USMCA Signed (But Not Finished) — Addendum

Dear Friends, 

Further to the below, it appears that President Trump is going “all in” on the USMCA. 

It is being reported that President Trump told reporters on the trip home from Buenos Aires yesterday that he intends to notify Congress “soon” that the United States is withdrawing from NAFTA (Article 2205 of NAFTA provides that a party may withdraw from the agreement with 6 months written notice).  If President Trump does formally withdraw from NAFTA, it would give Congress a stark choice – approve the USMCA, or the U.S. trade with Canada and with Mexico would go back to pre-NAFTA days (pre-1994). 

All companies with substantial investment in NAFTA trade should be concerned with this all or nothing approach.  If you would like to discuss what you should be doing now in response, please let us know.

Best regards,
Ted 

 

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USMCA Signed (But Not Finished)

Dear Friends,

As you hopefully saw, the United States-Mexico-Canada Trade Agreement (“USMCA”) was signed by President Trump, President Peña Nieto and Prime Minister Trudeau yesterday in Buenos Aires ahead of the G20 summit. 

Further to the below, however, the USMCA has a long way to go before it comes into effect.  The agreement is required to be ratified by the legislatures of all three countries.  While passage in Mexico and Canada is largely considered to be a formality, it is far from certain that the U.S. Congress will be so accommodating.  It is expected that the agreement will be taken up by the next Congress in early 2019.  It will be interesting to see how President Trump and a Democratic-controlled House of Representatives proceed.  Are the Democrats willing to give President Trump a victory by approving the USMCA?  Will the Democrats attempt to have changes made to the USMCA to secure passage (like was done by a Democratic-controlled House with previous FTAs)?  Will President Trump threaten to withdraw from NAFTA if the House does not approve the USMCA as is (i.e., it is either the USMCA or no agreement)?

Look for all of this to play out in early-to-mid 2019 (as nothing will likely happen once the 2020 presidential campaign kicks off in earnest in the fall of 2019).  In the meantime, if you have any questions about how the possible implementation of the USMCA impacts your business, please let us know.

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

The End of NAFTA?

Dear Friends,

President Trump announced earlier today that the U.S. and Mexico have reached a preliminary agreement on a new trade agreement. 

In a meeting with reporters from the Oval Office, and President Enrique Pena Nieto of Mexico on the phone, President Trump announced that the two countries have reached an agreement on new trade agreement.  According to the President, this agreement will be called the “U.S.-Mexico Trade Agreement” and it will replace NAFTA (which, the President said had bad connotations because it was such a bad deal for the United States).  The Administration intends to notify Congress this coming Friday of its attention to sign this new trade agreement (the Administration is required to notify Congress at least 90 days before signing any trade deal and President Nieto leaves office November 30th, which is ~90 days from Friday, so they are trying to get this in under the wire).

As for Canada, the two presidents seemed to express different views.  President Trump said that negotiations with Canada had not started yet, but would be begin shortly.  He also suggested that they would be short – saying that if Canada wants to negotiate fairly, we will do that; but that, if not, the United States will just impose a duty on Canadian-made automobiles (presumably under the on-going Section 232 investigation).  He also said that any deal could be a separate deal, or it could be integrated in to the new U.S.-Mexico trade agreement.  President Pena repeated stated that Mexico’s intention was to have a trilateral agreement that included Canada (not two separate bilateral deals, as seems to President Trump’s preference).

The fact sheets put out by the USTR on the U.S.-Mexico Trade Agreement are available here.  A video of the meeting in the Oval Office is available on C-SPAN’s website.

While this is a momentous development, there are a few things to keep in mind.  First, the United States (and possibly Mexico?) appears to be willing to move forward without Canada.  It seems increasingly likely that President Trump intends to use his leverage (over autos, in particular) to present Canada with a ‘take it or leave it’ offer.  If Canada is not willing to accept President Trump’s terms, it is not clear whether Mexico would be willing to forego an agreement with the United States (that seems less likely based on today’s meeting).  Second, this process is far from over.  As mentioned above, the United States and Mexico are racing against a political deadline (when President Nieto leaves office November 30th), but that is not the only political consideration.  The U.S. political process/deadlines will also come into play, as mentioned in our previous updates.  It is not clear whether a renegotiated agreement can be finalized and ratified in the time available.  Nevertheless, all companies will meaningful NAFTA-related investment should be considering how today’s announcement is likely to impact their business and begin planning accordingly. 

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

Best regards,
Ted

 

Trade Update

Dear Friends,

There has been a lot going on with international trade in recent weeks and we wanted to flag for you a couple of items you may have missed.

The first involves the NAFTA renegotiation.  Rather than engage in discussions involving all three countries at once, the U.S. has focused its efforts on first reaching agreement with Mexico.  U.S. and Mexican officials have been in discussions over the past several weeks and talks are expected to continue this week.  The talks re-started following the Mexican presidential election in July.  This effort seeks to conclude a deal in August, so that the current Mexican president (President Enrique Pena Nieto) can sign the revised deal before he leaves office November 30th (thereby allowing the new president, President-Elect Andres Manuel Lopez Obrador to focus on domestic issues). 

It appears that these bilateral talks are making progress, including on providing an exemption to the Automotive Section 232 investigation for existing Mexican auto plants (it is being reported that the U.S. is not willing to extend that exemption to future/new auto production in Mexico, to make sure that there is an incentive for companies to put new production in the United States).  That said, tough issues remain (e.g., a sunset clause, investor state dispute mechanisms, etc.).  In addition, Canada has not been included in these most recent discussions.  It appears that the U.S. and Mexico are intending to present Canada with a renegotiated agreement and a ‘take it or leave’ offer.  It is not clear how Canada will respond, if such an offer is made.  It should be an interesting couple of weeks.

The second involves the Steel and Aluminum Section 232 investigations.  While these are purportedly ‘national security’ investigations, President Trump announced last week that the U.S. would double the duties imposed on Turkish steel and aluminum imports (from 25% and 10% to 50% and 20%, respectively).  The U.S. Trade Representative also announced that it was reviewing Turkey’s continued eligibility under the Generalized System of Preferences program.   These efforts appear to be in response to Turkey detaining a U.S. citizen who is alleged to be involved in the July 2016 coup attempt. 

These developments show that President Trump is willing to use U.S. trade policy to influence other countries’ positions on unrelated issues.  While that may undercut the legal basis for some of these trade actions (e.g., is doubling the steel duties on imports from Turkey really related to U.S. national security concerns, or is it more of an effort to get Turkey to release Pastor Brunson?  Is the Automotive Section 232 investigation about U.S. national security, or about getting Mexico, Canada, the EU, Japan, Korea, etc. to change their policies on other issues?), and be a different way of doing things than previous administrations, it may be working (at least in the short term; in the longer term, this approach will likely come back to bite us in several different ways).

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

Section 232 Update

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