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 Update — A List 3 Exclusion Process Coming Soon

As you likely heard, the president signed the Consolidated Appropriations Act, 2019 (H.J. Res. 31) earlier today and avoided another government shutdown.  That spending bill included an “Explanatory Statement” submitted by the Chairwoman of the House Committee on Appropriations that contains a number of interesting provisions.  Most notably with regard to Section 301, it contains a clear instruction from Congress that USTR establish within 30 days, a “Section 301 Exclusion Process” for goods included on List 3 How this instruction will be implemented by USTR—and whether it will applied retroactively to the original effective date of the List 3 duties— however, remains to be seen. 

 USTR has stated that it would not create an exclusion request process for List 3 Section 301 duties as long as those duties remain at the current 10% level.  At present, those duties are scheduled to increase to 25% on March 2, 2019 unless an agreement with China is reached (or the president pushes the deadline back further, which is more likely).  As a result, importers of articles on List 3 have not been able to apply for a product exclusion (unlike importers of articles on List 1 and/or 2).

 The Explanatory Statement (relevant portion attached), however, provides as follows:

USTR shall establish an exclusion process for tariffs imposed on goods subject to Section 301 tariffs in round 3. This process should be initiated no later than 30 days after the enactment of this Act, following the same procedures as those in rounds 1 and 2, allowing stakeholders to request that particular products classified within a tariff subheading subject to new round 3 tariffs be excluded from the Section 301 tariffs.

 While we believe that Congress likely intended that USTR create an exclusion process for List 3 articles within 30 days (i.e., by March 17, 2019), the inclusion of the phrases “same procedures” and “new round 3 tariffs” might be read to support USTR’s existing plan of creating an exclusion process for List 3 only if the duties increase to 25% (i.e., does “new round 3 tariffs” mean when the List 3 duties increase to 25%, any List 3 duties paid after the date of enactment of the spending bill, or something else?).

 Regardless, the expectation that USTR will create an exclusion process within 30 days is clear.  Exactly what it will cover and how it will be implemented is less so.

 We hope this is helpful.  We will continue to monitor the situation and provide further updates as more information becomes available.  In the meantime, please let us know if you have any questions.

 

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Buy American, Hire American Update

Further to the below, there have been two recent updates to the ‘Buy American, Hire American’ initiative (aka ‘the better enforce our government procurement rules of origin’ initiative) that we believe will have consequences for companies that sell products to the government directly or indirectly.

 The first is a recent United States General Accountability Office (GAO) report entitled “Buy American Act:  Actions Needed to Improve Exception and Waiver Reporting and Selected Agency Guidance” (December 2018).  The GAO looked at how the Buy American Act of 1933 has been implemented in the $500+ billion federal procurement market.  In particular, the GAO examined (i) how the federal government procures foreign (non-US) products through Buy American Act waivers and exceptions, and (ii) how 4 selected agencies (DOD, HHS, DHS, and the VA) provide training and guidance to implement the Buy American Act.  In short, the GAO concluded that, of the $508 billion the federal government spent in FY2017, approximately $7.8 billion was spent on foreign end products (using waivers, exceptions or concluding that the Buy American Act did not apply).  That said, the GAO also found that, due to limitations in how the data is reported/captured, the inconsistent training provided contracting officers across the agencies, and the mistakes uncovered in the sample contracts that were reviewed, this amount could well be higher.  In short, federal agencies are not doing as well as they should in applying the Buy American Act provisions to their procurements. 

 The second is the executive order President Trump signed late last month entitled “Executive Order on Strengthening Buy-American Preferences for Infrastructure Projects” (January 31, 2019).  While this order generally restates the principles set forth in the previous order, it extends those principles to the financial assistance federal agencies provide to non-federal recipient organizations (i.e., loans, loan guarantees, grants, etc.).  According to the Administration, federal agencies award more than $700 billion a year in financial assistance to such organizations and that, often, the recipients do not include Buy American considerations in their contracts.  This executive order requires federal agencies to “encourage recipients of new Federal financial assistance awards . . . to use, to the greatest extent practicable, iron and aluminum as well as steel, cement, and other manufactured products produced in the United States in every contract, subcontract, purchase order, or sub-award that is chargeable against such Federal financial assistance award.”  In short, federal agencies that provide financial assistance to non-federal entities (e.g., state or municipalities) for projects need to “encourage” the entities that received federal financial assistance to include Buy American-type provisions in their contracts.

 As a result of these developments, we expect that Buy American Act/Trade Agreements Act compliance will become an even bigger enforcement priority.  We expect that contracting entities, both at the federal and subfederal level, will begin scrutinizing certifications as to country of origin/compliance more closely than has generally been done in the past.  Accordingly, if you are selling directly or indirectly to the government, we recommend that you review your processes for ensuring that your “Buy America” certifications are accurate and auditable (i.e., make sure you are conducting the right analysis and retaining the right supporting documentation).  Companies that are confident in their programs should have a distinct advantage in this space for the foreseeable future.

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

 

Section 301 Update

 The latest round of negotiations in the on-going trade war between the United States and China concluded yesterday in Washington, DC.  We are now less than a month away from the additional duties imposed on Chinese-origin articles included on List 3 increasing from 10% to 25%, and the possible initiation of a List 4 (the imposition of additional duties on the remaining $267 billion worth of Chinese-origin imports), so we thought it would be helpful to recap where we are and share some thoughts on where we may be going.

 To recap:  The U.S. administration determined under section 301 of the Trade Act of 1974, as amended, that China’s laws, policies, practices, and actions are unreasonable or discriminatory and are harming American intellectual property rights, innovation, or technology development.  Specifically, the U.S. concluded that China uses foreign ownership restrictions (e.g., joint venture requirements, etc.), restrictive technology licensing terms, strategic investment in, and acquisition of, U.S. companies and assets, and unauthorized intrusions, cyber theft, etc. to improperly obtain U.S. intellectual property, trade secrets and other confidential information. 

 Based on this, the U.S. took a number of measures in an effort to get China to change its behavior.  These measures included, among other things, the imposition of additional customs duties on Chinese-origin products imported into the United States.  So far, the U.S. has imposed additional duties on 3 separate lists of Chinese-origin products (List 1 =25%, List 2 = 25% and List 3 = 10%).  In response, China took retaliatory measures that included imposing additional customs duties on U.S.-origin products imported into the United States.

 Late last year, the two sides agreed to a temporary cease fire to allow negotiations to begin.  The two sides gave themselves 90 days (until March 1, 2019) to work out a resolution.  Since then, there have been a series of discussions/meetings, including the meetings that occurred this week in Washington.  If a deal is not reached, the additional duties imposed on Chinese-origin articles included on List 3 are scheduled to increase from 10% to 25%.  President Trump has also indicated previously that, if an agreement is not reached, the United States is ready to proceed with imposing duties on the remaining $267 billion worth of Chinese-origin imports (i.e., initiating a List 4).

 Resolving this dispute is a tall order, under the best of circumstances.  The U.S. administration believes that China needs to make structural changes to how it operates and that there needs to be strong enforcement mechanisms in place to ensure continued compliance.  In response, China has reportedly focused on purchasing more U.S. products and services over time (with one series of reports suggesting that China would increase its purchases of U.S. agricultural, energy and other products to eliminate the trade deficit with the United States within 6 years – a period that would coincide with a second term for the Trump administration).  By most accounts, the two sides are still far apart.  That said, President Trump is expressing optimism that a deal can be reached.  He has also said, however, that a final deal (and a great deal, it would be) could only be reached during an in-person meeting with President Xi.  Thus far, no such meeting is scheduled.

 As a result, we view that the two most likely scenarios are (1) the parties continue negotiating over the next month and make enough progress that further escalation is delayed until a meeting between President Trump and President Xi where the two sides declare victory and then retreat to their respective corners, and (2) not enough progress is made and the U.S. increases the duties on List 3 goods to 25%.  While both sides are interested in reaching a deal, the two sides are too far apart to expect that a substantive solution will be reached in the next 30 days.  The question is whether China’s offer to purchase more U.S. products and some small structural changes will be sufficient to get the U.S. administration to declare victory.

 If an agreement is ultimately reached, people should also watch how the other presidential candidates react.  As you know, the race for president has already begun and several of the Democratic Party candidates have expressed ‘economic nationalist’ sentiments.  It will be interesting to see if President Trump is criticized for being ‘soft on China’ if an agreement is reached that does not address the issues covered in the Section 301 report.

 We hope this is helpful.  If you have any questions about how best to cope with the Section 301 duties, please let us know.

Review of 2018 Import Data

Just a quick note to remind you that now is the time to review your 2018 import data. 

 The goal of any internal control program is to effectively mitigate the risk associated with the company’s activities.  In order for the controls to be effective, however, they must be tailored to the risk involved.  One way to understand your risk profile from a customs perspective is to review the company’s import data (the same data that U.S. Customs and Border Protection looks at to select audit candidates).  The import data (whether ITRAC data obtained from CBP HQ, or ACE reports you are able to download) includes general entry information, such as tariff classifications, values, duties paid (including any Section 232 or Section 301 duties) preferential tariff programs used, etc.; as well as information regarding CBP’s review of a company’s import shipments (e.g., whether a CBPF-28 or CBPF-29 was issued).  It also identifies each of the links in the company’s international supply chain (i.e., foreign manufacturers, carriers, customs brokers and sureties).  In short, the import data is a useful tool for monitoring the effectiveness of your import compliance program, identifying areas of potential cost and duty savings, customs valuation reconciliation and identifying links in the international supply chain for security purposes (i.e., C-TPAT-related information). 

 Given how useful this information is, we recommend that all clients obtain their import data and review it at least annually.  Due to the volume of data involved, and the way it is presented by CBP, we have developed simple macros that can extract the most relevant data and summarize it in a table format so that trends, issues and opportunities can be more easily identified.  If you would like to have us obtain the data and/or run it through those macros and provide the summaries, please let us know.  If not, no problem, but please review it yourself and confirm that your controls are working effectively (e.g., your data does not know show the use of unapproved brokers, unauthorized preference claims, incorrect tariff classifications, etc.).  The business is always evolving.  You need to make sure your controls are keeping pace!

 We hope this this helpful.

 

Section 301 — Product Exclusions Approved!

On Friday, the Office of the U.S. Trade Representative announced that a first wave of approximately 1,000 Section 301 product exclusion petitions submitted under List 1 have been approved.  According to an advance copy of a notice that will be published in the Federal Register (copy available here), the approval covers products covered by (i) seven 10-digit tariff subheadings (which cover 918 product exclusion requests), and (ii) 24 specially-draft product descriptions (which cover 66 product exclusion requests).   

 The exemptions from the Section 301 duty are available to any product that meets the description of the tariff subheadings or the specially-drafted product descriptions identified in the notice.  The exemptions relate back to the date the additional duty went into effect (i.e., July 6, 2018) and are good for one year from the date this notice is published in the Federal Register (which would normally be sometime this week, but for the government shutdown).      

 The USTR received more than 10,000 product exclusion petitions for List 1.  Of those requests, approximately 1,250 have been denied, approximately 1,000 have been approved, and approximately 8,500 are in various stages of review.  The notice indicates that this is the first round of approvals and that the USTR will publish further approvals periodically.

 This is a positive development that shows that the standard for granting product exclusion petitions is not prohibitively high.  Given the nature of the Section 301 dispute, it was not clear how high the USTR would hold the bar for approval (i.e., whether any exclusions would actually be approved).  This action shows that approval is possible (for at least certain products), which is a positive development for all those companies who have pending petitions (whether for List 1 or List 2). 

 We hope that this is helpful.  If you have any questions about the product exclusion process, or Section 301 mitigation strategies more generally, please let us know.

 

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

 

 

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