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Ted Murphy Principal Baker & McKenzie LLP 815 Connecticut Avenue, N.W. Washington, D.C. 20006 Tel: +1 202 452 7069 Mobile: +1 703 867 8318 Fax: +1 202 416 7069 ted.murphy@bakermckenzie.com

Duties on Imports from Mexico Indefinitely Suspended

President Trump tweeted Friday evening that a deal had been reached to stem the tide of migration through Mexico and, as a result, the additional duties that were threatened to be imposed starting Monday have been “indefinitely suspended.”  The details of the “signed agreement” will be released by the State Department shortly, according to the tweet.

 This should be viewed as a welcome relief to companies producing in, or importing from, Mexico.  The threat of additional duties on imports from Mexico has been averted – for now.  Everyone should keep in mind that duties that can be imposed by a tweet, and be taken away by a tweet, can always be re-imposed by a tweet.  The world we are living in today is different and, while it is difficult, companies need to take this into account and plan accordingly. 

 We trust this is helpful.  If you have any questions about these issues, please let us know.

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U.S. Threatens to Impose Duties on All Articles Imported from Mexico over Immigration Issues

Yesterday, President Trump announced that, beginning on June 10, 2019, the United States will impose additional duties on all articles imported into the United States from Mexico (via land, sea or air) on an escalating schedule until Mexico does more to stop the flow of illegal migrants to the United States.  This tweet was then followed by a longer statement issued by the White House (available here).  That statement accuses Mexico of “passive cooperation in allowing [the] mass incursion” of illegal migration to the United States over many years (e.g., not enforcing its own strong immigration laws, not instituting stricter border controls on its southern border with Guatemala, etc.) and says that this “constitutes an emergency and extraordinary threat to the national security and economy of the United States.”  In response, President Trump is invoking the International Emergency Economic Powers Act to impose additional duties on all articles imported into the United States from Mexico until the “migration crises is alleviated through effective actions taken by Mexico” (as determined by the United States).  More specifically, the statement lays out the following escalating schedule:

June 10, 2019 – 5% additional duty imposed on all articles imported into the United States from Mexico
July 1, 2019 – 10% additional duty imposed
August 1, 2019 – 15% additional duty imposed
September 1, 2019 – 20% additional duty imposed
October 1, 2019 – 25% additional duty imposed

 Tariffs will then remain at 25% until “Mexico substantially stops the illegal inflow of aliens coming through its territory.”

 There are a few points to keep in mind here. 

 First, the statement is a threat of future action.  While everyone should take this threat seriously, there is a week for the United States and Mexico to resolve the issue and avoid the imposition of duties (which would certainly involve Mexico doing more to stem the flow of migrants from Central America through its territory).  That said, if enough is not done, we fully expect that these duties will be imposed and will remain in place until President Trump is satisfied that Mexico does more. 

 Second, if the duties are imposed, they are in addition to whatever duties are currently due on articles.  So, if an article imported from Mexico enters the United States duty free today under NAFTA, it will be subject to a 5% duty rate as of June 10th.  In short, eligibility does not impact these additional duties; they are paid regardless of NAFTA qualification. 

 Third, the additional duties will be paid by the U.S. importers.  Given that much of the Mexico-U.S. trade is between related parties (e.g., a wholly-owned assembly factory or maquila/IMMEX company producing articles imported into the United States by a U.S. parent/affiliate), the duties will be borne by U.S. interests.  As the White House statement makes clear, though, the Administration is aware of this – “[i]f Mexico fails to act, Tariffs will remain at the high level, and companies located in Mexico may start moving back to the United States to make their products and goods.”  So, either Mexico does more to stop the migrants transiting its territory on the way to the United States, or companies will start moving their production facilities from Mexico to the United States (or some third country).

 Fourth, it is hard to imagine that this helps the Administration’s efforts to get the USMCA enacted.  Yesterday, the Administration tried to advance the USMCA by sending a draft Statement of Administration Action to Congress for discussion purposes.  The Administration is pushing to get USMCA through this summer (before the presidential election cycle fully ramps up this coming fall), but the additional duties will likely impact that timing. 

 Finally, this is another example of President Trump using U.S. trade statutes in expansive and unprecedented ways.  What qualifies as an emergency or a national security risk is largely undefined under the statutes.  President Trump has shown a willingness to push the envelopes, but where does that end?  Is climate change an emergency or national security risk that justifies the imposition of additional duties?  What about a trade deficit itself?  Eventually, Congress will likely (try to) step in and put some parameters around these provisions.  In the meantime, business will be faced with greater uncertainty and we will all need to keep an eye on our twitter feeds (and hold on).

 We hope this is helpful.  If you have any questions, please let me know.

 

Section 301 — List 3 Product Exclusion Process

Further to our earlier post Section 301 — Increase in US Duties (Further Update), the U.S. Trade Representative (“USTR”) stated that it would establish a product exclusion request process in the notice that increased the additional duties on List 3 articles from 10% to 25%.  Last week, a notice was published in the Federal Register requesting public comment on the product exclusion request form that the USTR proposed be used for this process.  There are a couple of things interesting about this notice. 

 The first is that it says that USTR anticipates that the product exclusion request process “will open on or around June 30, 2019“. 

 The second is that the form proposed to be used for this round of product exclusions differs in several important respects from the form used in earlier rounds (i.e., the product exclusion petitions submitted for List 1 and List 2 articles).   In reviewing the proposed List 3 Exclusion Request Form, it requires more detailed information than what was required under List 1 and List 2.  Not only did the number of questions increase from 11 to 17, but much more detailed information is required including information that relates to product details and economic data on the impact of the increased duty to the requestor.  It appears that the USTR will be digging more into the nuts and bolts of how products are classified as well as closely examining the economic impact.  As a result, it will be important to submit clear, complete and detailed information in order to ensure that full consideration is given to your request.  Attached is a copy of the proposed List 3 Exclusion Request Form.  List 3 (Proposed Exclusion Request Form)

 In short, all companies impacted by List 3 should be gathering the information needed to submit a product exclusion now, so you are ready to submit the request as soon as the process opens in late June/early July.  We expect that thousands (and thousands) of requests will be filed and, while the approvals will presumably still be retroactive to the date the duties went into effect (although an interesting question is raised as to whether it will be retroactive to when the 10% duty rate went into effect or when the 25% duty rate went into effect), it is better to be at the front of the line, than the back. 

 We hope that this is helpful.  If you have any questions, please let us know.

 

Update — Section 232 — Autos and Steel & Aluminum Imports from Canada and Mexico

Further to our earlier post, here are some thoughts on Friday’s trade developments with respect to the Section 232 Auto/Auto Parts investigation and the prospects for the USMCA:

 (1) the 6-month delay in the Section 232 Auto/Auto Parts investigation makes sense given where we are with China.  If the US imposes import restrictions on autos/auto parts now, the retaliation will be several times larger than what was imposed on U.S. exports after the U.S. imposed the Section 232 duties on imported steel and aluminum.  Given where the negotiations are with China (near the end; although a deal is far from guaranteed), it makes sense to buy a few months here (i.e., it is worth delaying opening a new front in the trade war if you can resolve the front you are currently fighting on first).

 (2) it is far from certain that the EU and/or Japan (and any other country the USTR opens negotiations with – e.g., China on auto parts?) will be willing to enter into an agreement that “limits or restricts” exports of autos/auto parts to the United States (e.g., a voluntary export restraint agreement, which are frowned upon under the WTO rules).  Even if they were willing, 6 months is not a lot of time to negotiate such an agreement.  The 6-month period expires less than one year from the next presidential election, which makes for interesting timing (e.g., will the Administration be willing to increase the cost of cars sold in the United States (whether imported or domestic) by several thousands of dollars each, and have billions of dollars of U.S. exports subject to additional duties by our major trading partners, in a presidential election year?).

 (3) the stated rational for justifying import restrictions on autos/auto parts (i.e., American-owned producers are selling less than they otherwise would due to increased import competition and restrictions in foreign markets and are, therefore, spending less on R&D.  Automotive R&D is important to U.S. national defense.  Thus, we will impose import restrictions so American-owned producers can sell more and have more money to spend on R&D) can be applied to almost any industry to justify import restrictions – e.g., semiconductors, pharmaceuticals, life sciences, medical devices, aerospace, high tech manufacturing, robotics, etc.  Who will be next?  The stated rationale is also questionable economically – does increased competition cause companies to invest less in R&D, or more?  Stated differently, do companies protected by import restrictions have an incentive to keep innovating, or does competition force companies to keep innovating to survive in the market?

 (4) the lifting of the Section 232 steel and aluminum duties on Canada and Mexico signals just how much the Administration has invested in passage of the USMCA.  The United States was willing to lift the additional duties without explicit quantitative limits on imports from Canada and Mexico (although, we suspect that the parties have a clear understanding of what “historic volumes” means and will all be closely monitoring shipments) in exchange for movement on passage in Canada and Mexico (to increase pressure on Congress to do the same).  Given the USMCA’s focus on automotive rules of origin, the delay in the Section 232 Auto/Auto Parts investigation likely means the Administration will only get conditional (i.e., tepid) support from the automotive industry (which is generally opposed to the duties or other restrictions being imposed under Section 232), until the issue is resolved.  Given the timing for resolution (i.e., November 2019), it does not help the chances of passage. 

 The next few months will be even more interesting (if that is even possible).  Stay tuned!

 

Section 232 Update — Autos and Steel & Aluminum Imports from Canada and Mexico

Friday was a(nother) busy day in the world of international trade . . . .

 First, President Trump issued a Presidential Proclamation with regard to the Section 232 investigation into whether imports of automobiles and auto parts present a national security risk to the United States.  The proclamation (copy available here) provides as follows:

(1) The U.S. Department of Commerce investigated the effects imports of passenger vehicles (which the proclamation states includes sedans, sport utility vehicles, crossover vehicles, minivans and cargo vans), light trucks and certain automobile parts (which the proclamation states includes engines and engine parts, transmissions and powertrain parts, and electrical components) on the national security of the United States.  Commerce concluded American-owned automotive research and development and manufacturing are vital to U.S. national security, but that increases in imports of automobiles and auto parts and protected foreign markets (such as the European Union and Japan) have inhibited R&D expenditures by American-owned producers (i.e., American-owned producers’ domestic market share is going down due to increased import competition, at the same time foreign markets are imposing import barriers to U.S. exports, American-owned producers have less revenue, which means they have less money to spend on R&D, which is vital to U.S. national defense).  Therefore, “domestic conditions of competition must be improved by reducing imports.  American-owned producers must be able to increase R&D expenditures to ensure technological leadership that can meet national defense requirements.”

 (2) The President concurs with Commerce’s “finding that automobiles and automobile parts are being imported into the United States in such quantities and under such circumstances as to threaten to impair the national security of the United States.[.]”

 (3) The President has directed the United States Trade Representative to pursue negotiations with the European Union, Japan “and any other country the Trade Representative deems appropriate” of agreements which “limit[s] or restrict[] the importation into, or the exportation to, the United States” of automobiles and auto parts.  If such agreements are not reached within 180 days (by  November 13, 2019), then the President can impose other measures (e.g., additional duties, etc.).

 In short, the President has delayed taking action on imports of autos/auto parts and has given jurisdictions (primarily, the EU and Japan) 6 months to reach a negotiated settlement.  It is likely that the settlement the Administration has in mind involves quantitative restrictions (like it negotiated in the steel and aluminum Section 232 context with certain countries), but such restraints are particularly unpalatable (and economically distortive).  We expect that the EU and Japan will engage with the USTR, but will also make plans to retaliate against U.S. exports, if deals cannot be reached within the 6-month period.  As a result, all companies (not just those that import autos/auto parts into the United States) should be paying attention to this and preparing for possible retaliatory duties (e.g., what happens if your product is subject to an additional 10% or 25% duty upon importation into the EU or into Japan?).

 Second, the Administration announced an agreement with Canada and Mexico to (i) remove the Section 232 duties on steel and aluminum imports from those countries, and (ii) remove all retaliatory duties on U.S.-origin goods by those countries.  The duties are to be eliminated two days from today (by Monday, May 20th).  Copies of the U.S.-Canada joint statement and the U.S.-Mexico joint statement are available here and here.   The joint statements include provisions to monitor for surges in imports, the re-imposition of additional duties and the imposition of retaliatory duties (but only on steel and aluminum).  While the joint statements do not include explicit quantitative restrictions on imports from Canada or Mexico (unlike previous settlements with other countries subject to the steel and aluminum Section 232 duties), the surge language appears to be intended to ensure that imports from those countries do not exceed “historic volumes of trade over a period of time[.]” 

 These agreements also remove one of the remaining (but not the last) hurdles to having the USMCA considered by Congress.

 We hope that this update is helpful.  If you have any questions about these issues, please let us know.

 

China Retaliatory Tariffs

As expected, China has announced an increase in its retaliatory tariffs on $60 billion in US-origin products. The move is in response to the US announcement regarding the increase of the tariff rate applicable to $200 billion in Chinese-origin products that took effect on May 10, 2019. The products subject to the China’s retaliatory measures fall on four lists, originally published on August 3, 2018, that were separated according to proposed tariff rates of 25%, 20%, 10% and 5% (see lists below). Those products have been subject to reduced tariff rates of 10% and 5%, but the originally proposed tariff rates will take effect with respect to US-origin product entered into China on or after June 1, 2019. Tariff exclusions for certain auto parts on the 5% list will, for the time being, continue to apply in accordance with announcements published in January and March of this year.

As a significant development, China has also unveiled a formal product exclusion process whereby Chinese importers, Chinese designated parties of US manufacturers, and relevant chambers of commerce and industry organizations may file requests with the China Ministry of Finance to exclude products from the retaliatory tariffs. In deciding whether to grant a product exclusion request, the Ministry of Finance will consider factors such as: (i) the availability of substitute products; (ii) the economic hardship caused on the applicant; (iii) the adverse impact of the tariffs on related industries; and (iv) the related societal impact of the tariffs. An excluded product will be exempt from the retaliatory tariffs for one year from the effective date of the exclusion, and the previously levied retaliatory tariffs may be refunded if the exclusion applies to all the products under a tariff line or a refund is otherwise considered feasible by customs.

If you would like to explore the new exclusion process, or have any questions about China’s retaliatory tariffs, please let us know or reach out to Jon Cowley (Hong Kong) at Jon.Cowley@bakermckenzie.com and Frank Pan (Shanghai) at Frank.Pan@bakermckenzie.com.

China Retaliatory Tariff Lists

US products to be subject to 25% tariff, increased from the current 10% tariff:

http://gss.mof.gov.cn/zhengwuxinxi/zhengcefabu/201905/P020190513719203602248.pdf

US products to be subject to 20% tariff, increased from the current 10% tariff:

http://gss.mof.gov.cn/zhengwuxinxi/zhengcefabu/201905/P020190513719204287788.pdf

US products to be subject to 10% tariff, increased from the current 5% tariff:

http://gss.mof.gov.cn/zhengwuxinxi/zhengcefabu/201905/P020190513719204715521.pdf

US products to remain subject to 5% tariff:

http://gss.mof.gov.cn/zhengwuxinxi/zhengcefabu/201905/P020190513719205123756.pdf

Section 301 — List 4 (Everything Else)

The U.S. Trade Representative’s Office made available this afternoon an advance copy of the notice that will be published in the Federal Register later this week beginning the process of imposing additional duties of up to 25% on all remaining imports from China (i.e., List 4).  List4  According to the notice, “[i]n light of China’s failure to meaningfully address the acts, policies, and practices that are subject to this investigation and its response to the current action being taken in this investigation, and at the direction of the President, the Trade Representative proposes to modify the action being taken in this investigation.”  The modification being proposed is imposing additional duties of up to 25% on “essentially all [Chinese-origin] products not currently covered” by one of the previous lists.  This new “List 4” covers approximately $300 billion worth of imports from China and includes, for example, subheading 8517.62.0090, HTS which was created in an earlier phase of the investigation and excluded from duties at that time.  Articles such as pharmaceuticals, pharmaceutical inputs, select medical goods, rate earth materials and critical minerals are excluded; as are articles covered by previously granted product exclusions.

 Before taking such action, the USTR is soliciting public comments like was done in previous phases of this investigation.  There will be an opportunity to participate in a public hearing that will begin on June, 17, 2019, as well as to submit written comments.  The notice asks that interested parties address:

(1) the tariff subheadings to be subject to increased duties (whether the ones included in the Annex to the notice should be retained or removed, or others not on that list added);

(2) what the appropriate additional duty rate should be (i.e., 25% or something less); and

(3) whether the entire ~$300 billion in imports should be targeted, or something less.

 For (1), the USTR asks that commenters specifically address “whether imposing increased duties on a particular product would be practicable or effective to obtain the elimination of China’s acts, policies, and practices, and whether imposing additional duties on a particular product would cause disproportionate economic harm to U.S. interests, including small- or medium-size businesses and consumers.”

 In terms of timing, we expect that the hearing will last at least one week.  Rebuttal comments are due 7 days after the close of the hearing.  Based on this timing, the Administration would not be in a position to impose the additional duties until after President Trump and President Xi have the opportunity to meet at the G20 summit in Japan (June 28-29th).  That means there is a (slim) chance that, if negotiations continue in the meantime, that a final resolution can be reached at that meeting and these additional duties will never be imposed.  Obviously, however, no one can bank on that happening.  As a result, all companies that are impacted by List 4 should participate in this process.  There seems to be genuine misunderstandings within the Administration over issues such as ‘who pays the additional duty’ and how quickly U.S. companies can modify their supply chains.  Participating in the process offers the chance to clear this up.  In addition, we believe that participation in the public hearing can help (somewhat) with the product exclusion process (which, if the additional duties are set at 25%, should be created at or around the same time).  While we do not expect that many articles will actually be excluded based on public participation given the current state of US-China trade relations, we nevertheless believe it is important for all companies to participate in one form or another.

 To paraphrase Winston Churchill, this is not the beginning of the end, but is hopefully getting us closer to the end of the beginning.  If you have any questions, or if you would like to discuss participating in the process, please let us know.