Trade law and supply chain news, insights, and commentary
Following a meeting of the G7 Summit Leaders, on May 19, 2023, the United States and the United Kingdom announced a new round of sanctions and export controls against the Government of the Russian Federation (“Russia”) to continue their efforts against key sectors of Russia’s military-industrial base.
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The Raising Tariffs on Imports from China Act was introduced by Senator Josh Hawley (R-Mo.) and aims to increase tariffs on imports from China until the United State’s bilateral trade deficit returns to balance. In tandem with this legislation, Senator Hawley is pushing for debt limit talks to focus on the reduction of the trade deficit.
Following the normalization of trade relations between the United States and China, the trade deficit grew to 382,917 million in 2022. Senator Hawley points to the ongoing trade deficit between the United States and China, which has averaged $350 billion annually since President Clinton granted China permanent Normal Trade Relations, as the catalyst for the loss of 3.82 million jobs, particularly 2.89 million manufacturing jobs.
As of 2020, China is the United States’ largest supplier of goods imports and the top two import categories include electrical machinery, machinery, toys and sports equipment, furniture and bedding, and miscellaneous textile articles. Additionally, China is the 7th largest supplier of agricultural imports to the United States and has steadily increased imports of services to the United States since 2010.
Senator Hawley’s legislation Raising Tariffs on Imports from China would:
On May 3, 2023, Senators Tammy Baldwin, D-Wis., Sherrod Brown, D-Ohio, and J.D. Vance, R-Ohio, introduced the ‘‘Country of Origin Labeling Online Act’’ or the ‘‘COOL Online Act’’ in an attempt to require origin and location disclosure for new products of foreign origin offered for sale on the internet. Following previous unsuccessful attempts to pass similar legislation in 2020, this group of bipartisan senators has reintroduced legislation in an effort to promote goods made in America.
Currently only products sold in-person are required to disclose country-of-origin, however the Country of Origin Labeling Online Act seeks to amend labeling laws to force e-commerce sites to provide similar information. According to Senator Baldwin, “whether we buy things online or in-store, Americans have a right to know if the product they are purchasing was made in America, by American workers.” Senator Vance claimed that the legislation would, “close a legal loophole by extending current, commonsense labeling requirements to e-commerce.” Senator Brown asserted that, “companies shouldn’t be able to hide their ‘made in China’ label just because they’re selling online.” The percentage of total retail sales from e-commerce relative to in-store has been steadily increasing each year, causing groups such as the Coalition for a Prosperous America to become more vocal about the need for legislation. Proponents of this legislation argue that American consumers will prefer to buy American products should they have the full knowledge online of where retailed goods are manufactured which would be a boon for U.S. producers.
Big retailers, including electronics, furniture, and toy industries, have argued that this legislation would add onerous regulations for online sellers which could be complex both legally and technically to comply with. The National Retail Federation (“NRF”), the retail industry’s largest trade group, said back in 2021 that it “opposes the measure because it would create complications for retailers who might source any number of items – T-shirts, say, or strawberries – from multiple countries.”
The bill requires sellers to conspicuously disclose the country of origin of products sold over the internet. This includes compliance with the labeling of the country of origin of the product and the country of origin in which the seller has its principal place of business. There are several exclusions to this requirement – such as certain agricultural products, certain food and drug products, used or previously-owned articles, and small sellers with annual sales of less than $20,000 and fewer than 200 discrete sales. If passed and approved, the law would take effect 12 months after the date of the publication of the Memorandum of Understanding between the Federal Trade Commission, the U.S. Customs and Border Protection, and the Department of Agriculture, which must be signed within 6 months after the date of enactment.
While the Biden’s administration’s recent corporate enforcement actions and initiatives have garnered significant press attention, China has engaged in recent months in a series of less-publicized corporate enforcement actions and initiatives against non-Chinese companies (mostly, but not exclusively, U.S.-based) operating in the country, including through new investigations, raids of China-based offices, and even detention of employees.
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Tamara Capeta, Advocate General of the Court of Justice of the European Union, has given her opinion regarding the scope of the EU Foreign Direct Investment Screening Regulation. AG Capeta considers the Regulation to cover not only acquisitions by foreign (non-EU) investors, but also the acquisition of one EU undertaking by another, if the acquirer has third-country shareholding. AG Capeta’s opinion may foreshadow a revision of the EU FDI Screening Regulation.
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On April 18, 2023, the U.S. Department of Commerce Bureau of Industry and Security (“BIS”) released a memorandum entitled, “Clarifying Our Policy Regarding Voluntary Self-Disclosures and Disclosures Concerning Others” (the “April Memo”). The April Memo highlights additional penalties and incentives to encourage exporters – and whistleblowers – to disclose potential violations of the Export Administration Regulations (“EAR”). In a change of policy, BIS will now consistently treat a decision not to voluntary self-disclose significant violations of the EAR as an aggravating factor in the calculation of penalties. The April Memo additionally reminds the regulated community that reporting another exporter’s violative conduct can act as a mitigating factor in future enforcement actions against the reporting party (even if the reported potential violations are unrelated to the future enforcement action). Finally, the April Memo calls out to the academic community (as opposed to just private sector exporters), as sharing a key role in identifying, preventing, and mitigating export control violations, in line with BIS’s initiative to encourage university compliance, namely through its Academic Outreach Initiative.
Minor Violations Still Get a Quick Response
Last June, BIS implemented a dual-track system to handle voluntary self-disclosures (VSDs), in which most minor violations are now fast-tracked and resolved within 60 days of final submission. More serious cases are assigned a field agent, an Office of Chief Counsel Attorney, and occasionally, an attorney from the Counterintelligence and Export Control section of the Department of Justice (“DOJ”). The April Memo confirmed this practice is still in effect, and actively encouraged submissions of a single VSD to report multiple minor technical violations that occurred close in time.
Not Submitting a VSD for “Significant” Violations is an Aggravating Factor
Prior to the April Memo, BIS has consistently treated the filing of a VSD as a mitigating factor. Under the existing BIS settlement guidelines, it results in an automatic 50% reduction of any penalty, and, in some cases, even a full suspension of any penalty. The April Memo clarifies that going forward, OEE will also “consistently apply [the submission of a VSD] as an aggravating factor when a significant possible violation has been uncovered by a party’s export compliance program but no VSD has been submitted.” While this policy change only applies to “significant” violations, the April Memo does not define significant, nor provide examples.
Disclosing Potential Violations of Others is a Mitigating Factor
The April Memo also encourages disclosures of potential violations by others. BIS urges anyone to come forward and report potential EAR violations by others, including competitors and points to its confidential reporting form on the website as a mechanism by which to do so. BIS will consider the provision of information that leads to an enforcement action against others to qualify as a mitigating factor of “exceptional cooperation,” meaning, for example, that if Company A reports potential violative conduct of Company B, and that tip results in enforcement action, BIS will consider that report to be a mitigating factor if a future enforcement action, even for unrelated conduct, is brought against Company A.
To further encourage this reporting behavior, BIS notes the existence of whistleblower programs at Financial Crimes Enforcement Network (“FinCEN”) and DOJ that offer monetary rewards for information that leads to successful enforcement actions. Although these programs were designed to encourage reporting of violations of sanctions programs and the Bank Secrecy Act, the April Memo notes that FinCEN has discretion to pay monetary awards if the reported information leads to successful enforcement of “related actions,” which could include violations of the EAR.
After more than 6 months since the UFLPA went into effect in June 2022, CBP released its UFLPA Statistics Dashboard. The UFLPA Dashboard provides users a snapshot of the number of shipments that have been subjected to UFLPA-related reviews and enforcement actions. Per CBP, the Dashboard contains “data related to enforcement of the UFLPA,” covering data since June 21, 2022, the date when CBP began to enforce the UFLPA. CBP continuously updates the Dashboard on a quarterly basis.
Alongside the Dashboard, CBP also released the “Uyghur Forced Labor Prevention Act Data Dictionary,” which serves as a “how to” guide on how to maneuver the Dashboard. Of relevant importance, the Dashboard does not include any data related to other forced labor enforcement actions by CBP – such as Withhold Release Orders (WROs). In addition, all information provided in the Dashboard is “in the form of aggregated numbers and values in order to protect entities associated with its law enforcement investigations and actions, as well as other law enforcement sensitive information.” As such any specific company or product information, business confidential information, or information pertaining to active law enforcement actions, investigations, or pending cases are not disclosed.
The Dashboard itself provides an aggregate of the total shipments stopped by CBP for UFLPA related reasons. In addition, the Dashboard also provides a breakdown of the stopped shipments by noting which of the stopped shipments have been denied and which have been released. The difference between the total stopped shipments and the sum of the denied and released shipments is the number of shipments still pending a determination. Finally, the Dashboard includes an aggregate total dollar value of the total shipments stopped by CBP. In addition to these aggregate quantities and values, the Dashboard includes the following four filters:
The four filters, all of which can be used individually or together, allow users to further breakdown the aggregate values, depending on the filters used. Of particular relevance, users are able to filter for stopped shipments belonging to the following 9 industries: Agriculture and Prepared Products; Apparel, Footwear, and Textiles; Automotive and Aerospace; Base Metal; Consumer Products and Mass Merchandising; Electronics; Industrial and Manufacturing Materials; Machinery; and Pharmaceutical, Health, and Chemicals. In addition, users can also filter for the following countries of origin: Malaysia, Vietnam, China, Thailand, Sri Lanka, and all others.
At the time of writing this post, with data that was current as of Aril 3, 2023, the total number of stopped shipments was 3,588. Of these, 490 shipments (approximately 14%) were denied compared to 1,323 shipments (approximately 37%) that were released. The value of the total stopped shipments represented approximately $1.078 billion. The top three industries related to the stopped shipments were Electronics; Apparel, Footwear, and Textiles; and Industrial and Manufacturing Materials.
With regards to country of origin, Malaysia represented the largest value of shipments at approximately $576 million and 1,042 shipments. In comparison, China represented a value of approximately $109.71 million with 1,300 shipments. Per the current data, while there are less shipments in terms of quantity with Malaysia as the country of origin compared to China, the shipment values from Malaysia are higher than those from China. As such, the average unit value of the stopped shipments from Malaysia is approximately $553,000 compared to $84,000 for shipments from China, suggesting that stopped shipments with a country of origin from Malaysia are likely from higher values, more developed industries when compared to those from China. As CBP continues to update the UFLPA Statistics Dashboard, Crowell & Moring LLP will continue to monitor and highlight major developments.
For more information on actions addressing human rights and forced labor abuses and regulations, contact our team and see previous posts below.
The Office of the United States Trade Representative (USTR) and the U.S. Department of Commerce (DOC) have announced that they will send a U.S. delegation to Singapore in May 2023 for the third round of negotiations of the Indo-Pacific Economic Framework (IPEF). According to the White House, “the Indo-Pacific supports more than three million American jobs and is the source of nearly $900 billion in foreign direct investment in the United States.”
IPEF is an economic initiative launched by the U.S. in May of 2022, along with Australia, Brunei Darussalam, Fiji, India, Indonesia, Japan, the Republic of Korea, Malaysia, New Zealand, Philippines, Singapore, Thailand, and Vietnam. Canada is currently seeking membership. IPEF is not a free trade agreement, rather, focuses on four pillars which seek to advance member state economies in a flexible economic strategy that each may incorporate. Negotiating rounds have been held to date in Australia and Indonesia, with a special but more limited round in India.
The IPEF has four pillars. These include pillars on trade, supply chains, “clean economy” and “fair economy” to include anti-corruption and similar issues. In addition, the White House has explained that IPEF’s “efforts include, but are not limited to, cooperation in the digital economy.”
The 2023 Trade Policy Agenda and 2022 Annual Report outlined the Biden-Harris Administration’s work with key trading partners to advance digital trade, promote IPEF, and support the U.S. and allies in the region. The 2023 National Trade Estimate Report on Foreign Trade Barriers (NTE) defines barriers to digital trade as “barriers to cross-border data flows, including data localization requirements, discriminatory practices affecting trade in digital products, restrictions on the supply of Internet-enabled services, and other restrictive technology requirements.” The NTE identifies some IPEF participants as among those imposing barriers to digital trade as well as China, the European Union and others.
Moving into the third round of negotiations this May, the U.S. Chamber of Commerce has said that it expects talks in Singapore to center on trade facilitation, which can “streamline procedures and ease logistical impediments to the free flow of goods and services.” Trade facilitation may include: “accepting electronic documents and using electronic systems for traders to submit required documentation; revolutionizing the customs clearance of lower-value e-commerce shipments whose volumes grew substantially since the pandemic’s onset; [or] digitizing the customs declaration and payment of any duties, fees, and taxes,” among other examples.[1]
As negotiations move forward, Crowell & Moring LLP will continue to monitor IPEF and highlight major developments.
[1] John Goyer, Indo-Pacific Economic Framework’s Opportunity on Trade Facilitation, U.S. Chamber of Commerce (March 31, 2023), available at https://www.uschamber.com/international/trade-agreements/indo-pacific-economic-frameworks-opportunity-on-trade-facilitation
Main Idea: HTSUS Chapter 98, Subchapter 17, U.S. Note 4(b) exclusions are determined based on weighing all criteria. Although a product may meet the definition outlined in U.S. Note 4(a), they may fit the criteria outlined in U.S. Note 4(b) and therefore be excluded.
In ruling N330488 (Feb. 9, 2023), Customs and Border Protection (CBP) determined the appropriate HTS classification and subheading applicability of a rotation cushion made in Spain. The PEPE Patient Rotation Cushion, item number P40013, is intended to help facilitate grooming tasks and prevent bedsores. This product is utilized by caregivers of people with severely reduced mobility, including elderly and disabled people. This cushion is in a half-moon shape with cutouts to fit the patient’s legs and two handles for grasping on either side. This product is made up of high-density HR foam covered in a hypoallergenic, waterproof, and non-slip fabric cover, is approximately 17.7” (W) x 15.7” (H) x 5.1” (D), and can be used with a patient who weighs up to 242 lbs.
Customs classifications under the Harmonized Tariff Schedule of the United States (HTSUS) are made pursuant to the General Rules of Interpretation (GRIs). GRI 1 stipulates that the classification of goods is to be determined per the terms of the headings of the HTSUS and relevant section or chapter notes. If the goods are unable to be classified solely based on GRI 1 and if the headings and legal notes do not otherwise require, the remaining GRIs 2 and 6 may be applied, respectively.
CBP determined that, per GRI 1, the applicable classification for the PEPE Patient Rotation Cushion is subheading 9404.90.2090, HTSUS, which provides for “Mattress supports; articles of bedding and similar furnishing (for example, mattresses, quilts, eiderdowns, cushions, pouffes, and pillows) fitted with springs or stuffed or internally fitted with any material or of cellular rubber or plastics, whether or not covered: Other: Pillows, cushions and similar furnishings: Other, Other.”
The manufacturer of this PEPE Patient Rotation Cushion inquired whether a secondary subheading providing duty-free treatment, 9817.00.96, is available. However, CBP explained that subheading 9817.00.96 requires that the subject articles meet the terms of the HTSUS Chapter 98, Subchapter 17, U.S. Note 4(a) and not be included in exclusions listed in U.S. Note 4(b). Specifically, subject articles that meet the terms of Note 4(a) must be for “blind or other physically or mentally handicapped persons,” which includes “any person suffering from a permanent or chronic physical or mental impairment which substantially limits one or more major life activities.”
HTSUS Chapter 98, Subchapter 17, U.S. Note 4(a) and 4(b) states:
(a) For purposes of subheadings 9817.00.92, 9817.00.94, and 9817.00.96, the term “blind or other physically or mentally handicapped persons” includes any person suffering from a permanent or chronic physical or mental impairment which substantially limits one or more major life activities, such as caring for oneself, performing manual tasks, walking, seeing, hearing, speaking, breathing, learning, or working.
(b) Subheadings 9817.00.92, 9817.00.94, and 9817.00.96 do not cover –
(i) articles for acute or transient disability;
(ii) spectacles, dentures, and cosmetic articles for individuals not substantially disabled;
(iii) therapeutic and diagnostic articles; or
(iv) medicine or drugs.
According to CBP, it considers the following information in determining whether or not an article is specifically designed or adapted for the handicapped: (1) The likelihood of general public use; (2) Whether or not articles are imported by manufacturers and distributors proven to be involved in this type of articles for the handicapped; (3) Whether or not the articles are sold in stores specifically designed to serve handicapped people; and (4) Whether or not the condition of the articles upon the time of importation indicates that the subject articles are designed for handicapped people. Each of the aforementioned factors is weighed on a situational basis to determine whether or not an article is “specially designed or adapted” per the meaning of the statute.
CBP therefore determined that the subject PEPE Patient Rotation Cushion meets the terms of HTSUS Chapter 98, Subchapter 17, U.S. Note 4(a) and is not included among exceptions listed in U.S. Note 4(b). In so finding, CBP specifically stated that the product was not for an acute or transient disability. The rate of duty for the product was consequently found to be free pursuant to subheading 9817.00.96.
On March 22, 2023, the Department of Defense (DoD) issued a proposed rule that would amend the Defense Federal Acquisition Regulation Supplement (DFARS) to require certain contractors to provide export authorizations to the Defense Authorization Management Agency (DCMA).
DCMA performs quality assurance reviews for manufacturing operations to ensure contractors have the appropriate systems in place to meet quality and functionality standards along with contractual requirements regarding testing and validation. In some cases, DCMA will engage a foreign auditor to perform the quality assurance review. However, to do so DCMA needs insight into applicable export authorizations to see if engaging the foreign auditor is permissible.
The proposed rule would require contractors to provide export authorizations to DCMA when the contract requires (i) government quality assurance surveillance oversight and (ii) performance in or delivery to a government quality assurance country (Australia, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Israel, Italy, Republic of Korea, Netherlands, Norway, Poland, Romania, Slovakia, Spain, Sweden, Turkey, and the United Kingdom). Export authorizations include export licenses, exemptions, exceptions, and other approvals. The contractor must also provide the contact information for an empowered official or export point of contact.
Currently, DCMA uses Federal Acquisition Regulation (FAR) 4.703(a) to obtain access to customer export authorizations. Notably, the current provision only requires contractors to make export authorizations available to DCMA. As a result, DCMA has to travel to the contractor’s location to review the export authorizations. The proposed change would eliminate the need for travel because contractors would be required to provide the export authorization itself to DCMA. This change would make it easier for DCMA to determine if a foreign auditor can perform the required quality assurance review.
The proposed rule makes this change by updating DFARS 252.225-7048, Export Controlled Items to include this requirement. Comments on the proposed rule are due on May 22, 2023.
