Dana Watts, counsel with Miller & Chevalier, explains the “first sale” rule for reducing U.S. importers’ duty levels, and discusses whether it remains a viable method for achieving that purpose.

The first sale rule, in use for several decades, allows a U.S. importer to declare a product’s valuation on the basis of its sale by a foreign manufacturer to foreign middleman, instead of the price the importer paid. “First sale allows you to use the earlier, cheaper price to pay lower duties,” Watts explains. To successfully employ the rule, importers must meet three criteria: there must be a bona fide sale, an “arm’s-length” transaction, and an export assessment for the U.S.

In the past, many importers haven’t bothered to invoke the first sale rule because the low level of most U.S. duties — around 5% — didn’t make it worth their while to do the additional paperwork required by Customs and Border Protection. But when President Trump imposed duties of up 25% in 2018, the rule became a far more attractive means of lowering overall import costs.

Complicating matters was a decision by the U.S. Court of International Trade in Meyer Corp. vs. U.S., in which the court added a fourth criterion for the use of the first sale rule: “the absence of any non-market factors that would influence the price,” says Watts. Since China is considered by the U.S. to be a “non-market” economy, that ruling could theoretically affect every imported product from China.

 “The trade bar is looking closely at all CBP rulings to see if that language will be repeated, and used as a rationale in future rulings,” says Watts. Such a decision could accelerate moves by manufacturers to shift production out of China and other “non-market” economies, she adds.