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. 

 

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.

 

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

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

Important US Customs Ruling on Determining Country of Origin for Section 301 Purposes

Dear Friends,

U.S. Customs and Border Protection recently published a ruling that every company considering shifting production from China to Mexico (or Canada) as part of a strategy to mitigate the impact of the Section 301 duties should be aware of.  In Headquarters Ruling H300226, CBP concluded that, while the NAFTA Marking Rules (19 C.F.R. Part 102) are used to determine the country of origin of articles imported into the United States from Mexico for marking purposes, the traditional substantial transformation test is used to determine the country of origin of articles for Section 301 duty purposes.  A copy of the ruling is attached here for your reference: H300226.

As you will see from the ruling, parts of a motor were imported into Mexico for assembly.  The assembly operation in Mexico was sufficient to satisfy the applicable NAFTA Marking Rule, such that the finished article was considered to a “product of Mexico” for marking purposes.  CBP, however, then went on to say that the traditional substantial transformation test is used for purposes of “antidumping, countervailing, or other safeguard measures[.]”  CBP then applied the traditional substantial transformation test to the facts and concluded that the Mexican assembly operations were not sufficient to confer origin and, therefore, the finished motor imported into the United States was a “product of China” for Section 301 purposes.  So, in short, the product had to be marked to indicate that it was of Mexican origin, but the importer had to pay the Section 301 duty applicable to Chinese-origin articles.

This ruling highlights a few important points.  First, while the traditional substantial transformation test and the NAFTA Marking Rules are meant to embody the same origin principles, they do not always produce the same result due to the different nature of the tests (i.e., the traditional substantial transformation test is subjective; whereas the NAFTA Marking Rules are objective).  Second, for purposes of section 301, the traditional substantial transformation test must be used even if the goods are imported from an FTA-partner country (e.g., Mexico, Canada, Singapore, etc.).  The NAFTA Marking Rules may be helpful to that analysis, but are not determinative.  Finally, CBP is willing to live with this seemingly absurd result (i.e., an article marked “Product of Mexico” being subject to duties applicable to “products of China”).

I hope that this helps.  If you have any questions about these issues, please let us know.

Best regards,
Ted

NAFTA is Dead, Long Live the USMCA!

Dear Friends,

As you have undoubtedly seen by now, last night, an agreement was reached on a revised trade agreement that will replace NAFTA.  The new agreement will be called the United States-Mexico-Canada Agreement (“USMCA”).  The USMCA contains new provisions that were not in NAFTA (e.g., digital trade, data storage location requirements, etc.) and changes to others (e.g., agriculture, financial services, de minimis, certain rules of origin, such as autos, investor protections, trade remedies, etc.).  There are also side letters on how products of Canada and of Mexico will be treated, if the United States proceeds to impose additional duties on autos and auto parts (or other products) under Section 232.  There is a great deal in the revised agreement and all companies with meaningful NAFTA (or now, USMC) activity should be reviewing the proposed text to determine how it impacts their operations.  The text of the agreement is available here.

That said, the agreement has a long way to go before it comes into effect.  

As indicated below, the unofficial deadline to get a deal done was last night.  The deadline was based on the fact that President Pena Nieto leaves office December 1st.  Under U.S. law, President Trump has to publish the text of any agreement 60 days before signing.  Therefore, if the goal was to have the agreement signed before President Nieto leaves office, the text had to be published by September 30th.

Signing the agreement, however, is not the end of the process.  The agreement must be ratified by each of the three countries.  In the United States, that process (which includes a study by the U.S. International Trade Commission on the potential economic impact and consideration by both the House and Senate) will take meaningful time (i.e., months).  As a result, USMCA implementing legislation will not be considered until well after the first of the year. 

In addition, given the mid-term elections in a few weeks and the resulting uncertainty over the composition of the next Congress, it is not clear whether the agreement will have the votes necessary for passage.

It should be an interesting next few months.  Again, our recommendation is that all companies with meaningful cross-border activity with Canada and/or Mexico review the text and start planning for the alternatives (i.e., a new USMCA, an old NAFTA, or possibly no agreement at all).

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

Best regards,
Ted