About tedmurphybm

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

Section 301 — Notice Delaying Duty Increase on List 3 from 10% to 25%

Dear Friends,

Further to the below, included here is an advance copy of a notice that will be published in the Federal Register next week officially delaying the increase in Section 301 duties on articles included on List 3 from 10% to 25%.  Based on the agreement reached by President Trump and President Xi last month (see previous post), the duty rate will now increase on such articles on March 2, 2019 (rather than on January 1, 2019) unless an overall agreement is reached, or there is a further delay.

Best regards,
Ted

 

 

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Section 301 — Standstill Agreement Reached

Dear Friends,

Further to the below, the United States and China have agreed to adopt a standstill agreement in the on-going trade war to provide time for the two side to negotiate an overall resolution.  According to the White House press release:

On Trade, President Trump has agreed that on January 1, 2019, he will leave the tariffs on $200 billion worth of product at the 10% rate, and not raise it to 25% at this time. China will agree to purchase a not yet agreed upon, but very substantial, amount of agricultural, energy, industrial, and other product from the United States to reduce the trade imbalance between our two countries. China has agreed to start purchasing agricultural product from our farmers immediately.

President Trump and President Xi have agreed to immediately begin negotiations on structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture. Both parties agree that they will endeavor to have this transaction completed within the next 90 days. If at the end of this period of time, the parties are unable to reach an agreement, the 10% tariffs will be raised to 25%.

A copy of the press release can be found here.

This will certainly come as good news to many companies (in particular, those importing articles included on List 3).  The increase in the duty rate applicable to articles included on List 3 from 10% to 25% has been delayed from January 1, 2019 to March 1, 2019.  It is also reasonable to assume that the U.S. Trade Representative will not begin the process for imposing duties on the remaining $267 billion worth of imports until after March 1st, at the earliest. 

This announcement also suggests that President Trump views the dispute with China to be a ‘little picture’ trade dispute, rather than a ‘big picture’ geo-political battle with a rising power.  That is good news for companies with significant investment in U.S.-China trade, as the former is at least susceptible to a negotiated settlement; whereas the latter is almost certainly not.  That said, a great deal of work remains to be done if the two sides are to reach an agreement within 90 days on “structural changes with respect to [China’s policies regarding] forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture.” 

While this may be a positive development, the outcome is still far from certain.  As a result, companies should continue to be looking at the various mitigation strategies.  If you have any questions about these strategies, or if you would otherwise like to discuss the situation further, please let us know.

Best regards,
Ted

USMCA Signed (But Not Finished) — Addendum

Dear Friends, 

Further to the below, it appears that President Trump is going “all in” on the USMCA. 

It is being reported that President Trump told reporters on the trip home from Buenos Aires yesterday that he intends to notify Congress “soon” that the United States is withdrawing from NAFTA (Article 2205 of NAFTA provides that a party may withdraw from the agreement with 6 months written notice).  If President Trump does formally withdraw from NAFTA, it would give Congress a stark choice – approve the USMCA, or the U.S. trade with Canada and with Mexico would go back to pre-NAFTA days (pre-1994). 

All companies with substantial investment in NAFTA trade should be concerned with this all or nothing approach.  If you would like to discuss what you should be doing now in response, please let us know.

Best regards,
Ted 

 

USMCA Signed (But Not Finished)

Dear Friends,

As you hopefully saw, the United States-Mexico-Canada Trade Agreement (“USMCA”) was signed by President Trump, President Peña Nieto and Prime Minister Trudeau yesterday in Buenos Aires ahead of the G20 summit. 

Further to the below, however, the USMCA has a long way to go before it comes into effect.  The agreement is required to be ratified by the legislatures of all three countries.  While passage in Mexico and Canada is largely considered to be a formality, it is far from certain that the U.S. Congress will be so accommodating.  It is expected that the agreement will be taken up by the next Congress in early 2019.  It will be interesting to see how President Trump and a Democratic-controlled House of Representatives proceed.  Are the Democrats willing to give President Trump a victory by approving the USMCA?  Will the Democrats attempt to have changes made to the USMCA to secure passage (like was done by a Democratic-controlled House with previous FTAs)?  Will President Trump threaten to withdraw from NAFTA if the House does not approve the USMCA as is (i.e., it is either the USMCA or no agreement)?

Look for all of this to play out in early-to-mid 2019 (as nothing will likely happen once the 2020 presidential campaign kicks off in earnest in the fall of 2019).  In the meantime, if you have any questions about how the possible implementation of the USMCA impacts your business, please let us know.

Best regards,
Ted

CBP’s Section 301 Enforcement Push

Dear Friends,

As companies consider mitigation strategies to offset the impact of the Section 301 duties, we wanted to share an important update regarding enforcement priorities at the border.  Further to recent reports, CBP’s Office of Regulatory Audit has confirmed that it will be ramping up enforcement of “various types” of imported electronics (i.e., products classified in chapters 84 and 85 of the Harmonized Tariff Schedule of the United States).  In connection with these efforts, Regulatory Audit is adding staff, including managers and auditors.  For instance, CBP is adding 60 new auditors across Regulatory Audit’s 10 field offices.  Our contacts in Regulatory Audit have informed us that, as part of this effort, a first “wave” of CF-28s (Requests for Information) since the imposition of the Section 301 duties will be issued in 2-4 weeks.  

There are several reasons for CBP to focus its enforcement on imported electronics.  Most importantly, billions of dollars in revenue are at stake for the U.S. government, and CBP is intent on collecting that revenue (the Trump administration expects CBP to collect “record-setting revenues”).  Also, given that electronics have generally been entitled to be entered duty free (or subject to very low duty rates), CBP recognizes that importers are under pressure to reduce the Section 301 impact and, therefore, may (intentionally or unintentionally) act in a manner contrary to U.S. customs laws and regulations.  Last, targeting electronics is justifiable given the conclusions of the Section 301 investigation, namely that the Government of China engages in intellectual property theft and forced technology transfers to support its industrial advancement goals.  Stated differently, targeting electronics aligns with the legal basis for the Section 301 duties and the administration’s messaging around China’s unfair policies. 

While CBP has confirmed that an enforcement push will be made with respect to electronics, we understand that CBP is increasing enforcement activities on all fronts.  As such, companies pursuing Section 301 mitigation strategies should tread cautiously.  Re-classifying products, changing the country of origin, and/or decreasing the customs valuation (for example, by declaring the “first sale” price in a multi-tiered transaction, rather than the price the U.S. importer pays), is likely to draw scrutiny from CBP.  As such, it is important that companies be able to demonstrate that they exercised reasonable care in carrying out these activities (not exercising reasonable care can lead to steep penalties, in addition to owing unpaid duties).  To demonstrate that a company is exercising reasonable care, we recommend having on file contemporaneously drafted documentation that substantiates the legal basis for any changes (e.g., documentation explaining that, based on changes to the supply chain, the product is no longer Chinese origin, since it is now last substantially transformed origin somewhere else).  Further, any company that receives a CF-28 or CF-29 (Notice of Action) should escalate the matter to the company’s legal department before responding and/or engage outside trade counsel, if appropriate. 

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

Best regards,

Ted

Section 301 – Upping the Ante

Dear Friends,

The in-person meeting between President Trump and President Xi of China scheduled for the side-lines of the G20 Summit in Buenos Aires on November 20, 2018 is taking on heightened significance. 

In a television interview yesterday, President Trump said that he has tariffs on the remaining $267 billion worth of Chinese imports into the United States “ready to go” if the two sides cannot reach a deal.  He also said that, while he is confident that a deal could be made, he believes that “China is not ready”. 

While anything can happen, it is wise to take such political rhetoric seriously (but not literally).  Accordingly, all companies should prepare for the United States initiating the process for List 4 shortly after the November 20th meeting.  Based on the timeline followed in the previous rounds, the List 4 additional duties could go into effect by late January/early February 2019.

We hope this is helpful.  If you have any questions, or if you would like to discuss these issues further, please let us know.

Best regards,
Ted

Is Increased/Intensified FTC Enforcement of “Made in USA” Claims on the Horizon?

Dear Friends,

There have been some recent developments with regard to the Federal Trade Commission’s enforcement of the “Made in USA” guidelines that we wanted to bring to your attention.

A theme of “America First” trade enforcement activity under the current administration is protecting/promoting U.S. manufacturing.  This is evident in the Section 301 tariffs on Chinese-made goods, the Section 232 tariffs on steel and aluminum, the renegotiation of NAFTA and the pending Section 232 investigation contemplating duties on autos and auto parts.  It is now also visible in significant changes to “Made in USA” enforcement at the FTC.

Since taking office, President Trump has appointed a full contingent of new FTC Commissioners (5 of 5).  This is uncommonly quick (Commissioners are appointed for limited terms; Presidents Bush, Obama and Clinton each only appointed all five FTC commissioners once they reached their second terms in office.)  The effect of the new appointees is already being seen.

As you may know, the FTC enforces a stringent definition of what qualifies as “Made in USA” for labeling and advertising purposes. Only products manufactured or assembled in the United States with “all or virtually all” U.S.-origin content (generally viewed as 95%+ U.S. content) meet this standard.  While the FTC has engaged in regular enforcement actions over the last 20 years, it has rarely sought to impose penalties greater than a public censure in the form of a consent order.  Most consent orders do not even involve an admission of guilt by the named party (just an agreement to change the offending behavior going forward).

A trio of recent cases suggest that this may be about to change.  In each case, the facts were clear cut—companies plainly (even enthusiastically) advertising Chinese-made products as “Made in USA” (for example, in one case, Chinese-made hockey pucks were labeled as “Proudly Made in the USA,” “MADE IN AMERICA,” “100% Made in the USA!,” “100% American Made!”, and sold as “The Only American Made Hockey Puck!”).  What was noteworthy about these cases, was that three Commissioners issued (or joined in) separate opinions addressing the settlements.

Commissioner Slaughter (D) and Chairman Simons (R) took the unusual step of issuing a concurring statement, supporting the cases’ resolution by consent decree, but emphasizing that the FTC should make “strategic use of additional remedies” such as “monetary relief or notice to consumers” to enhance effectiveness going forward, and noting that the FTC has begun a “broad review of whether we are using every available remedy as effectively as possible” to pursue “vigorous enforcement.”

Commissioner Chopra (D), on the other hand, was the lone vote against the three consent settlements.  He argued, quite simply, that “no-money, no-fault settlements” are an insufficient remedy for extreme cases of consumer fraud.  In cases like these, he argued, the FTC should insist that companies admit to fraud before accepting a settlement.  Doing so could make it easier for such companies to be exposed to lawsuits by competitors under the Lanham Act.

Although the current FTC commissioners were all appointed by President Trump, these enforcement developments do not seem to be partisan (or may actually be bipartisan. . .).  Earlier this week, three Democratic Senators (Sens. Brown, Baldwin and Murphy) wrote to the FTC that “no-fault no-money” settlements of “Made in USA” cases are indicative of “lackluster enforcement”, and urged that the FTC begin assessing fines and making wrongdoing companies “admit they lied to the public” when the FTC determines that has been a violation of the guidelines.

As a result, all companies that label, advertising or otherwise market goods in the United States as “Made in USA” (or with any other type of U.S.-origin claim) should be mindful of these developments and appreciate that such claims are likely to face greater scrutiny going forward.  In addition, to the extent you are aware of competitors who may be violating these rules to gain an unfair competitive edge, the FTC appears more receptive than ever to complaints.

We have advised many businesses on these issues in the past, and would be happy to answer any questions you may have.

We hope this his helpful.

Best regards,
Ted