NAFTA Drawback on Trial

One of my hobbies is trying to explain NAFTA drawback in 50 words or less. It goes something like this:

No drawback for duty paid imports exported to Mexico or Canada in excess of the lesser amount of duties paid the U.S. or the other country. That's amount, not the rate of duty. This prevents non-NAFTA goods from moving among the NAFTA countries duty free. Exceptions apply.

That's 47 words. Not bad.

The recent decision in Merck & Co., Inc. v. United States, is all about that "exceptions apply" caveat. Under the NAFTA, the U.S. eliminated, with certain exceptions, substitution unused merchandise drawback for exports to Canada or Mexico. Merck imported a chemical with a really long name which will hereinafter be called "stuff." It paid duty on the stuff. Later, it imported more stuff. This time, it was duty free. It then exported some of the duty-free stuff to Mexico and Canada and claimed substitution unused merchandise drawback for duties paid on the dutiable stuff. Customs said no because, after all, substitution unused merchandise drawback was eliminated.

But, Merck said an exception applies under sec. 3333(a). According to Merck, the exception applies because the drawback was claimed not on the imported goods but on the substituted exported goods. Is this at all clear? You might need to read the opinion a couple times. The opinion focuses whether a dependent clause modifies the reference to the imported merchandise or the exported merchandise. Customs reads the exception to refer to "imported merchandise." Applying the "last antecedent rule," the Court found that the exception focuses on the "imported merchandise." Thus, the drawback is not allowed.

Could that be more complicated?

The analysis is clearer when it turns to the legislative history, which makes it clear that the intent was to eliminate the right to a refund of duties paid on imported merchandise upon the shipment to a NAFTA country of other merchandise substituted for the imports. Similarly, the implementing regulations make this relatively clear. Thus, no drawback.

Good try, though. Gotta give Merck that much.


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