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

 

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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

Section 232/Section 301 Update

Dear Friends,

I wanted to share with you a couple of thoughts on the Section 232/Section 301 process that I thought might be helpful.

The first is a reminder.  The temporary exclusions from the Section 232 duties on steel (an additional 25%) and aluminum (an additional 10%) granted to products of Canada, Mexico, Australia, Argentina, Brazil and the EU expire at midnight on Monday, April 30th (i.e., tomorrow).  While there has been some reports that the Administration intends to extend the temporary exclusions for some countries (i.e., those that have expressed a willingness to negotiate a voluntary export restraint-type agreement), that is not likely to extend to all countries.  Based on what the EU has said publicly about its willingness to accept a VER, it seems likely that the additional duties will go into effect on Tuesday.

The second is also a reminder.  As companies grapple with the Section 232/Section 301 duties, many are reviewing their imports and determining whether articles are correctly classified or not (e.g., if an article is on the list of products proposed to be subject to the Section 301 duties, can the article be re-classified in a different HTS provision not on the list?).  Many companies are also reviewing the publicly-available data of their competitors. . . .

 As many of you know, U.S. Customs and Border Protection makes available to the public manifest data for import and export shipments.  The manifest data includes information such as the name and address of the foreign shipper & U.S. consignee/notify party, the ports of lading and unlading, the carrier, a description of the goods, weight, etc.  This data is obtained by private companies that repackage it (and often add their best guess at classification, entered value, etc.) and then sell it to the public for a fee. 

You may also know that CBP allows companies to request confidential treatment for their manifest data.  Under the regulations, if a company requests confidential treatment, CBP will not disclose the names and addresses of the importer/consignee, foreign shipper or notify party and any other identifying marks. 

The process to obtain confidential treatment is pretty straight-forward (it involves submitting a letter to CBP HQ) and we recommend that all clients pursue confidential treatment every 2 years.

We hope that this is helpful.  If you have any questions, or if you would like any assistance with Section 232/Section 301 issues, including requesting confidential treatment for your manifest data, please let us know.

Best regards,
Ted

The Art of the Deal – Update on Section 232 Duties on Steel & Aluminum

Dear Friends,

Late last week, the President issued two proclamations amending his earlier proclamations imposing additional duties on imports of steel and aluminum.  Copies of these proclamations may be found here and here.

The proclamations made a number of important changes to the section 232 duties.  Most notably, the President extended the temporary exemption previously afforded to Canada and Mexico, to Australia, Argentina, South Korea, Brazil and the EU.  In addition, the temporary exemption will now only run through April 30, 2018.  As of May 1, 2018, covered steel and aluminum articles from all countries will be subject to the additional 25% (steel) and 10% (aluminum) duties unless a further agreement is reached.

The President also indicated that, if any long-term agreements are ultimately reached with any countries, such that the exemption is continued beyond April 30, 2018, he will consider whether to adjust the additional duty rates (the 25% and 10%) to ensure that the desired goal is achieved (limit imports sufficiently to allow for domestic production utilization of 80%).      

The proclamations also include provisions that discuss the possible implementation of a quota on imports from exempted countries, place restrictions on articles admitted into Foreign Trade Zones and provide further detail on the product exclusion petition process (e.g., additional criteria for approval and retroactive treatment for approved petitions).

Regardless of what you think of the policy, the threat of significantly increased duties has (thus far) had the desired result, as many countries have sought to negotiate with the United States.  It will be interesting to see what unfolds over the next few weeks (e.g., will the imposition of section 232 duties to Canada and Mexico be tied to concluding the NAFTA renegotiations? will countries like Japan seek its own long-term exemption? if long-term exemptions are granted, will the duty rates be increased to even higher rates? what sort of voluntary-restraint type of agreement/quota will be required in order to obtain a long-term exemption?).  All companies that utilize steel or aluminum articles (whether imported or domestically-produced) should be taking steps now to review the economic impact the section 232 duties will have on their business.  Consideration should be given to the impact on long-term supply agreements (whether upstream or downstream – who bears the cost of increased duties?), the impact on market competition (e.g., are you making a product here with imported steel or aluminum, but competing against finished products produced abroad and imported into the United States without being subject to the section 232 duties?), etc.

We are assisting numerous companies navigate these issues (as well as the product exclusion process) and would be happy to discuss your situation with you further.  If you would like to do so, just let us know. 

Best regards, 

Ted

 

Challenge to How the Substantial Test is Applied to Pharmaceutical Products

Dear Friends,

We wanted to bring to your attention a recent development regarding an issue that has been a thorn in the sides of pharmaceutical companies for many years.  The development involves how the substantial transformation test is applied to pharmaceuticals for purposes of determining country of origin.

As you know, will generally be found to have occurred if the manufacturing or processing operation results in a change in (1) commercial designation or identity, (2) fundamental character, or (3) commercial use.  In the pharmaceutical context, U.S. Customs and Border Protection’s (CBP) long-standing position has been that, for single API products, formulation (i.e., mixing a bulk active with excipients and putting it up in dosage form) is generally not enough to work a substantial transformation.  As a result, if an active is produced in one country and shipped to another country for formulation, the formulating operations performed in the second country will not be sufficient to change the origin of the active ingredient.  In short, the origin of the API controls (of course, CBP in its wisdom gets a different result under the NAFTA Marking Rules, which is maddening). 

A pharmaceutical company is now challenging CBP’s long-standing position at the Court of International Trade (CIT).  The case stems from an adverse final determination issued in the government procurement context.  CBP determined that the pharmaceutical at issue is not substantially transformed in the United States because the API, sourced from India, retains its chemical and physical properties upon processing in the United States.  The determination is adverse because, as a result of not being considered to be substantially transformed in the United States, the company’s product is not eligible for procurement by the U.S. government (India is not a TAA country).   In response to this determination, the company filed suit at the CIT.  The company argues that the API is substantially transformed into a new and different product with a different use as a result of the processes performed in the United States.  A copy of the compliant is attached for your reference. 

The case is significant because it means that CBP’s long-standing position of what constitutes a substantially transformation will be reviewed by an independent, third party — the CIT.  A positive outcome for the company could impact how country of origin is determined for pharmaceutical products across the board.

If this issue has caused you heartburn (or if your company sources API from non-TAA countries like India, China, etc. but formulates the finished products in TAA countries, like the U.S., Canada, Ireland, etc.), then you may want to consider weighing in at the CIT.  We would be happy to discuss how best to do that with you further.  If such a discussion would be helpful, just let us know. 

Best regards,

Ted