Trump on Trade/NAFTA’s Future – Part III

Dear Friends,

On the NAFTA front, there were two further developments this past week of which we wanted to be sure you were aware.

The first was a notice from the U.S. Trade Representative’s Office published in the Federal Register on Tuesday requesting public comment and input on what the U.S. position should be in negotiations with Canada and Mexico to modernize NAFTA.  Specifically, the USTR is interested in comments addressing the following topics:

(a) General and product-specific negotiating objectives for Canada and Mexico in the context of a NAFTA modernization.
(b) Economic costs and benefits to U.S. producers and consumers of removal of any remaining tariffs and removal or reduction of non-tariff barriers on articles traded with Canada and Mexico.
(c) Treatment of specific goods (described by HTSUS numbers), including comments on (1) Product-specific import or export interests or barriers, (2) Experience with particular measures that should be addressed in negotiations, and (3) Addressing any remaining tariffs on articles traded with Canada, including ways to address export priorities and import sensitivities related to Canada and Mexico in the context of the NAFTA.
(d) Customs and trade facilitation issues that should be addressed in the negotiations.
(e) Appropriate modifications to rules of origin or origin procedures for NAFTA qualifying goods.
(f) Any unwarranted sanitary and phytosanitary measures and technical barriers to trade imposed by Canada and Mexico that should be addressed in the negotiations.
(g) Relevant barriers to trade in services between the United States and Canada and Mexico that should be addressed in the negotiations.
(h) Relevant digital trade issues that should be addressed in the negotiations.
(i) Relevant trade-related intellectual property rights issues that should be addressed in the negotiations.
(j) Relevant investment issues that should be addressed in the negotiations.
(k) Relevant competition-related matters that should be addressed in the negotiations.
(l) Relevant government procurement issues that should be addressed in the negotiations.
(m) Relevant environmental issues that should be addressed in the negotiations.
(n) Relevant labor issues that should be addressed in the negotiations.
(o) Issues of particular relevance to small and medium-sized businesses that should be addressed in the negotiations.
(p) Relevant trade remedy issues that should be addressed in the negotiations.
(q) Relevant state-owned enterprise issues that should be addressed in the negotiations.

Comments on these issues (or any others) must be submitted to USTR by June 12, 2017.  In formulating any comments, it is important to keep in mind that this Administration has a different perspective than previous ones when it comes to modernizing or liberalizing NAFTA.  We believe that this effort (at least from a US perspective) will be aimed more squarely at benefitting the United States than previous efforts (which may have looked more at benefitting the NAFTA region as a whole, or US companies with operations in Mexico or Canada).  The following quote from the summary is clear (and consistent with the Administration’s messaging on trade to date): 

“The United States intends to commence negotiations with Canada and Mexico regarding modernization of the North American Free Trade Agreement (NAFTA). The NAFTA was negotiated more than 25 years ago, and, while our economy and U.S. businesses have changed considerably over that period, NAFTA has not. The United States seeks to support higher-paying jobs in the United States and to grow the U.S. economy by improving U.S. opportunities under NAFTA.”

Emphasis added.  A copy of the notice is available here.

The second development relates to a study the USTR requested the U.S. International Trade Commission undertake related to NAFTA imports.  The study, entitled “Probable Economic Effect of Providing Duty-Free Treatment for Currently Dutiable Imports,” will examine the impact of providing duty-free treatment to imports of currently dutiable imports from Canada and Mexico.  Specifically, the ITC will provide a report containing its advice as to the probable economic effect of providing such treatment on (i) industries in the United States producing like or directly competitive products, and (ii) consumers.  The ITC has been asked to look at every dutiable article in the Harmonized Tariff Schedule.  The ITC has also been asked to specifically address the probable economic effects of eliminating tariffs on any dutiable agricultural imports from Canada or Mexico.   

The report is due by August 16, 2017.  A copy of the ITC notice of initiation can be found here and the USTR’s letter to the ITC can be found here.

*     *     *

These efforts to modernize NAFTA/trade with Canada and Mexico represent a ‘once in a generation’ opportunity.  Every company that produces articles in the NAFTA territory, sources articles in the NAFTA territory or competes with articles produced or sourced in the NAFTA territory has a strong incentive to participate in this process.  Given how quickly it is moving, companies need to assess their opportunities/challenges and decide how best to engage now.  Those who do not do so will likely find themselves at a competitive disadvantage once this process is over. 

We are helping numerous clients perform this assessment, as well as develop and implement strategies (offensive or defensive) to maximize the potential benefits.  If you have any questions about how to go about this, please let us know.

Best regards,
Ted

 

International Trade-Related Executive Orders

Dear Friends,

What an interesting time to be working in international trade! 

We are writing to make sure you saw the Executive Orders President Trump issued over the past few days on international trade issues.  All of the Executive Orders are available here.

The Presidential Executive Order Addressing Trade Agreement Violations and Abuses was signed on April 29, 2017.  It directs the Secretary of Commerce and the United States Trade Representative to conduct “comprehensive performance reviews” of all international trade and investment agreements the United States is a party to, as well as trade relations with those WTO member countries with which the United States does not have a trade agreement, but does have a significant trade deficit in goods. The goal of these reviews is to (i) identify violations or abuses by our trading partners, (ii) trade or investment agreements that have not created new U.S. jobs, had favorable effects on our trade balance, increased U.S. exports, etc., and (iii) make recommendations to address the issues identified in (i) and (ii). 

Based on statements President Trump has made to date, we expect that NAFTA as it relates to trade with Mexico, the Korea-U.S. Free Trade Agreement, the WTO Government Procurement Agreement and others to receive negative marks under the standards to be used in the performance reviews.  What will be more interesting are the recommendations that are made to address those perceived shortcomings (e.g., revising rules of origin, withdrawing from agreements, etc.).  The performance reviews must be submitted to the President by October 26, 2017.

The Presidential Executive Order on Establishment of Office of Trade and Manufacturing Policy was also signed on April 29, 2017.  It creates a new Office of Trade and Manufacturing Policy (OTMP) within the White House.  The stated mission of the OTMP “is to defend and serve American workers and domestic manufacturers while advising the President on policies to increase economic growth, decrease the trade deficit, and strengthen the United States manufacturing and defense industrial bases.”

These Executive Orders encapsulate much of the President’s trade policy, which is focused on (1) seeking to identify and remedy unfair trading practices, and (2) reducing the trade-in-goods deficits the United States has with other countries.  Companies should be viewing these Executive Orders as a creating an opportunity to engage with the Administration to help shape the recommendations for addressing the problems that they perceive exist with trade.

We are assisting numerous clients navigate these issues.  If you would like to discuss your specific situation and what you should be doing further, just let us know.

Best regards,
Ted

Trump on Trade/NAFTA’s Future – Part II

Dear Friends,

It is being widely reported this afternoon that President Trump is considering imposing a 20% tax on imports from Mexico in order to pay for the border wall (which would mean that U.S. companies/consumers will be paying for the wall, not Mexico. . . ). 

While nothing is imminent, this is a further example of how the rhetoric on renegotiating/withdrawing from NAFTA is being ratcheted-up.  Any company with meaningful investments in Mexico, or that otherwise imports meaningful volumes from Mexico, should be modeling different scenarios and developing contingency plans.  We are assisting numerous clients with this and would be happy to discuss the issues with you further.  If you would like to do so, please let me know.

Best regards,
Ted

Trump on Trade/NAFTA’s Future

Dear Friends,

Earlier today, I had the privilege of speaking at a seminar hosted by my colleagues in Toronto entitled “Trade and Business Strategies for a Post-Globalization World – CETA, Brexit, NAFTA and Preserving Cross Border Data Flows.”  I spoke on a panel entitled “NAFTA’s Prospects and Preserving its Benefits” with colleagues from the US, Canada and Mexico.  I thought that you might find the slides from this panel to be of interest.

If you have any questions about the future of NAFTA, or trade in general, in these interesting times, please let me know.  Also, please check out our “Trump on Trade” webpage for further updates.

Best regards,
Ted

 

Recent NAFTA Penalty Decision

Dear Friends,

We are writing to let you know about an all-too-common misunderstanding of the law by U.S. Customs and Border Protection that, as the attached penalty decision demonstrates, can be an expensive trap for the unwary.

The issue involves claims made under NAFTA that are later corrected/revoked by the importer after being informed by the exporter that the goods no longer qualify – and more specifically what the importer is liable for in such a situation.

In the situation involved in the attached decision, a U.S. company imported goods from a related party in Mexico and claimed NAFTA preference based on a NAFTA Certificates of Origin provided by the exporter/producer.  The NAFTA eligibility of the goods hinged on the fact that a key component was itself NAFTA originating.  The exporter/producer had a NAFTA Certificate of Origin covering this component from an unrelated supplier.  Based on the applicable rule of origin, the finished goods would originate, provided that this component originated.  Since it had a NAFTA Certificate of Origin from the unrelated component supplier, the exporter/producer certified that the finished goods were originating and the importer made claims based on the exporter/producer’s NAFTA Certificate of Origin.

Years after the claims were made, the unrelated component supplier advised that its component was actually of Chinese origin and revoked its NAFTA Certificates of Origin.  This resulted in the finished goods no longer qualifying for NAFTA.  After confirming this analysis, the exporter/producer notified the U.S. importer that the goods it had previously certified as being NAFTA originating no longer qualified.  The U.S. importer then filed a corrected declaration with CBP at the appropriate Port of entry pursuant to 19 C.F.R. §181.21(b).  The corrected declaration identified all of the effected entries over multiple years.  In terms of duties, however, the importer only tendered the duties and Merchandise Processing Fees on the unliquidated entries.  The importer’s position was that it had acted with reasonable care when it relied on the NAFTA Certificate of Origin voluntarily provided by the exporter/producer (and the exporter/producer acted reasonably when it relied on a facially valid NAFTA Certificate of Origin for the component voluntarily provided by the third-party supplier).  The fact that the supplier revoked its certification years after the fact does not make those claims negligent acts.  If the importer was not negligent, there was no basis to reopen the liquidated entries.

The Port disagreed and chose to treat the corrected declaration as a prior disclosure (i.e., an admission of a culpable violation of the law).  Since the importer did not tender all of the duties covered by the “prior disclosure,” it was deemed to be invalid and the Port initiated a penalty action.  The Port sought duties and MPF of approximately $400,000 and a penalty based on a claim of negligence of approximately $800,000.  After much back and forth, the importer was ultimately able to get the case referred to CBP Headquarters for a decision.  As you will see from the attached, CBP Headquarters confirmed that an importer that relies on a facially-valid NAFTA Certificate of Origin is exercising reasonable care and that, if that certificate is later revoked, the importer is not liable for the duties or MPF on the liquidated entries.  The Port’s $1.2 million demand was remitted in full.

This an issue that any company that imports under NAFTA should be aware of, as the approach taken by the Port involved here is not an isolated instance.  We have 3 similar cases currently pending at other Ports and are aware of at least one other situation handled by another firm.  Importers should remember (particularly since CBP seems not to) that NAFTA (unlike our more recent FTAs) is an exporter-based agreement, which means that an importer who relies on a facially-valid NAFTA Certificate of Origin voluntarily provided by the exporter has a good argument that it exercised reasonable care.  If that certificate later turns out to be incorrect, then the importer will be liable for the duties and fees on the unliquidated entries (i.e., the past 10 months or so), but not on the liquidated ones.  As demonstrated by the attached, remembering this can help ensure that the company does not tender monies to the government unnecessarily.

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

Best regards,
Ted