Customs Attaché will undertake to approach a foreign shipper or manufacturer in regard to the cost of production of his goods without the prior general permission of the appropriate authorities of the government in whose territory such shipper or manufacturer is located. This general permission would appear to be implied from the recognition by a foreign government of the Customs Attachés at the time that the notification of their status and the statement of their duties are made by the diplomatic mission.

In the event that, in reply to the notification by the diplomatic mission of the status and duties of the Customs Attachés, any foreign government signifies its refusal to permit these officials to carry out investigations into the cost of production, the chief of the mission will notify the Customs Attaché to that effect and will inform the Department transmitting copies of the correspondence containing such refusal. Under such circumstances, Customs Attachés are instructed not to attempt cost-of-production investigations in the country in question.

In countries where Customs Attachés have been recognized by the local government, in each specific case where the ascertainment of the cost of production is necessary, the Customs Attaché will inform the Chief of the American Diplomatic Mission thereof and the latter is hereby instructed to notify the government to which he is accredited that the Customs Attaché will approach the firm in question with a view to ascertaining the cost of production.

The Customs Attaché will simultaneously call upon the firm in question and request facilities for making the necessary investigation. In case the firm refuses to permit the Attaché to carry out such an investigation, the latter will inform the Chief of the American Diplomatic Mission, who, in turn, will take up the question with the government, pointing out again the purpose for which the investigation is to be made, and that exclusion from the United States of the firm’s goods under Section 510 may result as a consequence of the refusal.

In the event that representations to the foreign government do not result in overcoming any firm’s objections to the investigation by the Customs Attaché, it will not be attempted further and the Customs Attaché will refer the case back to the American Customs authorities with an appropriate notation of the refusal.

It is believed that no fixed procedure can advantageously be outlined by the Department for the guidance of American diplomatic missions in bringing such requests to the notice of foreign governments. It would appear that in each country there might be worked out by the Mission and the appropriate foreign government a procedure that would satisfy the requirements of that government without necessitating the active intervention of the Mission in each individual case. It is left to the discretion of the individual Chiefs of Mission, after consultation with the Customs Attaché, and to the exigencies of situations in particular countries to determine the procedure to be followed. It is the Department’s object to ensure that no investigation into the cost of production will be undertaken by Customs Attachés of the Treasury without the prior general permission of the foreign government concerned, and, in certain countries where the activities of Customs Attachés have been or may be questioned by the governments thereof, without prior notification to the foreign government of each specific cost of production investigation.

The general plan outlined above, providing for notification to the foreign government of each cost-of-production investigation that it is planned to undertake, is subject to modification or suppression by the Chief of the Diplomatic Mission, in his discretion, in those countries where the Customs Attachés’ activities have not been questioned. In such countries, it may appear to the Chief of Mission not to be desirable to raise any question in the minds of the authorities of the country to which he is accredited. Under these circumstances, no action in regard to this instruction need be taken, aside from the general notification of the status and duties of the Customs Attachés, unless some subsequent question as to their activities is raised by the government.

It is fully realized that there may be objection on the part of certain foreign governments and by certain foreign manufacturers to disclosing one or another element of the cost-of-production investigation. For instance, it has been felt by foreign manufacturers that valuable trade secrets were being requested by Customs Attachés which, if they became known to the competitors of the firm, might well prove disastrous to the latter’s prosperity. In regard to this quite natural fear, it may be said that the Customs Attachés stationed abroad are men of long service and proved reliability in the United States Customs Service. Their reports are strictly confidential and are never accessible to any American or foreign individual or firm, nor are they even available to other departments of the United States Government or to bureaus of the United States Treasury Department other than the Customs Division thereof. Under article 1323 of the Customs Regulations of 1923 the divulgence of information of this character subjects the guilty party to dismissal or criminal prosecution or both. The record of the United States Customs Service for preserving the confidentiality of data given to it in confidence has been excellent and it may be safely assumed that cases of the betrayal of such confidence, should any such case unfortunately occur, will be punished with the utmost severity.

In making investigations into the cost of production abroad, where such investigations have been permitted by the government concerned, the Customs Attachés have been given specific written instructions, a copy of which is transmitted herewith.³⁸ It will be observed that these instructions make it possible for the Customs Attachés’ reports to contain the data necessary for valuation purposes without disclosing all the individual items which go to make up such cost. Thus, it is contemplated that only the Customs Attaché himself will have information as to labor cost, finishing cost, etc., which the manufacturer may be hesitant to divulge.

It has been alleged in certain foreign countries that the Customs Attachés, in requesting data from foreign shippers, have threatened the exclusion of their goods from the United States unless such data were furnished. In this connection it may be pointed out that Customs Attachés are under strict instructions to make no such threats. They are authorized, however, to explain the provisions of Section 510 of the United States Tariff Act, in order that the foreign shippers may understand the possible result of their refusal or the inability of the customs appraiser to obtain a legal basis for the appraisement of the merchandise.

It is pertinent to call attention to the fact that the methods of valuation established by the Tariff Act of 1922,—including the provision for the cost of production—were arrived at after the most careful study by the Congress of the United States as alternatives to the “American Valuation” of goods for customs purposes. As has been explained above, the United States Treasury must enforce the existing tariff law, and as a practical matter, it does not appear probable that an amendment of Section 510 of that law will be seriously considered in the near future. Consequently, it should be made clear to foreign officials, who question the propriety of investigations abroad by United States Customs Attachés, that a failure on their part to cooperate with these Attachés in their duties under the Tariff Act will in some cases operate to preclude shipments to the United States.

Under the Canadian tariff regulations, Canadian investigators have conducted investigations into the books and records of American manufacturers. This Government has not objected to such investigations, since it has appeared to it only fair that American exporters, desiring to enter a foreign market, should comply with the tariff and other regulations of that market. For this Government to prohibit proper activities of Canadian investigators would be to injure American exporters by depriving them of their trade with Canada in those cases where investigation of books is demanded by the Canadian Customs authorities.

Tariff Commission Representatives

Your attention is especially directed to the fact that the United States Tariff Commission is entirely separate from the United States Treasury Department. It was created by Act of Congress approved September 8, 1916.³⁹ It is not an administrative department of this Government. Its duties consist of investigation and recommendations to the President and to the Congress of the United States, as a result of such investigations. You are referred to the statement of the Commission’s duties which appears on page 393 of the Congressional Directory dated January, 1925.

Investigations in foreign countries are conducted under Sections 315, 316 and 317 of the Tariff Act of 1922. The most frequent investigations abroad are to ascertain costs of production under Section 315. Section 315 provides as follows:

(a) That in order to regulate the foreign commerce of the United States and to put into force and effect the policy of the Congress by this Act intended, whenever the President, upon investigation of the differences in costs of production of articles wholly or in part the growth or product of the United States and of like or similar articles wholly or in part the growth or product of competing foreign countries, shall find it thereby shown that the duties fixed in this Act do not equalize the said differences in cost of production in the United States and the principal competing country he shall, by such investigation, ascertain said differences and determine and proclaim the changes in classifications or increases or decreases in any rate of duty provided in this Act shown by said ascertained differences in such costs of production necessary to equalize the same. Thirty days after the date of such proclamation or proclamations such changes in classification shall take effect, and such increased or decreased duties shall be levied, collected, and paid on such articles when imported from any foreign country into the United States or into any of its possessions (except the Philippine Islands, the Virgin Islands, and the Islands of Guam and Tutuila): Provided, That the total increase or decrease of such rates of duty shall not exceed 50 per centum of the rates specified in Title I of this Act, or in any amendatory Act.

(b) That in order to regulate the foreign commerce of the United States and to put into force and effect the policy of the Congress by this Act intended, whenever the President, upon investigation of the differences in costs of production of articles provided for in Title I of this Act, wholly or in part the growth or product of the United States and of like or similar articles wholly or in part the growth or product of competing foreign countries, shall find it thereby shown that the duties prescribed in this Act do not equalize said differences, and shall further find it thereby shown that the said differences in cost of production in the United States and the principal competing country can not be equalized by proceeding under the provisions of subdivision (a) of this section, he shall make such findings public, together with a description of the articles to which they apply, in such detail as may be necessary for the guidance of appraising officers. In such cases and upon the proclamation by the President becoming effective the ad valorem duty or duty based in whole or in part upon the value of the imported article in the country of exportation shall thereafter be based upon the American selling price, as defined in subdivision (f) of section 402 of this Act, of any similar competitive article manufactured or produced in the United States embraced within the class or kind of imported articles upon which the President has made a proclamation under subdivision (b) of this section.

The ad valorem rate or rates of duty based upon such American selling price shall be the rate found, upon said investigation by the President, to be shown by the said differences in costs of production necessary to equalize such differences, but no such rate shall be decreased more than 50 per centum of the rate specified in Title I of this Act upon such articles, nor shall any such rate be increased. Such rate or rates of duty shall become effective fifteen days after the date of the said proclamation of the President, whereupon the duties so estimated and provided shall be levied, collected, and paid on such articles when imported from any foreign country into the United States or into any of its possessions (except the Philippine Islands, the Virgin Islands, and the islands of Guam and Tutuila). If there is any imported article within the class or kind of articles, upon which the President has made public a finding, for which there is no similar competitive article manufactured or produced in the United States, the value of such imported article shall be determined under the provisions of paragraphs (1), (2), and (3) of subdivision (a) of section 402 of this Act.

(c) That in ascertaining the differences in costs of production under the provisions of subdivisions (a) and (b) of this section, the President, in so far as he finds it practicable, shall take into consideration (1) the differences in conditions in production, including wages, costs of material, and other items in costs of production of such or similar articles in the United States and in competing foreign countries; (2) the differences in the wholesale selling prices of domestic and foreign articles in the principal markets of the United States; (3) advantages granted to a foreign producer by a foreign government, or by a person, partnership, corporation, or association in a foreign country; and (4) any other advantages or disadvantages in competition.

Investigations to assist the President in ascertaining differences in costs of production under this section shall be made by the United States Tariff Commission, and no proclamation shall be issued under this section until such investigation shall have been made. The commission shall give reasonable public notice of its hearings and shall give reasonable opportunity to parties interested to be present, to produce evidence, and to be heard. The commission is authorized to adopt such reasonable procedure, rules, and regulations as it may deem necessary.

The President, proceeding as hereinbefore provided for in proclaiming rates of duty, shall, when he determines that it is shown that the differences in costs of production have changed or no longer exist which led to such proclamation, accordingly as so shown, modify or terminate the same. Nothing in this section shall be construed to authorize a transfer of an article from the dutiable list to the free list or from the free list to the dutiable list, nor a change in form of duty. Whenever it is provided in any paragraph of Title I of this Act, that the duty or duties shall not exceed a specified ad valorem rate upon the articles provided for in such paragraph, no rate determined under the provision of this section upon such articles shall exceed the maximum ad valorem rate so specified.

(d) For the purposes of this section any coal-tar product provided for in paragraphs 27 or 28 of Title I of this Act shall be considered similar to or competitive with any imported coal-tar product which accomplishes results substantially equal to those accomplished by the domestic product when used in substantially the same manner.

(e) The President is authorized to make all needful rules and regulations for carrying out the provisions of this section.

(f) The Secretary of the Treasury is authorized to make such rules and regulations as he may deem necessary for the entry and declaration of imported articles of the class or kind of articles upon which the President has made a proclamation under the provisions of subdivision (b) of this section and for the form of invoice required at time of entry.

The investigations authorized above are in their nature statistical inquiries directed to the ascertainment of the differences between costs of production in the United States and in foreign countries, the purpose being to enable the President to put into effect changes in classification of articles or in rates of duty under the United States Tariff Act of 1922.

The investigations are not concerned with individual importations, and they do not involve the imposition of any penalties under the Tariff Act for refusal to disclose information. Foreign manufacturers, so far as the Tariff Act is concerned, may or may not disclose their costs of production to Tariff Commission investigators, as they may see fit.

However, in view of the fact that the findings of the Tariff Commission as to foreign costs of production may lead to a recommendation to the President that the United States Customs duty on certain classes of foreign goods be raised or lowered under authority of Section 315, foreign manufacturers may consider it advantageous to cooperate with these investigators.

The confidentiality of information concerning individual costs of production and trade secrets of any foreign producer or merchant is protected by Section 708 of the Act of September 8, 1916, which makes it a crime, punishable by fine or imprisonment, or both, for any member of the Tariff Commission, or for any employee, agent, or clerk thereof, or for any other officer or employee of the United States to divulge, or to make known in any manner whatever not provided for by law, to any person, the trade secrets or processes of any person, firm, copartnership, corporation or association embraced in any examination or investigation conducted by the commission.

Representatives of the Tariff Commission do not enjoy the status of attachés of American diplomatic missions. American diplomatic and consular officers are directed, however, in compliance with the Executive Order of April 4, 1924, to cooperate in all proper ways with these officials, and, upon request, to introduce them to the appropriate foreign authorities.

General

Chiefs of Diplomatic Missions and Consuls General who receive this instruction are directed to advise the American consular officers in their territory of the duties and status of the Customs Attachés and of the Tariff Commission representatives. American consular officers will be expected to give full cooperation to these officials in the performance of their duties.

I am [etc.]

Frank B. Kellogg

36. i. e., those in countries in Europe with which the United States maintained diplomatic relations, and in China and Japan.
37. 42 Stat. 858.
38. Not printed.
39. 39 Stat. 756.