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.

 

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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.

 

Section 301 Update

Just a quick update on the evolving Section 301 situation.

 First, negotiations for a deal are continuing (and appear to be making meaningful progress).  U.S. trade officials were in Beijing this week, and Chinese officials will be coming to Washington, DC next week, to continue the negotiations.  By all accounts, progress is being made on the terms of a deal, but certain key issues remain unresolved.  If progress continues to be made (which, while not guaranteed, we expect given both sides’ strong desire for a deal), there will likely be a summit/signing ceremony sometime late April-June. 

 One of the things to keep an eye on as the talks progress is whether the deal will result in either side rolling back the duties already imposed (e.g., the List 1, 2 and 3 duties in the United States).  Last week, President Trump said that, even if a deal is reached, he intended to keep the duties in place “for a substantial period of time” until he is sure that China is complying with the terms (remember, we do not always take what he says literally, but we do take it seriously).  If the United States takes this approach, we expect that China will keep its retaliatory duties in place as well (the U.S. has imposed additional tariffs on $250 billion worth of Chinese-origin goods and China has imposed retaliatory duties on $110 billion worth of U.S.-origin goods).

 Second, the U.S. Trade Representative’s office recently released a second tranche of product exclusion approvals for List 1.   These exclusions include numerous products in Chapter 84, 85 and 90, including various types of housings, filters, rotors, valves, engines & motors.  There are also exclusions for certain high tech products (ADP storage units, digital displays, LED displays), and consumer products (instrument tuners, breast pumps, salad spinners).  Since the approvals are product-specific (not company-specific), all companies which import merchandise subject to Section 301 duties should be reviewing the approvals to see if they can benefit.  Remember, the approvals are retroactive (e.g., back to July 6, 2018 for List 1 articles).

Third, the U.S. Trade Representative’s office has not created a product exclusion process for List 3 by March 17th, despite the clear instruction from Congress in the Explanatory Statement to the Consolidated Appropriations Act, 2019 (H.J. Res. 31) (see previous post).  It appears that the USTR is sticking to its position that the exclusion process will only be created if the List 3 duty rate goes from 10% to 25%.

Finally, one of the ‘hidden’ (or maybe lingering) costs of the trade way will be the increased bond costs many importers are bearing as a result of the increased duties.  Even if a deal is reached (and even if duties are eventually rolled back), we do not believe that bond amounts will be lowered very quickly (if at all).  As a result, importers will likely be bearing this additional cost well into the future.

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

 

(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 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

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