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

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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

Miscellaneous Tariff Bill — One Step Closer to Reality

Dear Friends,

In a bit of good trade news, late last week, the Senate passed a slightly modified version of the Miscellaneous Tariff Bill Act of 2018 that had passed the House back in January 2018.  The bill authorizes temporary duty suspensions or reductions for hundreds products (the duty suspensions/reductions are generally effective for 2 years).  The bill also contains a provision extending certain customs user fees. 

The Senate version strikes a small number of products included in the House version, and modifies a handful of others.  As a result, the two versions of the bill will now need to be reconciled (given the small number of changes made by the Senate, the House will likely just vote on/pass the Senate version).  If this occurs, then it appears that the MTB will be sent to the President for signature as a stand-alone bill (rather than waiting to include it as part of a larger trade bill).  Given the concerns some in Congress have raised regarding the President’s recent trade policies – e.g., the handling of the ZTE enforcement case, the processing of Section 232 product exclusion petitions, etc., MTB’s best shot is probably as a stand-alone bill, rather than waiting to be included as part of a larger trade bill, as has been done traditionally.  It will also be interesting to see whether the President is inclined to sign such a bill.  While MTB is generally viewed as providing a limited benefit to U.S. manufacturers (the MTB’s intent is to provide a tariff break to manufacturing inputs that are not available domestically), the President has indicated in the past that MTB primarily benefits Chinese exporters.   

It is important to note that the MTB, if enacted, only impacts the Column 1, General rates of duty for covered articles (i.e., the Most Favored Nation/Normal Trade Relations rates).  The MTB does not change or otherwise impact Section 232 or Section 301 duties; those still apply.

All companies should review the list of products included in the MTB.  The provisions are not (supposed to be) company-specific.  Stated differently, any company that imports an article covered by a MTB description can claim the duty benefit (even if you were not the proponent of the provision).  Also, it is worth mentioning that the process of requesting MTB benefits will re-open in about a year (by October 15, 2019), so it is not too early to start preparing to participate in that process.

We hope this is helpful.  We helped numerous companies get their articles included in the MTB and would be happy to discuss this with you further.  If you have any questions, please let us know.

Best regards,
Ted

Section 301 – Product Exclusion Process

Dear Friends,

The U.S. Trade Representative issued a press release this afternoon that includes details on the process for seeking product-based exclusions from the additional duties being imposed on Chinese-origin articles under Section 301 (the first round of those duties went into effect earlier today).  An advance copy of the Federal Register notice containing the specifics for this process is attached for your reference.

 In summary, the product-based exclusion process is as follows:

* all requests to exclude a particular product must be filed by October 9, 2018 (90 days from today);

* there is an opportunity to file comments on such requests, and then for the requester to respond;

* if an exclusion request is granted, it will be effective back to July 6, 2018 (the effective date of this round of additional duties) and will be valid for one year from the date the exclusion approval is published in the Federal Register;

* exclusion requests should cover a “particular product” (this is broader than a just a part number and cannot be based on company-specific characteristics);

* exclusion requests may be filed by “interested persons, including trade associations” (which also suggests that the term “particular product” is meant to be interpreted broadly);

* each request must provide the rationale for the exclusion and, at a minimum, address (1) whether the particular product is available only from China, (2) whether the imposition of additional duties on this product will cause “severe economic harm” to the requestor or to other U.S. interests, and (3) whether the particular product is strategically important or related to China’s industrial policies, including “Made in China 2025”; and

* USTR will evaluate each request individually and take into account “whether the exclusion would undermine the objective of the Section 301 investigation”.

In terms of administering any approvals at the border, the notice also states that requestors may provide information on how U.S. Customs and Border Protection can administer the exclusion (i.e., how will CBP be able to differentiate between products covered by the exclusion and products not covered by the exclusion?).  Interestingly, the USTR’s press release makes it clear that one need not apply in order to benefit from an approval – i.e., approvals are product-specific, not company-specific (“Because exclusions will be made on a product basis, a particular exclusion will apply to all imports of the product, regardless of whether the importer filed a request. The U.S. Customs and Border Protection will apply the tariff exclusions based on the product.”).

The good news here is that (i) there is a product exclusion process (which should help address the impact the Section 301 duties are having on U.S. companies), (ii) petitions can be filed on a “product” basis, rather than on a single sku or part number basis, like with the Section 232 exclusion process, (iii) approvals will be retroactive to when the additional duties first went into effect (although it will be important to keep an eye on liquidation dates to be safe), and (iv) the USTR provided guidance on the factors that will be considered when reviewing requests.

The bad news is that there is no stated timeline for how long it will take the USTR to review and process exclusion requests.  Undoubtedly, the USTR is hoping that by broadening the scope of the petitions and the approvals to “particular products” it will result in fewer petitions being filed than have been filed at Commerce in the steel and aluminum Section 232 cases (i.e., more than 20,000 exclusion petitions filed and only 98 acted on in 3+ months = 51 years of processing time . . . .).  We believe that hope is misplaced and that the USTR will likely receive thousands of exclusion requests. 

Accordingly, it is important that any company impacted by the Section 301 duties, and considering filing a product exclusion petition, do so quickly.  We are assisting numerous clients with this process (which began before today) and would be happy to discuss with you how best to approach this effort now that we have these additional details.

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

Best regards,
Ted

Section 232 Update — The End of the Temporary Exemptions

Dear Friends, 

Further to the below, the President issued two new proclamations this morning regarding the imposition of additional duties on imports of steel (25%) and aluminum (10%) under Section 232 of the Trade Expansion Act of 1962, as amended.  Copies are attached here for your reference. 

The steel proclamation (1) exempts imports from Argentina, Austrailia, Brazil and South Korea from the additional 25% duty (based on voluntary-export restraint agreements (i.e., export quotas) Argentina, Brazil and South Korea agreed to with the United States; Australia is also exempt, but thus far, no export quota has been imposed); and (2) ends the temporary exemptions previously afforded imports from Australia, Canada, Mexico and the EU.  As a result, imports of steel from all jurisdictions except Argentina, Australia, Brazil and South Korea will be subject to an additional 25% duty as of 12:01 am tonight (i.e., June 1, 2018).

The aluminum proclamation (1) exempts imports from Argentina and Australia from the additional 10% duty (based on voluntary-export restraint agreements (i.e., export quotas) those countries have agreed to with the United States); and (2) ends the temporary exemptions previously afforded imports from Brazil, Canada, Mexico and the EU.  As a result, imports of aluminum from all jurisdictions except Argentina and Australia will be subject to an additional 10% duty as of 12:01 am tonight (i.e., June 1, 2018).

We expect that many countries will proceed with imposing retaliatory measures.  For example, the EU already announced that it is ready to impose an additional 25% duty on $3.3 billion worth of U.S. imports as of June 20, 2018.   Other countries have also announced an intent to pursue this at the WTO level (e.g., Japan, India, etc.), which could lead to the imposition of more retaliatory duties on U.S. products.

At this point, it is not clear how long the additional U.S. duties will be in place.  It is clear, however, that the duties are being used as leverage to influence on-going negotiations aimed at re-balancing our trade relationships with many countries (including many of our closest allies).  In the meantime, companies impacted by today’s announcements should be considering all of their options, including the viability of filing product exclusion petitions with the Dept. of Commerce.

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

Best regards,
Ted


Dear Friends,

By now, you have probably seen that the President issued two new proclamations regarding the imposition of additional duties on imports of steel (25%) and aluminum (10%) under Section 232 of the Trade Expansion Act of 1962, as amended.  The proclamations do the following:  (1) extend the temporary exemption applicable to imports of covered articles from Argentina, Australia and Brazil while the details associated with permanent exemptions are finalized; (2) extend the temporary exemption applicable to imports of covered articles from Canada, Mexico and the EU through May 30, 2018; (3) address issues related to the application of the additional duties when foreign trade zones are involved; and (4) clarify that “[n]o drawback shall be available” with respect to section 232 duties.  The steel proclamation also finalizes the permanent exemption afforded imports of covered steel articles from South Korea.  Imports of aluminum covered articles from South Korea are not covered by a permanent exemption and are, therefore, subject to the additional 10% duties as of May 1, 2018.  Copies of the April 30th proclamations are attached here for your reference:  2018-09841 and 2018-09840.

Since the issuance of the proclamations, it has been reported that the permanent exemption to be afforded Brazil will only apply to steel imports (in exchange for a limit on Brazilian steel exports to the USA) and that aluminum imports will be subject to the additional 10% duty.  It is also been reported that the permanent exemption to be afforded Argentina will cover both steel and aluminum imports (again, in exchange for a limit on Argentine exports to the USA).

In terms of Canada and Mexico, the permanent exemptions appear to be tied to the on-going NAFTA negotiations.  While those negotiations have reportedly made substantial progress in recent weeks, it is not clear whether a deal will be able to be announced in the next couple of weeks.  The Administration has recently expressed concern that if a deal is not reached by May 21, 2018, then any revised agreement would need to be voted on by the next Congress, due to timing issues associated with applicable legal requirements (e.g., the Administration has to provide notice of any deal to Congress, the U.S. International Trade Commission has to do a study of any new deal, etc.).  This is problematic because the next Congress (which will be sworn in in January 2019) will not have had an opportunity to help direct the negotiations (as the current Congress has) and may have a different composition as a result of the elections in October.  As a result, expect the U.S. Administration to put on a full court press to get a deal done (or at least announced) before May 21st.  If that does not happen, then there is an increased chance that the section 232 duties will go into effect for Canada and Mexico June 1, 2018.

In terms of the EU, the Administration has made clear that the key to getting a permanent exemption from the section 232 duties is agreeing to an export quota, or other voluntary-export-restraint-type agreement.  The EU, however, has made it clear that it will not agree to any sort of quota or VRA.  It has, however, reportedly offered to enter into negotiations with the United States for a new ‘trade in goods’ free trade agreement.  It will be an interesting few weeks to be sure as these discussions play out.

In the meantime, we recommend that any company which imports covered articles from Canada, Mexico or the EU (or relies on covered articles from these countries imported by other U.S. parties) consider preparing product exclusion petitions now.  While exclusions are not needed currently, there is a meaningful chance that such exclusions will be needed in the near future (i.e., June 1st).  Given the delay in the processing of product exclusion petitions, it is important that companies which are impacted be proactive in protecting their interests (e.g., not languishing at the back of a very long line, etc.).

We hope that this update is helpful.  We are assisting numerous clients deal with these section 232 issues.  If you would like to discuss any of this further, please let us know.

Best regards,
Ted