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On February 14, 2019, the Office of Foreign Assets Control (OFAC) announced it had assessed a civil monetary penalty of over $5.5 million dollars against AppliChem GmbH (AppliChem) of Darmstadt, Germany (a company that manufactures chemicals and reagents for the pharmaceutical and chemical industries) for 304 violations of the Cuban Assets Control Regulations, 31 C.F.R. part 515 (CACR). Specifically, OFAC determined that between May 2012 and February 2016, after it had been purchased by a U.S. company and come within the jurisdiction of the U.S. sanctions on Cuba, AppliChem sold chemical reagents to Cuba. 19 C.F.R. § 515.201.

Pedro Szekely

A.The U.S. Company’s Merger and Acquisition Due Diligence Team Successfully Identified the Cuban Sanctions Issue.

On January 1, 2012, Illinois Tool Works, Inc. (ITW), a company based in Glenview, Illinois, acquired AppliChem. In December 2011, during its merger and acquisition due diligence, ITW discovered references to countries subject to U.S. economic and trade sanctions on AppliChem’s website. That same month, ITW told AppliChem it would be required to cease all Cuban transactions after it was acquired. ITW then incorporated AppliChem into its Reagents Division, and allowed AppliChem’s former owners to stay on as manager-employees. On January 12, 2012, the General Manager of ITW’s Reagents Division sent AppliChem’s former owners a memorandum explaining ITW’s guidelines for complying with U.S. sanctions, including the CACR.

B. Willful Evasion by the Non-U.S. Entity and Persons Working for It.

However, despite these warnings, AppliChem continued to complete and collect on existing orders with Cuba under pre-acquisition contracts. Upon discovering AppliChem’s continued Cuban business, ITW’s European legal department sent a third warning to AppliChem’s former owners on April 5, 2012 to immediately cease all sales to Cuba.

In late January, 2016, an anonymous report was made through ITW’s ethics helpline. The call alleged that AppliChem had continued making sales to Cuba through an intermediary company in Berlin, Germany. ITW began a full investigation, which revealed that AppliChem’s former owners had continued AppliChem’s Cuba business by creating a scheme that concealed this business from ITW after having been specifically told by ITW to cease Cuban sales.

Rather than ceasing sales to Cuba as directed by ITW, between February 2012 and April 2012, AppliChem designed and implemented what it called the “Caribbean Procedures” (whereby Cuba was referred to by the code word “Caribbean”), which made sure that no documents mentioning Cuba would be prepared or retained by AppliChem in connection with its continued business with the country. Pursuant to the Caribbean Procedures, AppliChem engaged an external logistics company and an independent hazardous materials consultant to prepare the necessary shipping documents and hazardous materials declarations, which previously had been handled internally.

Once AppliChem implemented the Caribbean Procedures, AppliChem senior management conducted both written and in-person training sessions for AppliChem’s staff, particularly those working in the logistics department, to ensure that Cuba-related sales would be concealed from ITW. The reasons for the implementation of the Caribbean Procedures were “well known to AppliChem staff during this time” and were described by AppliChem staff as an “open secret” at AppliChem. Consequently, between May 2012 and February 2016, AppliChem fulfilled Cuban orders on 304 invoices. The transaction value of the shipments made during this time was €2,833,701 (approximately $3,433,495).

C.  OFAC Investigation and Results

OFAC determined that ITW voluntarily self-disclosed the violations on behalf of AppliChem, and that the violations constituted an egregious case. The statutory maximum civil monetary penalty applicable in this matter was over $20 million dollars. The base civil monetary penalty was over $10 million dollars.

OFAC determined the following to be aggravating factors:

(1) the willful conduct of AppliChem’s management;

(2) the use of written procedures to engage in a pattern of conduct in violation of the CACR;

(3) AppliChem’s sales to Cuba of approximately $3,433,495 in 304 transactions over the course of five years caused significant harm to the sanctions program objective of maintaining a comprehensive embargo on Cuba; and

(4) the size and sophistication of AppliChem, with an average annual revenue of around $23 million between 2012 and 2015, and the fact that it is a subsidiary of ITW, a large international company.

OFAC determined the following to be mitigating factors:

Once ITW discovered ApliChem’s perfidy, it cooperated by filing a thorough voluntary self-disclosure with OFAC, providing prompt responses to requests for information, performing a thorough internal investigation, and signing a tolling agreement on behalf of AppliChem.

This case demonstrates the importance of auditing and verifying foreign subsidiaries. In contrast to previous enforcement actions in which a buyer failed to identify a sanctions exposure, ITW identified the sales and took steps to ensure they ceased. The issue arose because of its new subsidiary’s ability to circumvent those instructions and hide ongoing sales, underscoring the importance of verifying that internal procedures are being followed. Further, U.S. companies with international operations should consider:

(i) implementing risk-based controls, such as regular audits, to ensure subsidiaries are complying with their obligations under OFAC’s sanctions regulations;

(ii) performing follow-up due diligence on acquisitions of foreign persons known to engage in historical transactions with sanctioned persons and jurisdictions; and

(iii) appropriately responding to derogatory information regarding the sanctions compliance efforts of foreign persons subject to the jurisdiction of the United States.

 

 

If you have any questions regarding this penalty decision or any other aspect of U.S. economic sanctions, please do not hesitate to contact our team.

In Customs Ruling HQ H290670, the agency discussed a number of issues regarding the country of origin of Ethernet switches, routers, and network cards for purposes of U.S. Government procurement. Notably, the hardware was designed in Taiwan and manufactured in China, later to be provided with software in the United States.

Under the rule of origin set forth under 19 U.S.C. §2518(4)(B):

An article is a product of a country or instrumentality only if (i) it is wholly the growth, product, or manufacture of that country or instrumentality, or (ii) in the case of an article which consists in whole or in part of materials from another country or instrumentality, it has been substantially transformed into a new and different article of commerce with a name, character, or use distinct from that of the article or articles from which it was so transformed.

The company seeking the ruling explained that the assembly process was the same for all the products identified in the ruling. First, metal fabrication was used to create a protective case. This took place in Taiwan. Next, the remaining hardware assembly was done in China, where the country of origin for the individual components of the hardware included various Asian countries, including Singapore, Taiwan, and China. The company explained that the programming done in China was accomplished in order to verify that the product was manufactured correctly. It further explained that the hardware was incapable of performing its intended end function. “[T]herefore, the product enters the United States in a non-functional state.” The final programming on the device and the majority of the programming for the operating system were compiled, downloaded, and completed in the United States. Moreover, the software had to downloaded in order for the products to function as a switch/router.

CBP referenced several rulings that were similar to the company’s routers and switches in reaching its decision. These included HQ H258960 (May 19, 2016), HQ H175415 (Oct. 4, 2011), and HQ H052325 (Mar. 31, 2009). Essentially, the main factor in determining the country of origin for the relevant products is where in the production timeframe was the product ‘finished,’ or became functional as intended. In HQ H258960, CBP considered scenarios wherein in the importer purchased transceivers from Asia, which were then loaded with U.S. developed software in the U.S. Since the transceivers could not function as network devices without the U.S. developed software, the transceivers were substantially transformed as a result of the downloading of the U.S. developed software performed in the U.S. Similarly in HQ H175415, the importer’s Ethernet switches were manufactured wholly in China. Later, they were sent to the United States, where U.S. origin software would be downloaded, giving the hardware the capability of functioning as a local area network device. CBP ruled that the country of origin is the U.S., because without the software, the product could not function as intended.

CBP determined that the company’s non-functioning devices from China were substantially transformed as a result of downloading performed in the U.S., with U.S. developed software. Therefore, CBP the country of origin of the Ethernet switches, routers and network cards for purposes of U.S. Government procurement was the United States.

If you have any questions regarding this ruling please do not hesitate to contact us.

 

The U.S. International Trade Commission (ITC) will be issuing a mandatory questionnaire to companies that benefitted from the Miscellaneous Tariff Bill Act of 2018 (MTB Act). The purpose of the questionnaire is to collect information that will allow the ITC to prepare a report to examine the effect of duty suspensions and reductions contained in the MTB Act on the U.S. economy.

Photo by Guillaume Bolduc on Unsplash;

The MTB Act requires the ITC to solicit and append this report the agency’s recommendations with respect to domestic industry sectors or specific domestic industries that might benefit from permanent duty suspensions and reductions. Once the ITC report is completed, it will be posted at https://www.usitc.gov/mtbeffects for public comment.

Originally announced in the Federal Register on October 9, 2018, the U.S. International Trade Commission (USITC) has also instituted a new fact-finding investigation (Inv. No. 332-565; American Manufacturing Competitiveness Act: Effects of Temporary Duty Suspensions and Reductions on the U.S. Economy) to examine the effects of the newly enacted miscellaneous tariff bill (MTB). However, as a consequence of the Government Shutdown, a yet to be published Federal Register Notice will formally announce new deadlines for filings. These deadlines are:

  • Filing requests to appear at the public hearing – March 18 2019;
  • Filing prehearing briefs and statements – March 21, 2019;
  • The public hearing is now scheduled for April 8, 2019;
  • Filing post-hearing briefs – April 15, 2019;
  • Filing all other written submissions – April 23, 2019; and
  • The USITC will transmit its report to the House Committee on Ways and Means and the Senate Committee on Finance (Committees) by October 18, 2019.

All other dates pertaining to this investigation remain the same as in the notice published in the Federal Register on October 9, 2018.

 

 

 

Last week, the FAA moved forward with rulemaking on expanded drone operations with the release of several key documents: (1) a Draft Notice of Proposed Rulemaking (NPRM) for Operation of Small Unmanned Aircraft Systems over People, (2) a Draft Advanced Notice of Proposed Rulemaking (ANPRM) for Safe and Secure Operations of Small Unmanned Aircraft Systems, and (3) the announcement of the Unmanned Traffic Management (UTM) Pilot Program. This alert, the second of two, addresses the Draft ANPRM for safety and security and the UTM Pilot Program. The first alert, which addressed the Draft NPRM, can be found here. Manufacturers of all small drones would be well-advised to review the questions and track industry comments regarding these proposed rules.

Draft ANPRM

The FAA is contemplating additional rulemaking to address safety and security concerns associated with small drone integration. Feedback from industry in response to the ANPRM will help the FAA determine the extent of future operational limitations under the Small UAS Rule. The Draft indicates that the ANPRM will seek comment on:

  • Requirements for stand-off distances (the space between a drone and the nearest person or object).
  • The utility of applying performance limitations to address safety and security concerns.
  • Categories of operations that should be subject to UTM requirements.
  • Additional restrictions on hazardous payloads.
  • System design requirements for complex operations outside the scope of the NPRM for operations over people.

The ANPRM is a precursor to a proposed rule. The FAA will not seek or solicit comments until the final ANPRM is published in the Federal Register. Like the Draft NPRM for operations over people, the Draft ANPRM does not address recreational operations of small drones. Accordingly, manufacturers of all small drones would be well-advised to review the questions and track industry comments as it may affect them. Many questions in the ANPRM address system design, so industry responses will likely influence future manufacturing rulemaking. Commercial pilots would also do well to review the Draft ANPRM carefully, as it addresses performance limitations that may affect commercial operations.

UTM Pilot Program

Despite receiving less media attention than the draft rules, the UTM Pilot Program (the Program) is an important piece of the FAA’s announcement.

The Program, which will run through September 2019, will develop and demonstrate an air traffic management system, similar to Air Traffic Control, for low-altitude unmanned operations. It will provide the FAA with crucial data for future UTM rulemaking. Through a competitive RFP process, the FAA selected three UAS test sites to assist the Agency in its effort to demonstrate a UTM system capable of safely integrating drones into the National Airspace System. The three selected sites are Nevada UAS Test Site Smart Silver State (Nevada), Northern Plains Unmanned Aircraft Systems Test Site (North Dakota), and Virginia Tech Mid-Atlantic Aviation Partnership (Virginia). Each site built a team of drone industry partners to participate in the demonstrations. Although the FAA has awarded agreements to three sites, the FAA Reauthorization Act of 2018 contemplates UTM testing at additional sites, indicating that drone industry stakeholders who are not on a selected team may still have the opportunity to participate in UTM development.

 

The full texts of the Draft NPRM and Draft ANPRM can be found here.

 

Last week, the FAA moved forward with rulemaking on expanded drone operations with the release of several key documents: (1) a Draft Notice of Proposed Rulemaking (NPRM) for Operation of Small Unmanned Aircraft Systems over People, (2) a Draft Advanced Notice of Proposed Rulemaking (ANPRM) for Safe and Secure Operations of Small Unmanned Aircraft Systems, and (3) the announcement of the Unmanned Traffic Management (UTM) Pilot Program. This blog post, is the first of two.

The draft rule increases manufacturing and operational obligations based on the risk category, with higher-risk operations being subject to greater operational limitations and responsibilities. The lowest-risk category, light-weight drones, imposes no manufacturing requirements, and drone operations in this category can begin immediately after the final rule goes into effect. Higher-risk categories come with complex design requirements necessitating FAA acceptance, operating limitations, record-keeping requirements, and other obligations. Manufacturers should note that the proposed rule sets desired design outcomes without mandating a specific solution.

The manufacturing requirements for higher-risk operations over people will also apply retroactively to drones currently on the market. Thus, manufacturers of existing drones will need to comply with the proposed design requirements in order to market their drones for operations under the rule. Once the rule takes effect, compliance with and understanding of the design outcome requirements, and the process for FAA acceptance, will be crucial to manufacturers’ ability to market new and existing drones.

The Draft NPRM would allow routine nighttime operations and operations over people under the Small UAS Rule (14 C.F.R. §107) without a waiver or exemption. In a nod to advancing technology, the proposed rule seeks to balance the interests of safety-risk mitigation with rapid industrial innovation.

Current FAA regulations do not permit small drone operations at nighttime or over people. The existing waiver process for such operations can add substantial delays to important commercial operations. The proposed rule will provide significant relief from the cumbersome waiver process for both types of operations, subject to certain design and operational requirements.

Flying at Night and Over People

Under the proposed rule, operators may conduct nighttime operations without obtaining a waiver so long as they complete updated knowledge training and comply with anti-collision lighting requirements as specified in the Draft NPRM. Operators who do not meet these conditions may still request a waiver for nighttime operations using the traditional waiver process.

Operators would also be free to conduct operations over people, subject to important manufacturing and operational constraints. Recognizing that the risk associated with operations over people is higher than the risk of mere nighttime operations, the FAA proposes three categories of permissible operations over people, each keyed to the associated risk of injury.

The Small UAS Rule is Still in Effect

While the Draft NPRM signals an effort by FAA to relax operational restrictions for small, commercial drone operations, it does not change the overall regulatory structure for small drones. Remote pilots should note that the proposed rule does not:

  • Cancel operator requirements to comply with existing provisions of the Small UAS Rule.
  • Alter the enforcement regime currently in place.
  • Change the existing waiver process.

And, notably, the proposed rule applies only to operations conducted under the Small UAS Rule. Therefore, the following categories of operations would remain unaffected:

  • Operations of drones weighing greater than 55 pounds.
  •  Air carriers.
  • Operations under an exemption.
  • Recreational drone operators.

The FAA will not seek or solicit comments until the final NPRM is published in the Federal Register. However, interested parties should consider reviewing the draft now to identify concerns and cause for comment.

The FAA’s movement toward meeting its Congressional mandate to accelerate integration of drones into our national airspace system is encouraging for commercial drone operators. Robust industry participation in the rulemaking process is crucial to creating opportunities in the commercial drone space.

 

 

Watch our website for the second of two alerts, addressing the Draft Advanced Notice of Proposed Rulemaking and the announcement of the UTM Pilot Program, and for updates on deadlines for comments to the Notices.

The 116th Congress begins on January 3, 2019. Based on projections from yesterday’s midterms, Democrats will control the House of Representatives by a narrow margin, while Republicans will expand their hold on the Senate. The changes to Congress are likely to shape trade policy through 2019, but much will depend on how House Democrats use their new majority, and whether trade is a priority issue or whether it will be overtaken by domestic issues.

Companies will have to carefully navigate the new political environment in order to advance their policy objectives. In addition to accounting for the hard-nosed approach to trade taken by the current administration, an effective policy engagement strategy will have to account for the new political dynamics created by newly empowered House Democrats and a potentially polarized Congress. Companies should be prepared to intervene on issues that are likely to come up in 2019, including: ratification of the U.S.-Mexico-Canada Trade Agreement (USMCA); trade negotiations with the EU, Japan, and the UK; and the ongoing U.S. tariff interventions on China and for sensitive sectors.

Below is our best forecast for the makeup of the trade- and foreign affairs-related committees for the 116th Congress, and their voting record on key pieces of trade legislation:

 

NAFTA
(1994)

China PNTR
(2000)

U.S.-Colombia FTA  (2012)

Korea-U.S.-FTA (2012)

TPA**
(2015)
House Ways and Means
Chair: Richard Neal (D-Massachusetts)

Nay

Yea

Nay

Yea

Nay
Ranking Member: Kevin Brady (R-Texas)

N/A

Yea

Yea

Yea

Yea
House Foreign Affairs
Chair: Eliot Engel (D-New York)

Nay

Nay

Yea

Nay

Nay
Ranking Member: Michael McCaul (R-Texas) OR

N/A

N/A

Yea

Yea

Yea
Joe Wilson (R-South Carolina)

N/A

N/A

Yea

Nay

Yea
Senate Finance
Chair: Chuck Grassley (R-Iowa) OR

Yea

Yea

Yea

Yea

Yea
Mike Crapo (R-Idaho)

Nay (as House member)

Yea

Yea

Yea

Yea
Ranking Member: Ron Wyden (D-Oregon)

Yea

Yea

Yea

Yea

Yea
Senate Foreign Relations
Chair: Jim Risch (R-Idaho)

N/A

N/A

Yea

Yea

Yea
Ranking Member: Bob Menendez (D-New Jersey)

Nay

Nay

Nay

Yea

Nay

* China Permanent Normal Trade Relations
** Trade Promotion Authority

We expect the following impacts on 2019 U.S. trade priorities:

Impact on U.S.-Mexico-Canada Trade Agreement (USMCA)

The new USMCA is expected to be signed at the end of this month. USMCA would have likely passed in a Republican-held Congress on a bumpy but ultimately consistent trajectory. It will still likely enjoy broad backing in the Republican Senate. With Democrats now in control the House, there may be some new challenges to ratification.

Some of the new provisions in USMCA give cover for Democratic support—including the new wage-based rule of origin for autos and new enforceable labor rules, along with the weakening of investor-state dispute settlement. The Advisory Committee for Trade Policy and Negotiations (ACTPN), which includes the leaders of United Steelworkers and the International Brotherhood of Teamsters, last week expressed unanimous support for the agreement. But these changes still might not be enough to gain wide Democratic support. The Labor Advisory Committee for Trade Policy and Negotiations (LAC) noted several reservations on the agreement. Major environmental groups are also already preparing for a major advocacy campaign against USMCA. We expect House Democrats to seek additional concessions from the administration, particularly on the enforceability of the new labor provisions, on the environment, or possibly in the area of intellectual property protections.

If USMCA is signed on November 30, the U.S. International Trade Commission (USITC) would have to publish a study on its probable economic impacts by March 15, 2019, according to Trade Promotion Authority (TPA) procedures. The agreement could theoretically be voted on at any point after publication of the report, but difficulties in assembling the needed votes for implementing legislation would likely delay the process. The Trump Administration may still attempt to withdraw from the existing NAFTA as a tactic to force Congress to pass USMCA. It remains unclear how House Democrats or Senate Republicans would react to such a threat. The role of the business community will be key. The White House would look to U.S. business, including agribusiness, to generate bipartisan support for the agreement.

Impact on Future U.S. FTAs: U.S.-Japan, U.S.-EU, U.S.-UK

The U.S. Trade Representative (USTR) notified Congress on October 16 of its intention to begin negotiations for trade agreements with Japan, the EU, and the UK. The earliest that formal negotiations for the Japan and EU agreements could start is January 14, while negotiations with the UK would have to wait until after Brexit on March 29. USTR’s negotiating objectives for these agreements could be published in December or later.

For the new Congress, the Republican majority in the Senate and Democratic majority in the House will have differing sets of concerns for the new negotiations. Senate Republicans will seek many of the outcomes they sought in the NAFTA renegotiation. The Democratic House leadership is likely to call for new measures on labor and the environment, intellectual property, and/or dispute settlement. Some of these, such as opposition to investor-state dispute statement, would resonate with USTR Lighthizer and the White House, though it’s not clear how far the administration would move in the Democrats’ direction on labor or environmental issues. Consideration of the USMCA will be an early test on issues of concern to Democrats that will have implications for other agreements.

USTR is seeking short-term delivery of less controversial outcomes on regulatory alignment and other limited market access issues (such as an enlarged quota for high-quality beef and sales of U.S. soybeans) as part of an early harvest for negotiations with the EU, while with Japan the immediate priorities appear to be focused on market access for autos and agriculture.  Such priorities are not likely to require Congressional ratification and so will be less affected by the changes in Congress.

Impact on Section 301 tariffs

President Trump is expected to meet with President Xi at the G20 Summit in Argentina on November 30- December 1. While the White House has downplayed expectations for the meeting, others see the possibility of beginning a meaningful U.S.-China dialogue and perhaps moderating or delaying additional tariff actions. If no accommodation or way forward is reached, the U.S. has indicated it will increase existing tariffs on certain goods from 10 percent to 25 percent in January, with some reports that the U.S. could also impose new tariffs on nearly all remaining Chinese imports. China would likely respond in kind to any new tariffs.

The new Congress is not likely to change the direction of the U.S. economic relationship with China, although the plight of U.S. farmers facing their worst economic year in a long time might have some effect in pushing individual Members of Congress to seek a moderate course. We expect Republicans in the Senate will continue to have concerns on the impacts of China’s retaliation on the broader economy, but still be reluctant to contradict the administration’s approach. The Democratic-controlled House may be more enthusiastic in supporting tariffs overall and could give the Trump Administration cover to take a harder line if circumstances warrant, although may push back where there are specific constituent impacts. In fact, if the Trump Administration reaches a deal with China at the end of November (or anytime afterward), incoming House Democrats could use their newfound leverage to criticize the administration’s efforts and seek to outflank the administration on China issues. China policy is certain to figure in both parties’ presidential election campaigns as the 2020 presidential election begins to take shape during 2019.

While the current approach broadly to China is likely to continue, there may be enough bipartisan support for the new Congress to continue pushing the administration for a product-exclusion process for the 10 percent tranche of tariffs announced last September.

Impact on Section 232 tariffs

The Trump Administration has implemented tariffs on all imports of steel and aluminum, subject to certain country-specific exceptions. Negotiations for some country-specific exclusions could continue through 2019 (e.g., for Canada, Mexico, Japan, or the EU). In addition, the Trump Administration is considering implementation of tariffs on imports of autos and auto parts.

Changes to the control of Congress are not likely to affect the ongoing Section 232 tariffs related to steel and aluminum. House Democrats and Senate Republicans are likely to take positions on the Section 232 tariffs based on the economic impact for their district or state. Members from steel-heavy districts and states will continue to be supportive of the tariffs, while those from districts and states suffering from negative economic consequences because of retaliation or increased downstream costs are more likely to oppose.

Unless the Trump Administration imposes additional tariffs, we would not expect the new Congress to pass legislation designed to restrict the president’s Section 232 authority, as introduced by Senator Bob Corker (R-Tennessee) in the Senate and Representative Mike Gallagher (R-Wisconsin) in the House earlier this summer. That legislation did not have the votes to pass at the time, and the new Democratic majority in the House is not likely to increase the chances of passage.

In the area of the administration’s potential imposition Section 232 tariffs on autos and auto parts, the economic consequences of the tariffs and any resultant retaliation from other countries are likely to be broad. We would continue to expect a significant degree of bipartisan Congressional opposition to new Section 232 tariffs on autos.

Interaction between International Trade and Domestic Issues

Domestic factors are likely to dominate in shaping international trade and economic policy over the course of the new Congress and the remainder of President Trump’s term. Emerging issues, including renewed interest in comprehensive U.S. federal privacy legislation, could influence future U.S. trade-related rules (e.g., on cross-border data flows) as well as set policy models that other governments could replicate.

While the Trump Administration may be keen to pivot to international issues given its lack of a Congressional majority at home, its ability to negotiate and conclude agreements on multiple fronts could be complicated as it seeks to manage an increased array of investigations and oversight by the Congress. Add to this the inevitable turnover of Cabinet members and White House and Executive Branch staff changes that will occur after the mid-terms, and the administration may see a temporary hiatus in undertaking new policy initiatives, including on trade.

Furthermore, the upcoming presidential campaign could set the stage for an intra-party debate among Democrats on whether to take an even more hawkish approach on trade issues than the current administration; stay the current course; or return to a more centrist policy as was ultimately adopted by the Obama Administration while in office.

 

Most textile and wool products have a label listing the fiber content, country of origin, and identity of the manufacturer. In view of recent concerns about ocean pollution, a few states have passed bills to require polyester clothing to have a label warning consumers about washing their garments to prevent fiber pollution.

Current Legislation

Connecticut recently passed The Act Concerning Clothing Fiber Pollution, House Bill 5360, making it the first state to implement a law aimed at combatting microfiber pollution. Based on the House Bill, a working group of representatives from the apparel industry and environmental community was convened to develop an awareness and education program about microfiber pollution. The bill’s text requires representatives of specific influential organizations in the apparel industry to be part of the working group. The consumer awareness and education program must include consumer-oriented information explaining the process by which microfibers are shed from clothes and enter the waterways, best practices for consumers to eliminate and reduce the shedding, and information on efforts that members of the apparel industry—including brand labels—are undertaking to reduce or eliminate microfibers in clothing.

In New York, A10599 has been referred to the Committee on Environmental Conservation and, if passed, would require an additional care label by January 1, 2020 on clothing made of more than 50% synthetic material. The required care label, on clothes for which (1) such label would not violate federal law and (2) hand washing is either recommended or required, must state that the garment sheds plastic microfibers when washed and that hand washing is recommended. For all other clothing, the care label must explain that the garment sheds plastic microfibers when washed.

California’s legislation (AB-2379), which is similar to the New York legislation but has been tabled for now, would require that new clothing made from at least 50% synthetic material include a care label that informs consumers that the clothing sheds plastic microfibers when washed. It would also require a visible label at the point of sale that says, “This garment sheds plastic microfibers when washed, which contributes to marine plastic pollution.”

Industry Response and Takeaways

Companies have reacted to the research on microfiber pollution in a variety of ways. For example, Patagonia has helped fund research studies into the issue. It sells a filter bag called the Guppy Friend that is intended to capture microfibers from clothes being washed in a washing machine. Tersus Solutions, a water-less textile processing platform, has made considerable efforts to develop a waterless washing machine that uses pressurized carbon dioxide to clean clothing. Some companies such as Eileen Fisher have donated to the research that first brought this issue to light. The Outdoor Industry Association’s Sustainability Working Group, which represents over 250 companies, has started to examine the issue along with marine-debris specialists at the Ocean Conservancy.

Critics of the current legislative efforts believe they are premature and that the existing research does not yet show what impact synthetic microfibers in clothing truly have on microfiber pollution, unfairly blaming the problem on the apparel industry. They also argue that there is not yet a viable solution to solve the problem and that washing clothes by hand is not necessarily going to reduce microfiber pollution.

It is nonetheless important for the fashion industry to keep an eye on the pending legislation in New York and California as well as programs the working group in Connecticut implements. For example, if New York or California, which both make up a large part of the United States apparel industry, pass any labeling laws related to synthetic microfibers, it’s likely that these labels will essentially be required nationally.

While labeling laws would impose much more immediate and strict requirements on the apparel industry than the working group in Connecticut’s potential programs, the working group’s recommendations could not only have impacts on future legislation but also on consumers’ perception of synthetic microfibers in clothing. These impacts would be in addition to the publicity generated by the pending legislation in New York and California and the working group’s proceedings in Connecticut have already garnered.

It is possible that more states could follow in the path of Connecticut, New York, and California, though a lot may depend on if the pending legislation in New York gains ground or if the California legislation is brought back for a vote. If either one passes, we could be seeing more legislation related to microfiber pollution in the next few years in other states, and with it the possibility of more requirements for apparel companies to follow.

 

 

Thanks to Suzanne Trivette who contributed to this article as a 2018 summer associate with Crowell & Moring’s New York Office.

On September 17, 2018, the White House directed the United States Trade Representative (USTR) to implement 10 percent tariffs on nearly all the tariff lines in the original Section 301 List 3 valued at approximately $200 billion. Significantly, the notice does NOT indicate that there will be an exclusion process similar to Section 301 List 1 and 2.

The following day, the USTR issued a press release stating, “The [final] list contains 5,745 full or partial lines of the original 6,031 tariff lines that were on a proposed list of Chinese imports announced on July 10, 2018.”

On September 18, 2018, the USTR published the formal notice of this action in the Federal Register. 83 Fed Reg. 47,974.

For an unofficial downloadable spreadsheet providing affected HTS subheadings across all Section 301 actions, please click here. This includes:

  • Final List 1 ($34 billion);
  • Final List 2 ($16 billion);
  • Original List 3 ($200 billion);
  • Final List 3
    • Part 1 (5,745 lines);
    • Part 2 (11 Partial Lines listing 8-digit lines with their 10-digit exceptions); and
  • The 286 removed HTS codes.

The White House statement said the tariffs will rise to 25 percent on January 1, 2019.

On August 3, 2018, China threatened retaliatory tariffs on $60 billion worth of U.S. goods should President Trump move forward with any tariffs. This would result in a possible List 4.

Check here for the latest developments on all the on-going trade actions.

On September 18, 2018, the United States Trade Representative (USTR) published a notice in the Federal Register explaining the procedures and criteria related to requests for product exclusions from the additional tariffs placed on goods from China on August 23, 2018.

Deadlines

The USTR must receive requests to exclude a particular product by December 18, 2018. Responses to a request for exclusion of a particular product are due 14 days after the request is posted in the docket. Any replies to responses to an exclusion request are due the later of 7 days after the close of the 14 day response period, or 7 days after the posting of a response.

Per the notice, a docket will be opened on regulations.gov for the receipt of exclusion requests. The docket number is USTR–2018–0032. One product is allowed per request. Each request must identify a specific product and the 10-digit HTS. The product exclusion request must include the identity of the product, its physical characteristics and how to differentiate that product from others under the 8-digit HTSUS subheading. The USTR will not consider requests that identify the product using criteria that cannot be made public, or that identify the product by using the producer, importer, customer, chief use, trademark or trade name.

The USTR will periodically announce decisions on exclusion requests. If granted, the exclusion will be retroactively effective starting August 23, 2018 and extend for one year after the date on which the decision is published in the Federal Register.

 

On September 13, 2018, President Trump signed the Miscellaneous Tariff Bill (MTB) Act of 2018 (MTB), which temporarily reduces or eliminates import duties on specified raw materials and intermediate products used in manufacturing that are not produced or available domestically. It is intended to ensure that U.S. manufacturers are not at a disadvantage to their foreign competitors when sourcing manufacturing components.

The American Manufacturing Competitiveness Act of 2016 (AMCA) directed the International Trade Commission (ITC) to establish a process for the submission and consideration of MTB petitions for duty suspensions and reductions. It required the ITC to submit preliminary and final reports on the petitions to the House Committee on Ways and Means and the Senate Committee on Finance (Committees). The ITC’s preliminary report was submitted on June 9, 2017 and the final report was submitted on August 8, 2017. On September 4, 2018, the House agreed to Senate amendments, moving the legislation to the president for signature. The current MTB petition cycle is now complete. The next MTB petition cycle, for 2021 through 2023, will begin not later that October 15, 2019.

The duty suspensions and reductions are effective for goods entered or withdrawn from a warehouse for consumption on or after October 13, 2018, which is 30 days after the date of the enactment.  The suspensions and reductions will last until December 31, 2020. All of the MTB provisions are in subchapter II to chapter 99 of the Harmonized Tariff Schedule of the United States (HTSUS). This language was added in a Federal Register Notice on August 16, 2018 (83 Fed Reg 40,823 at page 40,825). The notice also created a new U.S. Note 20(c) to Subchapter II of Chapter 99, HTSUS.

Of the 1,660 items are covered by the new law, roughly half are produced in China. Therefore, overlap between the MTB list and the Section 301 tariffs in effect, and those being considered exists. Goods originating in China are still subject to relevant Section 301 tariffs.  On August 21, 2018, U.S. Customs and Border Protection (CBP) issued a message stating, “Products of China that are covered by the Section 301 remedy and that are eligible for special tariff treatment…or that are eligible for temporary duty exemptions or reductions under subchapter II to chapter 99, shall be subject to the additional 25 percent ad valorem rate of duty imposed by headings 9903.88.01 and 9903.88.02.