Allegations of Illegal Chinese Pencils

U.S. Pencil Anti-Dumping Duties are news once again as a result of new developments with regards to alleged transshipments of pencils produced in China via third countries to avoid these duties.   Despite the imposition of such duties since 1994 there has been a steady increase in imports by retailers and wholesalers most importantly from China, but also Indonesia, and numerous other countries over the past 20 years.  To maintain competitive through out this period much of the traditional volume supplied by U.S. pencil manufacurers has migrated primarily to Mexico and Asia, particularly the largest U.S. producers.

In effect, the large retailers and a new class of importers and distributors have significant increased importance to overall US pencil supply using lower cost imports by bypassing the historical U.S. producers. Today U.S. manufacturers now use a combination of U.S. production, foreign production in their own subsidiary facilities as well as outsourced production from third party foreign suppliers to meet thier customers needs. Only a very few maintain all their production within the U.S.

Today I estimate that less than 10% of U.S. pencil consumption consists of pencils actually manufactured in the United States.  Certainly the actual market share of the traditional U.S. producers is much higher when factoring in production imported from their own facilities in Mexico or China plus what they import from other foreign producers.  Perhaps 50% of the U.S. market today are pencils imported directly from China, despite the anti-dumping duties of 114% levied on Chinese pencils since 1994.  Most of these direct Chinese imports do not pay the full anti-dumping duty given that provisions under the statutes allow for a review process with the U.S. Commerce department that results in reductions in these duties applicable to some Chinese producers/exporters.  However, the review process is expensive and only the largest Chinese producers that export to the US participate.  As a result it has been long suspected that there also have been a substantial number of Chinese produced pencils being illegally transshipped via third countries to avoid these duties.  Suspecting and proving such transshipments however are separate matters. 

Now for the first time since implementation of the duties it was made public in May that there is an active civil case proceeding against several large U.S. retailers and importers for participating in the importation of illegal transshipped Chinese pencils via countries such as Taiwan, Indonesia and Vietnam.  This case was filed in 2008 by the Cullen Law Firm in Washington, D.C. per the this press release published May 17, 2012.  The public docket was made available May 1st.  Note that at this time these remain only allegations, but if the case prevails there are substantive fines and penalties that would be accruing going back to at least 2006 as it’s not just the transshipment to avoid duties that is a potential violation, but also incorrect marking relative to country of origin laws as well. 

I have now had the opportunity to review the actual Docket Report from the U.S. District court which was formally unsealed on May 1^st of this year.  Certainly the details of the allegations in these documents seem well researched and argued and are consistent with rumors of various transshipment practices I’ve heard throughout the years.  The Cullen law firm seems confident in their press release.  In the event the case is successful it appears that the the Cullen firm and their client will benefit financially receiving a share of the duties and penalties collected with the balance returning to the U.S. Government which remains an interested party to this case. 

There is also the matter of whether the defendants were knowingly or unknowingly participating in this practice.  My understanding is that the burden of proof on that point is not as relevant in a civil case vs. a criminal case and that may be the rub.  The plaintiff just has to prove the illegal transshipments occurred.  Whether these companies knew they were illegal transshipments doesn’t really matter.  If proven true, clearly the drive for ever lower procurement costs from these retailers will have played a part in supporting the illegal behavior facilitated by thier suppliers in one way or another.  As the importers of record they are potentially subject to the back duties and penalties and as these appear to be rather substantial I assume this case has definitely got their attention and hopefully the attention of other pencil importers.

Finally, from what I’ve learned about the case to date none of the traditional U.S. pencil producers appears to be actively involved as a plaintiff, nor has any been named or identified as a participant in any of the alleged transshipment activities.  In my experience the U.S. Industry participants have always supported “playing by the rules” and indeed several companies were involved as plaintiffs in the original anti-dumping case.  In that respect they helped set the current rules.  Even if some  of these U.S. producers may have relocated much of their own production overseas, they have long been active in assuring that their own imports of finished goods and raw materials are fully compliant with applicable U.S. trade law as well as all relevant consumer products safety regulations, etc.  While the U.S. Writing Instrument Manufacturers Association and it’s Pencil Section have taken no public position on this case, my personal view is that these member companies (of which ours is one) are watching this case with interest and hope that whatever the final ruling it will have some form of positive impact for all of those companies in our industry, foreign or domestic, that play by the rules.

So what does this all mean for U.S. pencil manufacturing?  If proven true, what changes will these defendants and potentially other retailers and importers make in their practices and supply chain structures to address potential risks brought to light by this alleged activity.  Will it benefit U.S. manufacturing or just redistribute purchasing to other foreign manufacturers?  What other market forces are currently at play that could impact the trends regarding the future of U.S. pencil manufacturing?  I’ll address these questions in my next post in just about two weeks time. In the meantime here's a link to a collection of my past posts on international trade issues related to the pencil Industry.