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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Section 301 — US Finalizes List 2

Dear Friends,

The U.S. Trade Representative issued a press release announcing the imposition of an 25% duty on a finalized ‘List 2’ yesterday (as you will recall, List 2 is the $16 billion worth of Chinese imports published on June 18, 2018) .  The finalized list contains 279 of the 284 HTS subheadings originally proposed to be covered.  The duties will be imposed on covered articles beginning on August 23, 2018.  The press release states that a notice will be published in the Federal Register shortly and that notice will include details on how interested parties can file a product exclusion petition.  A copy of the press release is attached here together with the finalized List 2.

The recent escalation of trade tensions (e.g., the finalization of List 2, China’s likely retaliation, President Trump increasing the List 3 duties from 10% to 25%, China announcing its intention to impose additional duties on a further $60 billion worth of U.S. imports in response, etc.), and the lack of meaningful negotiations to date, suggests that the duties (on both sides) will be around for awhile.  As a result, all companies that import from China should be reviewing their sourcing options and devising short, medium and long terms pans for coping (e.g., possibility of moving certain production steps out of China in the short term, while longer term options are explored, etc.).  These plans should include continuing to participate in the administrative process (e.g., filing product exclusion petitions, submitting comments/providing testimony on the impact of List 3 – and any subsequent lists, etc.), as well as Congressional outreach.  We are assisting numerous clients with these efforts and would be happy to discuss the options with you further.  If that would be helpful, just let us know. 

Best regards,
Ted

 

Section 301 Update

Dear Friends,

Further to the below, we wanted to provide a brief update on the Section 301 situation and request your assistance.

First, the update.  Roughly, 2,900 comments were submitted in response to the list of Chinese-origin articles the USTR proposed to subject to an additional 25% duty upon importation into the United States.  The comments were both opposed to, and in favor of, the imposition of additional duties (with the vast majority being opposed either broadly, or with regard to the inclusion of specific articles on the proposed list).  A 3-day hearing was also held this past week where approximately 125 individuals provided verbal comments either in opposition to, or in favor, of the additional duties.  Rebuttal comments are due this coming Tuesday, May 22nd.

Now the request — we assisted several clients prepare comments and testimony opposing the imposition of the additional duties.  We also assisted these clients in discussions with their respective Congressional delegations and were able to get commitments of support.   We advanced several different arguments during this process, but one, in particular, seemed to resonate especially well.  Based on that positive feedback, we wanted to follow-up with all of you to see if your companies are similarly-situated and, if so, if you would be willing to join our effort to gain a broad-based exemption. 

In short, we requested that USTR categorically exempt from the proposed additional duties products manufactured in China by wholly foreign-owned enterprises (“WFOEs”).

As explained in greater detail in our previous updates (below), the USTR concluded that China used foreign ownership/joint venture requirements, compulsory technology transfers, the acquisition of U.S. companies and assets, etc. to obtain cutting edge U.S. technology and that those practices were “unreasonable or discriminatory and burden or restrict U.S. commerce”[.]  It was then determined that the “appropriate” remedy “to obtain the elimination” of those practices was to impose an additional 25% duty on the identified articles.  So, stated simply, the USTR’s goal is to identify articles on which the imposition of additional duties will force China to change its unfair policies.  

WFOEs, which are, by definition, owned entirely by non-Chinese entities, are not subject to the ownership restrictions (i.e., a WFOE does not have a joint venture partner).  WFOEs in most industries are also not subject to compulsory technology transfer through government licensing, for example.  As a result, the imposition of additional duties on articles produced in China by WFOEs will have no impact on Chinese government policy (i.e., there is no “forced” technology transfer when the manufacturer involved is a WFOE, therefore, assessing duties on articles produced by a WFOE does not make sense).

Accordingly, we requested that the USTR categorically exempt from any Section 301 duties articles produced in China by a WFOE.  We also pointed out that such an exemption would be easily administrable from a customs perspective.  A new ‘special program indicator’ could be created that, when used, meant that the importer was certifying that the articles being imported were produced by a WFOE (similar to how claims are made now under our more recent free trade agreements).  Such a certification would be subject to audit/verification by U.S. Customs and Border Protection.  The manufacturer identification (or MID) codes could also be used to help ensure that only articles produced (not just sold) by the WFOE were entered under the exemption.

We believe that such a request has a meaningful chance of success for a couple of reasons.  The first is that exempting articles produced by WFOEs is consistent with the Section 301 determination (i.e., the goal is to get China to lift its restrictive ownership requirements so U.S./foreign companies can operate without local joint venture partners; WFOEs are already entirely foreign owned).  Second, this exemption request is a lot easier to justify than picking and choosing among the large number of compelling stories U.S. companies told in the context of their HTS-specific requests (i.e., assuming the USTR wants to provide some exemptions, our categorical request would be easier to grant than picking and choosing from among the numerous HTS-specific requests companies made).  Finally, it is also administrable.

As mentioned, our WFOE exemption has received positive feedback at a number of levels.  Accordingly, if you are opposed to the imposition of the Section 301 duties (either because you are on the list in this round, or you fear being on the list in the next potential round) and the articles you import are produced by a WFOE, please let us know.  Regardless of whether you filed comments already or not, we believe that you have the opportunity to engage with the Administration on this issue as part of our coalition.

We hope this is helpful.  If you have any questions, 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

Section 232 Duties on Steel & Aluminum — Process for Product Exclusions

Dear Friends, 

Further to the below, the Department of Commerce will publish procedures for (i) requesting product-based exclusions from the section 232 duties on steel and aluminum, and (ii) objecting to such requests, in tomorrow’s Federal Register (an advance copy of the Federal Register notice is attached here).  Any company potentially interested in seeking an exclusion for one or more articles covered by the section 232 duties should review the notice.  In particular, there are a number of key items worth noting:

(1) exclusion petitions may be submitted only by “individuals or organizations using [steel or aluminum] articles . . . in business activities . . . in the United States”;

(2) objections to exclusion petitions may be submitted by “any individual or organization in the United States”; 

(3) any approved exclusion petitions will be limited to a specific article (unless Commerce specifies a broader exclusion is granted) and to the petitioner (i.e., you cannot generally get the benefit of someone else’s exclusion petition); you can, however, file “follow-on” petitions;

(4) exclusions petitions must be filed electronically, using a specific form created for this purpose; objections must be filed within 30 days of an exclusion petition being filed, also using a specific form; petitions can cover only a single 10-digit Harmonized Tariff Schedule classification; and the review process will generally take 90 days from date of filing; and

(5) approved exclusions will be effective 5 business days after the approval is published; and will “generally” be good for 1 year.

Product exclusion petitions will only be approved “if an article is not produced in the United States in a sufficient and reasonably available amount, is not produced in the United States in a satisfactory quality, or for a specific national security consideration.”  We expect that Commerce will approve petitions only sparingly, and primarily for valid national security-related considerations. 

Product based exclusions can be filed beginning tomorrow, March 19, 2018.  If you are considering doing so, we recommend filing as soon as possible.  That said, it is important that your petition be as well prepared as possible (e.g., consider scope issues, the import data, whether there are any national security implications/allies in the federal government, any likely objections, etc.) to give it the best chance of success.  We are assisting many clients prepare petitions and would be happy to discuss this with you further.  If you are interested in doing so, please let us know.

Best regards,
Ted

3/8/17 Update: Section 232 Duties on Steel & Aluminum – Part IV

Dear Friends,

Further to the below, President Trump signed two Presidential Proclamations today – one on steel imports and one on aluminum imports (available here and here).  As expected, the President is imposing an additional 25% duty on steel, and an additional 10% duty on aluminum, imported from all countries except Canada and Mexico beginning on March 23, 2018.  The details are as follows:

Steel Duties

* the 25% additional duty will apply to “steel articles” imported from all countries except Canada and Mexico as of March 23, 2018; 

* “steel articles” are defined by reference to Harmonized Tariff Schedule (HTS) 6-digit subheading, as follows:  “7206.10 through 7216.50, 7216.99 through 7301.10, 7302.10, 7302.40 through 7302.90, and 7304.10 through 7306.90, including any subsequent revisions to these HTS classifications”;

* the 25% additional duty will apply to articles entered, or withdrawn from warehouse for consumption, as of March 23, 2018;

* imports from Canada and Mexico are exempted from the additional duty for now; the proclamation describes the special relationship the United States has with these countries and concludes that steel imports from these countries should be exempted, but qualifies it by saying “at least at this time”; this exemption is likely tied progress with the on-going NAFTA renegotiations and could be taken away by the President with little notice; also, it seems clear that the President means to exempt articles produced in Canada or Mexico, not just articles imported from Canada or Mexico (you cannot ship steel produced in China through Canada and avoid the additional U.S. duty);

* imports from countries with which the United States has “a security relationship” (e.g., allies, like the EU, Australia, Japan, Korea, etc.) are encouraged to discuss with the Administration “alternative ways to address the threatened impairment of the national security” presented by imports from their country; this could possibly lead to a series a ‘voluntary-restraint-type’ arrangements being negotiated where exporting countries agree to limit exports to certain levels; 

* there will be a petition-based, product exclusion process run by the Department of Commerce (with input from other agencies); the standard for exclusion will be whether the article is (i) produced in the United States “in a sufficient and reasonably available amount or of a satisfactory quality” or (ii) subject to specific national security considerations; petitions need to be filed by “a directly affected party located in the United States” (i.e., foreign suppliers need not apply); Commerce will issue formal procedures for this process by March 18th;

* the duties will remain in effect until “expressly reduced, modified, or terminated”;

* Commerce will continue to monitor the situation with regard to imports and their impact on the national security and recommend further actions to the President, as needed.

Aluminum Duties

* the 10% additional duty will apply to “aluminum articles” imported from all countries except Canada and Mexico as of March 23, 2018;

* “aluminum articles” are defined by reference to Harmonized Tariff Schedule (HTS) classification, as follows:  “(a) unwrought aluminum (HTS 7601); (b) aluminum bars, rods, and profiles (HTS 7604); (c) aluminum wire (HTS 7605); (d) aluminum plate, sheet, strip, and foil (flat rolled products) (HTS 7606 and 7607); (e) aluminum tubes and pipes and tube and pipe fitting (HTS 7608 and 7609); and (f) aluminum castings and forgings (HTS 7616.99.51.60 and 7616.99.51.70), including any subsequent revisions to these HTS classifications”;

* the 10% additional duty will apply to articles entered, or withdrawn from warehouse for consumption, as of March 23, 2018;

* imports from Canada and Mexico are exempted from the additional duty for now; the proclamation describes the special relationship the United States has with these countries and concludes that aluminum imports from these countries should be exempted, but qualifies it by saying “at least at this time”; this exemption is likely tied to progress with the on-going NAFTA renegotiations and could be taken away by the President with little notice; also, it seems clear that the President means to exempt articles produced in Canada or Mexico, not just articles imported from Canada or Mexico (you cannot ship aluminum produced in China through Canada and avoid the additional U.S. duty);

* imports from countries with which the United States has “a security relationship” (e.g., allies, like the EU, Australia, Japan, Korea, etc.) are encouraged to discuss with the Administration “alternative ways to address the threatened impairment of the national security” presented by imports from their country; this could possibly lead to a series a ‘voluntary-restraint-type’ arrangements being negotiated where exporting countries agree to limit exports to certain levels;

* there will be a petition-based, product exclusion process run by the Department of Commerce (with input from other agencies); the standard for exclusion will be whether the article is (i) produced in the United States “in a sufficient and reasonably available amount or of a satisfactory quality” or (ii) subject to specific national security considerations; petitions need to be filed by “a directly affected party located in the United States” (i.e., foreign suppliers need not apply); Commerce will issue formal procedures for this process by March 18th; 

* the duties will remain in effect until “expressly reduced, modified, or terminated”;

* Commerce will continue to monitor the situation with regard to imports and their impact on the national security and recommend further actions to the President, as needed. 

*     *     *

These additional duties will have a meaningful impact on the market that will go well beyond just producers or importers.  All companies that utilize steel or aluminum in their products are expected to be impacted.  As a result, there are a number of steps all companies should be taking to assess the impact.  For example, supply contracts should be reviewed (even for downstream – e.g., finished products) to determine whether cost increases due to increased customs duties can be passed on or not.  Companies should also be considering whether to apply for a product exclusion.  While the procedures will not come out for several more days, companies should be preparing now (this exclusion process is expected to be similar to that being used in the Section 201 cases, procedurally).  It is not clear whether exclusion will be granted with retroactive effect or not, so it would be best to get your petitions in as early in the process as possible.  We are helping a number of clients with the exclusion process and would be happy to discuss this or other issues related to these duties with you further.

We hope this is helpful.

Best regards,
Ted


It is being reported that the formal announcement regarding the section 232 duties will come as early as Thursday this week.  The reports also contain unclear/conflicting information on whether imports from certain countries could be exempted (the President had previously said that there would be no country-based exceptions, but that now seems to be in flux).  More to follow . . . .


Dear Friends,

Further to the below, it is being widely reported that the President has decided to impose a 25% duty on imported steel and a 10% duty on imported aluminum next week in response to the reports from Commerce.  It is not yet clear whether those additional duties will apply on imports from all countries, or just to imports from a subset of countries.

More to follow on this.  In the meantime, if you have any questions, please let us know.

Best regards,
Ted


Dear Friends,

As you may recall, early last year, President Trump issued two presidential memoranda instructing the U.S. Commerce Department to initiate an investigation into the national security implications of steel imports and aluminum imports into the United States.  If these so-called “section 232” (section 232 of the Trade Expansion Act of 1962, as amended) investigations determine that steel import and/or aluminum imports “threaten to impair the national security[,]” then the President can impose additional customs duties (among other things) on covered products.

Last Friday, the Secretary of Commerce issued his reports to the President in both matters (available here).   In each case, the Department of Commerce concluded that the quantities and circumstances surrounding steel and aluminum imports “threaten to impair the national security,” thereby opening the door to the imposition of import restraints.  Specifically, Commerce’s recommendations are as follows:

Steel – Alternative Remedies

1.  A global tariff of at least 24% on all steel imports from all countries, or

2.  A tariff of at least 53% on all steel imports from 12 countries (Brazil, China, Costa Rica, Egypt, India, Malaysia, Republic of Korea, Russia, South Africa, Thailand, Turkey and Vietnam) with a quota by product on steel imports from all other countries equal to 100% of their 2017 exports to the United States, or

3.  A quota on all steel products from all countries equal to 63% of each country’s 2017 exports to the United States.

The measures would apply to steel mill products classified in subheadings 7206.10 through 7216.50, 7216.99 through 7301.10, 7302.10, 7302.40 through 7302.90, and 7304.10 through 7306.90.

The goal of such measures is to ensure that U.S. steel producers utilize 80% of production of capacity.

The recommendation also includes a process to allow Commerce to grant requests from U.S. companies for specific product exclusions if there was insufficient domestic production, or for national security considerations.

Aluminum – Alternative Remedies

1.  A tariff of at least 7.7% on all aluminum exports from all countries, or

2.  A tariff of 23.6% on all products from China, Hong Kong, Russia, Venezuela and Vietnam. All the other countries would be subject to quotas equal to 100% of their 2017 exports to the United States, or

3.  A quota on all imports from all countries equal to a maximum of 86.7% of their 2017 exports to the United States.

These measures would apply to unwrought aluminum (heading 7601), aluminum castings and forgings (subheadings 7616.99.51.60 and 7616.99.51.70), aluminum plat, sheet, strip and foil (flat rolled products) (headings 7606 and 7607); aluminum wire (heading 7605); aluminum bars, rods and profiles (heading 7604); aluminum tubes and pipes (heading 7608); and aluminum tube and pipe fittings (heading 7609).

The goal of such measures is to ensure that U.S. aluminum producers utilize 80% of production of capacity.

The recommendation also includes a process to allow Commerce to grant requests from U.S. companies for specific product exclusions if there was insufficient domestic production, or for national security considerations.

The reports and recommendations are now under consideration by the President.  The President is required to make a decision on the recommendations by April 11th (for steel) and by April 19th (for aluminum).

*           *           *

We believe that it is likely that the President will take some action to “adjust imports” based on these reports.  Accordingly, all companies that rely on steel and/or aluminum articles need to evaluate the impact such action may have on their production.  This would apply not only to companies that import covered articles (which will be the articles hit with additional duties and/or quota limitations), but companies that import downstream articles (e.g., parts made of steel or aluminum) as well.  The actions being contemplated are significant enough to have a ripple effect that impacts far more than just the covered products.

If you have any questions about these reports, or what sort of evaluation you should be doing as a result, please let us know.

Best regards,

Ted