On June 15, the Office of the United States Trade Representative (USTR) issued a press release announcing its intent to impose additional tariffs on products imported from China. The additional tariffs are part of the U.S.’ response to China’s unfair trade practices related to “the forced transfer of American technology and intellectual property” pursuant to Section 301 of the Trade Act of 1974.

Two lists of tariff lines were released. The first list includes 818 of the original 1,333 lines and is valued at $34 billion worth of imports from China. Products falling under these tariff lines will see an additional duty of 25 percent beginning on July 6.

The second list consists of 284 new tariff lines identified by the interagency Section 301 Committee as “benefiting from Chinese industrial policies, including the “Made in China 2025” industrial policy.”

These 284 lines cover approximately $16 billion worth of imports from China. This list will undergo further review in a public notice and comment process, including a public hearing. After completion of this process, USTR will issue a final determination on the products from this list that would be subject to the additional duties.

 

Section 301 For covered products in List 1, please click here.

For covered products in List 2, please click here.

25%

 

TBD

7/6/2018

 

TBD

Status: List 1 is composed of 818 of the original 1,333 tariff lines, and goes into effect on 7/6/2018.

List 2 is composed of 284 proposed tariff lines identified by the interagency Section 301 Committee. These will see further review, to include a public hearing.

For full details, please click here.

On June 5, U.S. Customs and Border Protection (CBP) issued a message providing instructions for importers who receive approval for a steel or aluminum product exclusion from the Department of Commerce (DOC).

The message states, “Upon receipt of the approved product exclusion from the DOC, for the importer of record listed in the approved exclusion, please provide that company’s name, address and importer of record number, and the associated product exclusion number, to U.S. Customs and Border Protection (CBP) at Traderemedy@cbp.dhs.gov. You must provide this information to CBP before the importer of record submits the exclusion number with entries to CBP.”

Further instructions on how to provide the information are included.

It adds, “Exclusions granted by DOC are retroactive on imports to the date the request for exclusion was posted for public comment at Regulations.gov. To request an administrative refund for previous imports of excluded products granted by DOC, importers may file a Post-Summary Correction (PSC) and provide the product exclusion number in the Importer Additional Declaration Field.”

The message also states if an “entry has already liquidated, importers may protest the liquidation.”

 

 

On May 18, 2018, CBP issued a Withhold Release Order (WRO) banning the importation of all Turkmenistan cotton or products produced in whole or in part with Turkmenistan cotton. The Trade Facilitation and Trade Enforcement Act of 2015 (TFTEA) was signed into law P.L. 114-125 on February 24, 2016. It was created to ensure a fair and competitive trade environment. TFTEA prohibits all products made by forced labor, including child labor, from being imported into the United States.

On April 6, 2016, members of the U.S. Cotton Campaign, Alternative Turkmenistan News, and International Labor Rights Forum had submitted a petition to CBP requesting the agency ban the importation of all goods made with Turkmen cotton produced with forced labor under 19 U.S.C. § 1307.  Merchandise made with forced labor is subject to exclusion and/or seizure, and may lead to criminal investigation of the importer(s).

These three groups alleged that the Turkmen government forces public sector employees under threat of punishment, including loss of wages and termination of employment, to pick cotton. Further, the groups claimed that “[i]n the 2017 cotton harvest, in addition to forced mobilization of adults, the government of Turkmenistan forced children 10-15 years old to pick cotton in violation of international and domestic laws,” he added. When information reasonably but not conclusively indicates that merchandise made with forced labor is being imported, CBP may issue a WRO pursuant to 19 C.F.R. § 12.42(e).

CBP’s ban means retailers and brands need to move quickly to identify and eliminate Turkmen cotton from their supply chains.

The U.S. Court of International Trade (CIT) in U.S. Auto Parts Network, Inc. v. United States, Slip. Op. 18-38 (Apr. 6, 2018) recently granted a Temporary Restraining Order (TRO) and found in favor of an importer who alleged an impermissibly high single entry bond amount was imposed against the company.

U.S. Auto Parts Network (U.S. Auto), a company that imports and sells vehicle grilles and parts, was alleged to have imported 30 shipments of grills that contained counterfeit merchandise. U.S. Auto then received notice of the enhanced bond requirement in an email from U.S. Customs and Border Protection (CBP or Customs) on March 7, 2018. CBP indicated it was requiring single entry bonds valued at three times the value of the shipment. Because of the exceedingly high bond amount, on April 2, 2018, Auto Parts went to the CIT and sought a TRO preventing CBP from imposing such single entry bond requirements.

The CIT considered four factors when evaluating whether to grant a TRO to U.S. Auto. The company had to show the court that:

  1. It would suffer irreparable harm absent the restraining order.
  2. It was likely to succeed on the merits of the action.
  3. The balance of hardships favored the imposition of the temporary restraining order.
  4. It was in the public interest.

As to the first requirement, U.S. Auto indicated to the court it was not able to find a surety to post a bond in the amount because the potential risk was approximately $5 million per week. Irreparable harm includes “a viable threat of serious harm which cannot be undone.” U.S. Auto claimed without the restraining order it could not import and its business would effectively wind down. The Government characterized this as speculative harm; however, the Court found it to be sufficient to show irreparable harm.

The court next weighed the third requirement regarding the balance of hardships. The CIT weighed the closing of U.S. Auto’s business against CBP’s expense in resources. CBP alleged that it had conducted these inspections for months requiring “substantial diversion of resources” and “more than 1,100 man hours.” Still, the Court found that a company that is facing the closing of its business, loss of reputation, loss of customers, and other potentially permanent consequences due to the enhanced bond requirements had the balance of hardships tipped in its favor.

When evaluating the likelihood of success on the merits, the court examined U.S. Auto’s four claims against the Government in its Complaint. The first two claims alleged that Customs’ imposition of the higher bond requirement violated various provisions of the Administrative Procedure Act (APA). U.S. Auto’s third claim contended that the new bond requirement constitutes a punitive action and was unconstitutional under the Eighth Amendment’s Excessive Fines Clause. Plaintiff’s fourth claim asserted that Customs did not provide U.S. Auto with the opportunity to challenge the increased bond requirement, which amounted to a violation of Plaintiff’s right to due process under the Fifth Amendment.

Under the APA, a final agency action will be overturned if the action is arbitrary, capricious, an abuse of discretion, or not in accordance with law. According to the Court, and a fact that was confirmed by Customs, ninety-nine percent (99 percent) of U.S. Auto’s imports were not suspected of being counterfeit. Slip. In other words, U.S. Auto was being put out of business as a consequence of 1 percent of its imports. That, according to the CIT was contrary to Customs’ mandate to set bond amounts to ensure compliance. This was sufficient to show a likelihood of success on the merits of the APA claims.

U.S. Auto’s third claim was Customs’ process did not permit the importer an opportunity to challenge the bond amount. If true, this would be a violation of the Fifth Amendment requirement that no person is to be deprived of life, liberty, or property without due process of law. Due process is notice and a meaningful opportunity to be heard. The CIT did not find for the plaintiff because of the longstanding position that there is no “right” to import products into the United States.

Turning to the public interest, U.S. Auto contended allowing it to continue to operate while the case is being decided on the merits was in the public interest. Specifically, it prevented the likely loss of over 350 jobs and provides the public with a source of cheaper replacement parts. The Government contends that the public is best served through the enforcement of the intellectual property laws and by allowing CBP to better allocate resources. The Court found the public interest rose above enforcement of the trade laws.

Because only one of the four factors weighed in favor of the Government, the Court granted the TRO. Under the terms of the TRO, CBP may continue to require a single entry bond at three times the value of the portion of the shipment believed to be counterfeit merchandise. In other words, CBP may impose the enhanced bond requirement on the 1 percent, not the 99 percent of U.S. Auto’s imports. The TRO expired on April 20, 2018, so there is likely to be further litigation in this matter.

On April 19, Crowell & Moring’s International Trade Attorneys hosted a webinar on “Trade in 2018 – What’s Ahead?”

Please click here to register and view the webinar on demand.

Summary

From the Section 232 national security tariffs on steel and aluminum imports to the ongoing NAFTA re-negotiation, the Trump administration is seeking to implement significant changes in international trade policy and enforcement. Economic sanctions on Russia continue to expand, the future is far from clear regarding Iran, and perhaps North Korea is coming into focus. A new Asia trade agreement without the United States, and a bumpy road ahead for Brexit all make for uncertainty and the need for enhanced trade risk management. Join us as we identify the international trade risks and opportunities likely to continue and grow in 2018.

Our Crowell & Moring team discussed predictions for the remainder of the year, with cross-border insights from our practitioners in the U.S., London, and Brussels. Topics included likely trends and issues in the U.S. and EU including:

  • Trade policy developments: Section 232, NAFTA renegotiation, and trade remedies
  • Sanctions in Year Two of the Trump Administration: Russia, Iran, North Korea, and beyond
  • Anti-money laundering (AML) and beneficial ownership
  • Supply chain risk management: blockchain, forced labor, the U.K. Modern Slavery Act, and GDPR
  • Europe: Brexit, the EU’s 4th AML Directive, and the EU/U.K. AML enforcement
  • CFIUS: how significant is the new legislation?
  • Export controls: Wither reform?
  • Import and customs

U.S. Customs and Border Protection (CBP) issued a Federal Register Notice on April 20 regarding the renewal of the Generalized System of Preferences (GSP), a preferential trade program that allows the eligible products of designated beneficiary developing countries to enter the United States free of duty.

The renewal takes effect on April 22. The new expiration date for GSP is December 31, 2020.

The notice states, “As of April 22, 2018, the filing of GSP-eligible entry summaries may be resumed without the payment of estimated duties, and CBP will initiate the automatic liquidation or reliquidation of formal and informal entries of GSP-eligible merchandise that was entered on or after January 1, 2018, through April 21, 2018, and filed via ABI with SPI Code “A” notated on the entry.

Requests for refunds of GSP duties paid on eligible non-ABI entries, or eligible ABI entries filed without SPI Code “A,” must be filed with CBP no later than September 19, 2018.”

 

On March 26, 2018, the U.S. Court of International Trade (CIT) dismissed U.S. Customs and Border Protection’s (CBP) attempt to collect $4.5 million in penalties against a Canadian textile company, Tricots Liesse 1983, Inc. (Tricots).  U.S. v. Aegis Security Insurance Co. and Tricots Liesse 1983 Inc., Slip. Op. 18-29.

Tricots produces quality knit fabrics and sells its fabrics to high-end U.S. swim and active wear producers. Fabric imports made from NAFTA yarn are duty free under the rules of origin (ROO) and fabric imports made from non-NATA yarn are duty free if the Canadian government issues Tariff Preference Level (TPL) certifications under the TPL quota program.  Tricots attempted to correct certain past NAFTA ROO claims by filing a disclosure with CBP and submitting TPL certificates issued by Canada.  However, CBP rejected Tricots’ disclosure and corrections saying the TPL certifications were untimely.  CBP issued Tricots an administrative penalty and duty demand, but did not provide Tricots an opportunity for an oral hearing during the administrative proceedings as required by statute.  After CBP filed suit against Tricots in the CIT to collect the $4.5 penalty and duties, Tricots filed a motion to dismiss the penalty claims because CBP failed to exhaust administrative remedies.

The CIT held that “[t]he facts demonstrate that, despite Tricots’ efforts, Customs did not follow the statutory injunction to provide the company with a ‘reasonable opportunity’ to make oral representations ‘seeking remission or mitigation of the monetary penalty’ following issuance of the notice of penalty, and thus did not provide Tricots with the statutorily required opportunity to be heard.”   The court added, “Accordingly, Customs failed to perfect its penalty claim and thus is barred from bringing it.”  The CIT found that the hearing was necessary before the government could bring its penalty claims in the CIT. The court rejected CBP’s arguments that Tricots failed to show it suffered “substantial prejudice” because of the government’s failure to hold a meeting where Tricots could make its arguments in person.  Now the court must decide if it should also dismiss CBP’s claims for duties.

This decision should help importers by ensuring that they receive a full and fair administrative hearing before CBP imposes a penalty.

Tricots is represented by Crowell & Moring attorneys John Brew, Frances Hadfield and Ade Johnson.

The 7th round of NAFTA negotiations took place in Mexico City from February 25-March 5 with relatively little fanfare as the talks were overshadowed by President Trump’s comments that his administration would impose Section 232 tariffs on aluminum and steel imports. Following the close of the round, President Trump issued Presidential Proclamations announcing the tariffs on March 8.

Officials are nearing completion of chapters on telecommunications and technical barriers to trade and closed discussions on good regulatory practices, administration and publication, and sanitary and phytosanitary measures (SPS). The three parties also agreed to a specific chapter dedicated to energy, which the U.S. previously opposed.

On the more difficult issues, some discussions are taking place but the path to completion remains unclear.

  • Autos rule of origin: Officials reportedly continued discussions over Canada’s proposal on the rule of origin for autos, which would incorporate intellectual property and technology in determining country of origin. However, the U.S. has still not given any sign it will move away from its initial proposal requiring a regional content requirement of 85 percent and a U.S.-originating content requirement of 50 percent.
  • State-to-state dispute settlement: Mexico and Canada have proposed modifying the rules for selection of panelists in state-to-state dispute settlement. However, it remains unclear whether the U.S. will agree to a form of binding dispute settlement.
  • Investor-state dispute settlement (ISDS): Canada and Mexico have initiated bilateral discussions on ISDS without the United States. The Unite States has not shown signs of seeking any ISDS commitments thus far beyond the “opt-in” system it initially proposed.
  • Procurement: Similar to ISDS, Canada and Mexico are discussing bilateral options for liberalizing procurement access for their respective markets. The U.S. has thus far not engaged in these discussions.

There was no joint statement following the March round. U.S. Trade Representative (USTR) Robert Lighthizer noted progress made on relatively non-controversial chapters but warned that “time is running very short” for the negotiations.

NAFTA talks could be further complicated by President Trump’s action to impose Section 232 tariffs on imports of steel and aluminum, effective March 23. President Trump’s March 8 Presidential Proclamations on the tariffs initially exempts imports from Canada and Mexico, but appears to suggest that the exemptions are conditioned on ongoing discussions to address transshipment through both countries.

Meanwhile, statements by USTR Lighthizer and President Trump have suggested that the aluminum and steel tariffs could be used as a bargaining chip during NAFTA negotiations. Canada and Mexico have insisted that the discussions are on separate tracks.

The next NAFTA round is tentatively scheduled for the week of April 8 in Washington D.C.

 

During the long-anticipated sixth round of talks in Montreal to update NAFTA, from January 23-29, negotiators made progress in some issue areas while avoiding any major clashes that might have led to U.S. withdrawal from the existing agreement. Officials advanced discussions on digital trade, sanitary and phytosanitary measures, and technical barriers to trade to near completion while closing a chapter on anti-corruption measures.

Following the round, U.S. Trade Representative (USTR) Robert Lighthizer acknowledged progress in these areas, while highlighting the importance of the need to make progress on the “core issues” of greatest interest to the United States. These core issues, which could include the rules of origin for automobiles as well as other difficult issues (i.e., investment, procurement, dispute settlement and the U.S. proposal for a five-year “sunset clause” in the agreement), are ultimately what the U.S. will judge as determining the success or failure of the talks.

Despite some initial constructive engagement, however, negotiators remain far from resolving these issues. Canada responded to a few U.S. proposals during the round:

  • On the rule of origin for autos, Canada reportedly proposed expanding the formula for calculating regional and national content values to include intellectual property and new technologies. Lighthizer rejected this approach in his closing remarks, finding it to be the “opposite” of U.S. interests because it would lead to less regional content than the status quo. The initial U.S. proposal would increase the regional value content for automobiles from the current 62.5 percent to 85 percent, with 50 percent reserved for U.S.-origin content.
  • On investor-state dispute settlement (ISDS), Canada proposed a mechanism that would exclude the U.S., while maintaining mutual protections only for Canada and Mexico. While it is unclear whether USTR will favor this approach, U.S. industry groups will likely be opposed.
  • On the “sunset clause,” Canada made a counterproposal of a five-year review process for the agreement, without the threat of automatic termination.

Canada also proposed departing from a proposed rule that would require the NAFTA parties to automatically extend to one another the same level of market access for services as each commits to in future trade agreements—the so-called “MFN-forward” rule that Canada had already agreed to in TPP. Lighthizer said in his closing remarks that the proposal was “unacceptable” and referred to it as a “poison pill.”

The Trump Administration overall appears to be signaling that negotiations are likely to proceed without disruption at least through the next round, which will take place in Mexico City from February 26-March 6.

While officials initially set a target date of concluding talks by March 31, there are hints that negotiations could last beyond that date, even perhaps after Mexico’s general election on July 1. President Trump said on January 11 that he could be flexible on the timetable, and U.S. Secretary of Agriculture Sonny Purdue testified to the House Agriculture Committee on February 6 that he expects talks to be extended beyond March but completed before the end of the year.

Members of Congress representing agricultural interests continue to press the Trump administration to conclude an agreement that will “do no harm” to the U.S. agricultural sector, which has benefitted from expanded access to Canada and Mexico under NAFTA. These Members would prefer to see the negotiations extended beyond March, provided that the overall result remains favorable for U.S. agribusiness.

If importers did not have enough to worry about in the new trade protectionist environment – higher duties from dumping, subsidy, section 201 and section 232 cases and increased enforcement – now they also may have to contend with the increased risks of whistleblower cases brought under the False Claims Act (FCA).  31 U.S.C. §§ 3729-33.  The FCA has been around for more than 150 years, but recently, has been successfully used to allege underpayment of duties.  Actions under the FCA can be brought directly by the Department of Justice (DOJ) or by a private party, known as a relator, seeking recovery on behalf of the U.S. government in a qui tam action. There are strong incentives for relators to file qui tam suits in light of the statute’s treble damages and penalties and its provision allowing relators to receive a share of up to 30 percent of any recovery. Qui tam actions are filed under seal, and before the case is unsealed to the public, the government is given an opportunity to investigate and determine whether or not it will intervene in the action.  In some cases, the government’s investigation can last not just months but years, often involving extensive one-sided discovery that DOJ is granted under the FCA.  And, even when the government declines to intervene, a relator can still independently proceed with the litigation.  Only if the government affirmatively moves to dismiss the qui tam could the relator not proceed, something that DOJ has historically been extremely reluctant to do.

Traditionally, FCA suits have been based on allegations that a party improperly received payment from the government, but importers must also be aware of the potential exposure associated with the “reverse” FCA provision of the statute, which imposes liability on any person who “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.”  31 U.S.C. § 3729(a)(1)(G).  Under the statute, the knowledge element can be established by (1) actual knowledge (2) deliberate ignorance; or (3) reckless disregard.  See § 3729(b)(1).

Importers have become targets of reverse FCA claims associated with duty evasion in part because a recent case from the Third Circuit.  United States ex rel. Customs Fraud Investigations, LLC v. Victaulic Co. The Third Circuit held that a failure to mark country of origin could be actionable under a reverse FCA theory of liability if a company knowingly imported unmarked products in an effort to evade custom duties.  839 F.3d 242 (3d Cir. 2016).  The court found that Victaulic had an established obligation under 19 U.S.C. § 1484(a)(1) to disclose to Customs and Border Protection (CBP) the fact that its goods were unmarked or improperly marked and if Victaulic knowingly failed to notify the CBP of its pipe fittings’ non-conforming status, this could give rise to reverse false claims liability for the unpaid marking duties.  In May 2017, Victaulic filed a petition for a writ of certiorari but the Supreme Court denied the petition this past October, leaving Victaulic to defend itself in the district court. While that case has not reached a judgment, the concern for importers is clear given the court of appeals’ validation of such a theory under the FCA.

Other recent cases have targeted companies importing goods that are subject to antidumping and countervailing duties. In 2016, Z Gallerie LLC paid $15 million to settle whistleblower FCA allegations that it masked the type of furniture it imported from China in order to avoid extra dumping duties. Basset Mirror Company paid $10.5 million to settle a similar case on furniture from China just this past month.  The rise in FCA cases related to import duties was highlighted in the recent Wall Street Journal article, in which it stated that the DOJ collected $4.7 billion in fiscal 2016 and $3.7 billion as a result of False Claims suits brought by whistleblowers in fiscal 2017.

These cases, combined with increased duties as a result of numerous unfair trade proceedings, create a perfect storm – encouraging both FCA plaintiffs’ lawyers and whistleblowers alike to cash in on a company’s failure to comply with import laws.  FCA claims are not limited to marking or dumping matters.  Cases may be brought if importers incorrectly value or classify imported goods, or make incorrect duty free claims based on a free trade agreement.

With all this troubling news, there are steps that importers may take to mitigate the risks or defend against an FCA claim. First, importers should establish strong internal compliance programs. Even if internal controls fall short of ensuring 100% compliance with import laws, a strong compliance program can be important evidence if an importer is forced to defend an FCA suit because the plaintiff (whether DOJ or a relator) must establish that an importer acted with the requisite knowledge—i.e., the plaintiff must show that the noncompliance occurred because the importer acted with actual knowledge or at least reckless disregard.  The existence of robust internal controls could be essential in helping an importer overcome a finding of reckless disregard.  Second, and related to having a strong compliance program, taking steps to investigate, identify, and disclose to the government any errors made could foreclose FCA liability in other ways, too.  For instance, if a company makes a disclosure concerning a potentially improper practice and the agency response is to take no formal action, that may show that the practice is not material to the government’s decision to pay or the potential obligation for the company to pay (in the case of import duties).

The materiality of alleged false statements or claims has been receiving enormous scrutiny recently in the wake of the Supreme Court’s landmark FCA decision in 2016 in Universal Health Services v. Escobar, 136 S. Ct. 1989 (2016), with agency approval or failure to disapprove of allegedly fraudulent conduct repeatedly being cited in dismissing actions for failing to show materiality.  Moreover, if a company discloses to the government their practices or interpretations with respect to regulations they are subject to, what is known as the government knowledge bar can also foreclose a finding of FCA liability.  In short, while there is often no sure-fire way to avoid mistakes in transactions involving government dollars, there are various proactive measures a company can take to help prevent mistakes from turning into a case of alleged fraud.