Section 301 — Increase in US Duties (Update)

Further to our update on May 8, 2019, U.S. Customs and Border Protection (“CBP”) issued a Cargo Systems Messaging Service (“CSMS”) message today that addresses how merchandise exported from China prior to May 10th, but entered for consumption in the United States on May 10th or thereafter, will be treated.  A copy of CSMS #19-000236 is attached for your reference.  csms-cbp

 The good news is that CBP confirmed that such shipments are subject to the 10% duty rate (not the 25% duty rate).  The bad news is that it will take CBP awhile to work out the programming to make that happen.  As a result, importers will have to either (i) pay the 25% duty rate as of 12:01 am ET tomorrow and then file a Post-Summary Correction once the programming is completed to claim a refund, or (ii) wait to file the entry until the end of the 10-day period following arrival that is permitted under the regulations (and hope the programming is done in that window).  Here is the relevant excerpt from the CSMS message:

 For subject goods entered for consumption, or withdrawn from warehouse for consumption, on or after 12:01 a.m. eastern standard time on May 10, 2019, and exported to the United States on or after May 10, 2019, report the following HTS numbers and duty rates:

 HTS                                                                  Duty Rate
9903.88.03 and 9903.88.04                        25 percent 

 For subject goods entered for consumption, or withdrawn from warehouse for consumption, on or after 12:01 a.m. eastern standard time on May 10, 2019, and exported to the United States before May 10, 2019, the 10 percent duty rate will still apply.  CBP is working with USTR on additional guidance on the entry filing requirements for these imports.

 In the meantime, for goods entered on or after May 10, 2019, importers can pay the 25 percent duty and file a Post Summary Correction when filing instructions are available for the 10 percent duty.  Alternatively, importers can delay filing their entry summary within the standard ten-day entry summary filing period until additional filing instructions are available for the 10 percent duty.

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


Section 301 — Increase in US Duties on List 3 and Exclusion Process

Further to the below, attached is an advanced copy of the notice announcing that the 10% duty on articles included on List 3 will increase to 25%.  2019-09681  The notice also announces that, as promised, now that the duty rate is going to 25%, the U.S. Trade Representative will establish a product exclusion process for articles on List 3 (like has been done for articles included on Lists 1 and 2).  The notice is scheduled to be published in tomorrow’s Federal Register.

 Interestingly, there appears to be some wiggle room on the effective date for the duty increase.  The notice contains multiple references to the 25% rate becoming effective this Friday, May 10, 2019.  For example, the notice states:

The Annex to this notice amends the Harmonized Tariff Schedule of the Unites to provide that the rate of additional duties for the September 2018 action [i.e., List 3] will increase to 25 percent on May 10, 2019.

 The Annex (unlike previous Federal Register notices imposing the Section 301 duties), however, includes two separate conditions for the increase in duties to take effect.  Specifically, it states:

Effective with respect to goods (i) entered for consumption, or withdrawn from warehouse for consumption, on or after 12:01 a.m. eastern daylight time on May 10, 2019, and (ii) exported to the United States on or after May 10, 2019, subchapter III of chapter 99 of the Harmonized Tariff Schedule of the United States is modified . . . .

As a result, it appears that in order for the 25% duty rate to apply, the imported merchandise must be entered for consumption after 12:01 am ET Friday morning AND have been exported to the United States on or after Friday, May 10th.  So, an entry of merchandise included on List 3 exported from China prior to May 10th would not be subject to the 25% duty rate even if it was entered after 12:01 am Friday (it would still be subject to the 10% rate). 

 While this will likely be a welcome accommodation to companies with shipments on the water, it may lead to some confusion at the border.  Presumably, U.S. Customs and Border Protection will issue further guidance on the type of proof needed to demonstrate that a given shipment was exported to the United States before May 10, 2019 (e.g., bills of lading, etc.).


If you have any questions about these issues, please let us know.


Possible U.S.-Mexico Border Shut Down

As you have likely heard by now, President Trump has threatened to close the U.S.-Mexico border to all cross-border traffic (individuals and commercial) this week if Mexico does not do more to stem the tide of illegal immigration to the United States.  While such a shutdown would be devastating to many companies, it would not be unprecedented (Presidents Bush and Reagan each closed the border temporarily during their presidencies). 

 What we know so far is that U.S. Customs and Border Protection is reassigning at least 750 personnel to help with border security (which means that fewer folks are available to carry out cargo exams, etc.).  Also, the President of Mexico said some encouraging things about regulating migration through his country, so, as long as President Trump feels that progress is being made, he may not actually close the border.  Of course, if he feels that enough progress is not being made, we expect that he will do it.

 Accordingly, it is important that all companies that rely on cross-border trade (develop and) implement contingency plans to deal with this possibility.  If you have any questions about types of contingencies that are available, or if you would otherwise like to discuss these issues further, 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.


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.