Flare Up in US-EU Trade War

Yesterday, the U.S. Trade Representative stoked the fires of simmering trade dispute between the United States and the European Union.  Specifically, the USTR published a preliminary list of EU products that will be subject to additional duties upon importation into the United States as a result of a dispute over aircraft subsidies (the underlying dispute has been the subject of WTO litigation for many years).

 The United States has requested permission to impose countermeasures (i.e., additional duties) against EU products worth $11.2 billion a year.  The list includes aircraft and aircraft parts imported from France, Germany, Spain and/or the United Kingdom, as well as many other unrelated articles imported from any EU country (e.g., certain fish, cheeses, olive oils, wines, textiles, apparel, ceramics, metals, tools, motorcycles, lenses, oscilloscopes, etc.).  The WTO is considering the appropriate amount of the retaliation and a final list will be published once that is done.  In the meantime, interested parties may file comments with the USTR on what articles should be on the list.

 The EU has also brought a case at the WTO regarding U.S.-subsidies for domestic aircraft production.  In response to yesterday’s announcement that the United States was moving forward, the EU has said that it will also seek permission from the WTO to impose retaliatory duties on U.S.-origin products under its case.

 All companies that trade with the EU should review the attached list and consider its options.  These duties are in addition to the duties the United States currently imposes on steel and aluminum, and is threatening to impose on automobiles and auto parts, from the EU under Section 232.  The EU has imposed its own additional duties on U.S. products and is threatening to add to that here.   

 We hope this is helpful.  If you have any questions about these issues (including how to cope), please let us know.

 

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Year-End Transfer Price Adjustments – Don’t Forget the Customs Valuation Implications

Just a quick reminder for those of you working at multinational companies which operate on a calendar year basis – do not forget to ask your tax colleagues whether any retroactive transfer pricing adjustments were made at, or before, year-end (assuming that they do not send this information to you on their own).  This is particularly important this year in light of the significant, unexpected cost increases many companies faced in 2018 as a result of the Trump Administration’s trade policies.  For example, the Section 232 duties imposed on steel and aluminum imports, and the Section 301 duties on imports of Chinese-origin goods, were not foreseen when the transfer prices were set in late 2017.  As a result, the additional duty expense these actions represent may have skewed a company’s results for the year, thereby making it more likely that a retroactive transfer price adjustment was needed in order to maintain the arm’s length nature of the transactions.

 If such adjustments were made (whether upward or downward), please be sure to consider the customs valuation implications here.  The failure to declare upward transfer pricing adjustments is a very common enforcement issue in many jurisdictions (largely because the issue is so easy to identify and often involves significant amounts/penalties); whereas downward adjustments could lead to a refund of customs duties, taxes and fees in some jurisdictions (including the US, Canada, etc.).  A quick note to your tax colleagues now could save a potential headache down the line, or put some money back in the company’s pocket. 

 We regularly assist clients with (i) the internal discussions with tax to identify whether any adjustments or other additions to value exist, and (ii) reporting any relevant adjustments/additions to value to Customs Authorities where needed.  If you would like any assistance with these issues, please let us know.

 

Delay in Scheduled Increase in Section 301 Duties

With regards to my earlier post (see attached link), attached is an advance copy of the Federal Register notice formally suspending the increase in the duty rate applicable to articles included on List 3.  (301_Notice_2-28-2019)  As you will note, the notice suspends the increase in the duty rate “until further notice.”  This means that the duty rate applicable to articles included on List 3 will remain 10% for now. 

 Also, those of you waiting for a List 3 product exclusion process may be waiting awhile longer.  Further to the earlier post, based on his testimony before Congress earlier this week, it appears that the USTR views the instruction included in the Explanatory Statement to create a List 3 exclusion process within 30 days as advisory (not mandatory).  Members responded quickly by introducing legislation to clarify any confusion.  This could be mooted out if an agreement is reached by the end of this month.  Stay tuned for further updates.

In the meantime, if you have any questions, please let us know.

(Possible) Delay in Scheduled Increase in Section 301 Duties

 

 

(Possible) Delay in Scheduled Increase in Section 301 Duties

As you have likely heard by now, President Trump announced this past Sunday that “substantial progress” has being made in the on-going trade talks with China; as a result, he will be delaying the scheduled increase in tariffs applicable to Chinese-origin goods included on List 3; and that both sides are planning “a Summit” at Mar-a-Lago (reportedly in late March) to “conclude an agreement.”  While additional details have yet to emerge, we wanted to share some initial thoughts with you on what to look for when they do.

 First, the duty rate applicable to articles included on List 3 is scheduled to increase from 10% to 25% on March 2, 2019 (i.e., this coming Saturday).  We believe that a Federal Register notice, presidential proclamation, or some other official statement will be issued this week confirming the delay (i.e., we do not believe that the scheduled tariff increase can be delayed by tweet).

 Second, in any deal, it will be important to pay particular attention to the enforcement mechanisms that are included.  If the Trump Administration’s goals include reducing the United States’ trade deficit with China, then including a unilaterally-imposable ‘snapback’ type of enforcement mechanism would help achieve that.  For example, if the United States reserves the right to re-impose duties if China fails to live up to its commitments in one or more areas (e.g., failing to stop engaging in cyber theft – something China has not admitted to doing in the first place), then that will create significant uncertainty for U.S. businesses, which should impact sourcing/investment decisions.  If duties of 25% could be imposed on the articles you purchase from a given country with little-to-no advance notice, would you continue sourcing from there, or would you look to eliminate that risk by sourcing from elsewhere?  Thus, even if a deal resolving the dispute is ultimately reached, it will be important to understand how the agreement will be enforced.  It is likely (in our view) that, even if a deal is reached, that trade with China will not return to what it was before.     

 Finally, it seems strange that President Xi would be willing to come to the United States to conclude such a deal given the appearance it creates.  Where a “summit” like this is held matters, in terms of public/political perception.  This is why such summits are usually held in a third country, so as not to give the appearance that one side has ‘won,’ or is more powerful than the other (compare the Trump-Kim summits held in Singapore and in Vietnam; the Reagan-Gorbachev summit held in Iceland; etc., to Holy Roman Emperor Henry IV kneeling in the snow in front of Pope Gregory II’s castle in Canossa).  It is not clear why President Xi would be willing to come to the United States (and to one of President Trump’s golf resorts, in particular) to conclude such a deal.  The optics on that within China cannot be good (of course, if China thinks it is getting a very good deal . . . ).

 Time (and the terms of the deal) will tell.

 We hope that this helps.  If you have questions, please let us know.

 

Section 232 Investigation on Autos/Auto Parts — Possible Retaliatory Measures on U.S. Goods

We wanted to make sure you saw the recent reports that the EU is preparing a list of U.S. products to retaliate against (i.e., impose additional duties on), if the United States goes ahead and imposes restrictions on imported autos/auto parts pursuant to the Section 232 investigation. 

 As you may know, the Secretary of Commerce delivered his report and recommendations to President Trump this past Sunday (the report is still confidential, but is rumored to (i) find that imports of autos/auto parts present a national security risk and (ii) recommend the imposition of import restrictions).  The president has 90 days to decide what to do next.  Recent reports suggest that the EU is preparing for the worst – by drawing up a list of ~$22.7 billion worth of U.S. products to retaliate against if the United States goes ahead and imposes import restrictions.  Those reports also suggest that articles produced by iconic U.S. companies are a prime target of the EU (in general, the goal in imposing these types of duties/retaliatory duties is to exert political pressure on the other side to get it to change its behavior; so, you want to choose political-sensitive articles (e.g., articles in produced in politically sensitive states/areas, articles produced by leading companies, etc.). 

 This is something that all U.S. companies that export to the EU should keep an eye on.  If the United States imposes import restrictions on auto/auto parts, the retaliatory duties (by the EU and by other countries, presumably) will not be limited to imports of U.S. autos or auto parts. 

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

 

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.

 

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.