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.

NAFTA negotiators at the working level met intersessionally from December 9-15 in Washington D.C., conducting technical discussions on digital trade, financial services, customs, energy, state-owned enterprises, and textiles, among other chapters.

No chapters were closed during the latest meeting. Negotiators also mostly avoided addressing in detail the most controversial proposals tabled by the United States at the fourth round of negotiations last October (i.e., rules of origin for automobiles, dispute settlement, the “sunset clause,” or procurement). These will likely be discussed at the next formal round on January 23-28.

Please click here for more information on the negotiations.

The fifth round of NAFTA renegotiation, held for the first time without participation by the NAFTA trade ministers, took place in Mexico City from November 17-21. The negotiators made progress at the technical level on some NAFTA chapters, including on digital trade, sanitary and phytosanitary measures (SPS), customs, and regulatory cooperation.

Little progress was made on the most politically sensitive issues. At the close of the round, U.S. Trade Representative (USTR), Robert Lighthizer issued a statement outlining his concerns that the U.S. has “seen no evidence that Canada or Mexico are willing to seriously engage on provisions that will lead to a rebalanced agreement.”

Canada and Mexico did not submit substantive responses to several contentious U.S. proposals, in particular on rules of origin for automobiles. Neither party made a counteroffer to the U.S. proposal to increase the regional content requirement to 85 percent and establish a national content requirement of 50 percent for U.S.-origin content. Canada and Mexico are holding back on making a response—at least for the moment—in hopes that USTR will give in to pressure by U.S. industry and Congress to withdraw or soften its proposal. The two parties did ask for clarification of the U.S. analysis used to formulate the regional value and local content proposal.

Meanwhile, the Trump administration continues to signal that if deadlock on these issues continues through early next year, the President may announce an intention to withdraw the U.S. from the agreement, triggering a 180-day waiting period mandated by Article 2205 of NAFTA. The threat of such a move could create negotiating leverage, particularly with Mexico, though triggering withdrawal would be strongly opposed by agricultural groups, most U.S. industries, as well as likely a majority of Congress. U.S. agriculture groups have been vocal in recent weeks about their opposition to the Trump administration threatening withdrawal from the agreement, noting that it will cause enormous economic disruption in agriculture-dependent states that are important suppliers to Canada and Mexico.

A set of updated negotiating objectives released by USTR on November 17 reflect many of the U.S. proposals thus far, but also leave enough room for the U.S. to negotiate key outcomes. They include the following:

  • Sunset clause: An updated objective is to “provide a mechanism for ensuring that the Parties assess the benefits of the agreement on a periodic basis.” This is aligned with the U.S. proposal to automatically terminate NAFTA after five years unless renewed. Notably, Mexico proposed during the fifth round that NAFTA parties conduct a review of the agreement every five years—without the threat of automatic termination—which would also be aligned with the updated U.S. objective.
  • Investor-State Dispute Settlement: The updated U.S. objective is to seek “meaningful procedures for resolving investment disputes, while ensuring the protection of U.S. sovereignty and the maintenance of strong U.S. domestic industries.” While the objective reflects USTR Lighthizer’s skepticism regarding the benefits of ISDS, it does not necessarily commit the Administration to its proposal to establish an “opt-in” ISDS system.
  • Digital Trade: A new U.S. objective is to “establish rules that limit non-IPR civil liability of online platforms for third party content, subject to NAFTA countries’ rights to adopt non-discriminatory measures for legitimate public policy objectives.” The U.S. at the latest round proposed including legal protections against civil liability for 3rd party online platforms, aimed at protecting major U.S. Internet companies such as Google or Facebook.
  • Intellectual Property: The updated U.S. objective adds language to include “as an appropriate, exceptions and limitations” to protections for copyright and related rights as a part of the agreement. The new objective could suggest that the U.S. will continue to favor inclusion of copyright “safe harbor” limitations for Internet providers and intermediaries consistent with a series of recent U.S. trade agreements, and new provisions recognizing “balance” in the area of copyright similar to provisions on “exceptions and limitations” as first negotiated in the TPP.

The next formal negotiating round is set for January 23-28 in Montreal, Canada, though NAFTA negotiators will also meet in December to work on technical issues. The significant break between rounds will permit the Trump administration and Congress to focus on tax reform through the end of the year, the success or failure of which could have an impact on the political pressure to conclude a favorable NAFTA renegotiation in early 2018.

NAFTA negotiators have given themselves until March 31, 2018, to seek agreement on updating the regional trade agreement.

For more information, contact: Robert Holleyman, Melissa Morris, Evan Yu

The fourth round of NAFTA re-negotiation, which took place October 11-17, confirmed that Canada, Mexico and the United States remain far apart on several major issues, and forced the three countries to postpone the hoped-for timeframe for reaching a final agreement to the end of the first quarter of 2018.

Following the round, U.S. Trade Representative (USTR) Robert Lighthizer said he has seen “no indication” that Canada and Mexico are willing to make changes that will address U.S. trade deficits, a major objective for President Trump’s administration. The three parties also agreed to postpone the fifth negotiating round to November 16-21.

With a significant portion of proposals now under discussion, there are three broad categories of U.S. proposals on the table:

  1. Updates of issues consistent with longstanding U.S. policy goals. These include many measures that were negotiated in TPP, such as on state-owned enterprises, digital trade, financial services, and intellectual property. While there are likely disagreements within these issues, all three parties recognize the need for a major update.
  2. Revisions to existing NAFTA rules strongly opposed by Canada and Mexico. These include the U.S. proposal to eliminate Chapter 19 dispute settlement for trade remedy disputes, as well as changes to NAFTA’s procurement rules. While these revisions face significant opposition from Canada and Mexico, they are less of an issue for domestic U.S. stakeholders.
  3. Major changes to NAFTA facing significant opposition by U.S. (and North American) businesses (as well as Canada and Mexico). This category of proposals is opposed by many large U.S. companies, and potentially a majority of the Republican-controlled Congress, and includes:
    • The “sunset clause” proposal which would terminate the agreement after five years unless all parties agree to extend the agreement.
    • The introduction of an “opt-in” system for investor-state dispute settlement.
    • Rules of origin for the automobile sector, an increase in the regional content requirement to 85 percent and the introduction of a U.S.-based content requirement of 50 percent. The U.S. auto industry has argued that these high content requirements will incentivize them to opt out of NAFTA, pay the U.S. import tariff (currently at a most-favored-nation rate of 2.5 percent) and source their inputs globally.
    • Rules of origin for the textiles sector, the elimination of “tariff preference levels” from the existing NAFTA, which permit a specified amount of certain non-NAFTA originating yarns and fabrics to be counted as originating inputs. While elimination is supported by U.S. textile manufacturers (as well as potentially members of Congress for whom they represent a constituency), it is opposed by major retailers and the U.S. apparel industry.

Though some progress has been made in the first category of issues, there is currently no clear path forward for the other two. Canada and Mexico have little incentive to move forward substantially on proposals tabled by the Trump administration when they know the proposals are opposed by U.S. domestic industry and the Republican majority in Congress. Many in the business community actively oppose these proposals and view them as “poison pills” for the overall agreement.

Concerns over the substantive proposals have been compounded by President Trump’s statements this month, suggesting that announcement of an intention to withdraw will increase U.S. negotiating leverage. President Trump reportedly said in a meeting with Republican senators on October 24 that triggering withdrawal could be used as a negotiating tactic, and he has made similar comments to the press. Article 2205 of NAFTA permits any NAFTA party to withdraw from the agreement with six months’ notice; how the withdrawal would be implemented if carried out remains an untested legal question.

Announcement of withdrawal would be opposed by agricultural groups, most U.S. industries, as well as a likely majority of the Congress (including even Democrats who would be concerned about the dividing line between executive and congressional authority on trade matters). Many U.S. companies are examining various scenarios for reacting to a U.S. withdrawal from NAFTA, should it occur, including mobilizing Members of Congress to protest the action and devise limits on the President’s ability to act unilaterally.

For companies whose interests may be affected by NAFTA withdrawal, the high levels of uncertainty in the outcomes for the current NAFTA discussions will require continued close monitoring and engagement with appropriate stakeholders. Companies will also wish to evaluate their internal “worst case scenarios” for expected changes in duties and regulations affecting their supply chains in North America, to assess the extent of commercial effects resulting from a U.S. withdrawal.

For more information, contact: Robert Holleyman, Melissa Morris, Evan Yu

“Our nation’s ballooning trade deficit has gutted American manufacturing, killed jobs and sapped our wealth,” wrote Wilber Ross, the U.S. Secretary of Commerce, in a recent op-ed published in The Washington Post titled “These NAFTA rules are killing our jobs.” Ross’ article focused largely on the automotive and automotive parts industry due to its large percentage of imports from Canada and Mexico as compared to other industries.

In short, he suggested that the current North American Free Trade Agreement rules of origin are outdated because the rules apply to parts no longer used. He also suggested that the rules are lenient from a content perspective due to the concept referred to as “substantial transformation,” which, in some circumstances, qualifies non-NAFTA articles as originating within the territory due to further processing in the U.S., Mexico, or Canada. As a result of the current rules, he argued, the declining share in NAFTA content, as well as U.S. content specifically, in automobiles are causing the trade deficit with our NAFTA partners as well as putting jobs in the automotive manufacturing industry at risk.

Ross’ outlook on the effects of the NAFTA rules of origin is met with some opposition from certain U.S. automotive industry groups and leaders, such as the Motor and Equipment Manufacturers Association, which claim that the rules of origin were never intended to create jobs. Instead, they claim the intent was to connect supply chains and allow U.S. businesses to remain competitive in the global market, particularly with Asia and Europe.

Despite such disagreements, the Trump administration is pushing ahead and has made it clear in its published objectives for the NAFTA renegotiation that the goals are, in part, to create more stringent rules of origin in an effort to increase the total NAFTA content requirement in a given product, as well as increase the U.S. portion of that requirement.

The development of unrealistic rules, U.S. automotive industry groups argue, would increase manufacturing costs, resulting in increased consumer prices and elimination of U.S. jobs. Certain interests argue that if content requirements become too onerous, automakers will not bother to claim NAFTA preference and will simply pay the applicable duties.

One way or the other, change is coming, and it will likely have a strong impact on the future of the industry.

For more information and assistance monitoring this issue, contact: Amanda Simpson

Following the third negotiating round for NAFTA modernization, held in Ottawa September 23-27, the U.S., Canada, and Mexico issued a joint statement asserting “significant progress” in several areas such as competition, state-owned enterprises, digital trade, competition policy, and telecommunications, as well as the substantive completion of a chapter on small- and medium-sized enterprises (SMEs).

Still, all three NAFTA parties conceded that many difficult issues still have not been resolved, casting significant doubt on the likelihood of concluding talks by the end of the year. U.S. Trade Representative Robert Lighthizer said following the round that finishing negotiations by the end of the year will be “very, very difficult.”

According to press reports, several potentially contentious U.S. proposals were formally tabled during the latest round, including:

  • An intellectual property proposal that did not include “safe harbor” limitations on copyright protection.
  • A government procurement proposal to limit the dollar value of U.S. government procurement to that of the value of combined U.S. access to Canadian and Mexican procurement.
  • A textiles proposal to eliminate existing NAFTA tariff preference levels for certain types of apparel, yarn, and fabric.
  • A proposal to enable access to trade remedies measures for growers of seasonal fruit and produce.

These will all likely be added to the long list of issues that face significant opposition from Canada and Mexico.

The fourth round will take place in Washington, D.C. from October 11-15. USTR Lighthizer has said he hopes to table several proposals at the fourth round that are currently in the pipeline for interagency review and Congressional consultation, which may have major impacts on companies operating in North America. These include proposals on:

  • A “sunset review” mechanism: The Trump administration has previously floated a proposal to automatically terminate NAFTA every five years unless all parties agree to extend the agreement.
  • Rules of origin for automobiles and auto parts. The administration has previously floated proposals to increase regional content requirements as well as establish a national origin requirement.
  • Investor-State Dispute Settlement (ISDS). The administration has previously floated a proposal that would allow NAFTA parties to choose whether to “opt-in” to ISDS.
  • State to State Dispute Settlement. The administration has previously floated a proposal to replace binding state-to-state dispute settlement with a non-binding advisory system.

As some if not all of these proposals are likely to be controversial for Congress as well as U.S. industry, the fourth round will be important to monitor closely to determine what the U.S. negotiators ultimately put forth to their negotiating partners and the potential impact on North American supply chains and business.

For more information, contact: Robert Holleyman, Melissa Morris, Evan Yu

The Trump administration’s decision to renegotiate NAFTA has created concerns for U.S. fashion, apparel, and textile companies and their respective supply chains. As with U.S. automakers, NAFTA has allowed fashion, apparel, and textile companies to develop regional supply chains where qualifying U.S. apparel and textiles enter into Canada and Mexico duty-free.

The priorities for fashion, apparel and many retail brands in the renegotiation are more streamlined customs enforcement, facilitation of regional supply chains, protection of intellectual property and provisions for digital and e-commerce. These companies advocate a cautious approach so that a new deal does not harm their existing supply chains.

The U.S. textile industry has different priorities. Qualifying textiles have duty-free access to the U.S. and Canadian markets because of the “yarn-forward” origin rules, which require that each step of apparel production from the spinning of the yarn onwards take place in the United States, Canada, or Mexico. The U.S. textile industry wants the renegotiation to provide for more jobs and production in the United States, Canada, and Mexico and to this end mirrors the administration’s stated goals to “update and strengthen the rules of origin, as necessary, to ensure that the benefits of NAFTA go to products genuinely made in the United States and North America.” Textile companies would also like to remove tariff preference for articles produced from yarn and fabric from China and other non-NAFTA countries.

Conversely, U.S. fashion brands, importers, and many retailers believe the “yarn-forward” rule is too restrictive and limits their sourcing options. U.S. apparel would like to see less restrictive rules of origin for apparel articles made from fabric that is in short supply in North America. They would also like less restrictive rules to govern articles made from fabric not commonly produced in the NAFTA region. The administration has indicated that it would like to “ensure that the rules of origin incentivize the sourcing of goods and materials from the United States and North America.” Yet, apparel companies see the exceptions as a means to provide them with the flexibility to import materials not readily available in the NAFTA countries. It seems unlikely that the NAFTA renegotiation will liberalize the “yarn-forward” rules of origin to their benefit.

The added challenge to the process is the pressure to wrap up negotiations by the end of 2017. The renegotiation pursuant to Trade Promotion Authority (TPA) expires on June 30, 2018, and there are upcoming elections in all three member countries next year. Time is the enemy of the renegotiation. The political climate gives all parties a strong incentive to finish by the end of 2017, but a rushed timeline and lengthy agenda makes that equally unlikely to happen. There is also the risk that President Trump pulls the U.S. out of NAFTA if he loses patience for the renegotiation, which is the greatest risk to industries that have developed complex supply chains in accordance with the agreement.

For more information, contact:
Frances Hadfield

The U.S., Canada, and Mexico officially launched the renegotiation and modernization of NAFTA in August, holding the first round of negotiations August 16-20 in Washington, D.C. and the second on September 1-5 in Mexico City. Negotiators affirmed their commitment to a rapid pace of negotiations and produced a consolidated text to work on throughout the year, with the hope of concluding talks by December A third round is expected to take place September 23-27 in Ottawa.

U.S. proposals in the following areas were reportedly discussed:

  • Intellectual property, where the U.S. is seeking 12 years of market exclusivity for biologic medicines;
  • Trade remedies, where the U.S. is seeking to eliminate NAFTA’s Chapter 19 dispute settlement and the global safeguard exclusion;
  • Broad-based approaches to rules of origin, where the U.S. is seeking overall increases in regional content requirements (without yet elaborating on specifics); and
  • Digital commerce, where the U.S. is seeking commitments on e-commerce and telecommunications.

Trade officials have already begun discussion on some of the more difficult areas in the negotiations. Canada and Mexico have staunchly opposed elimination of Chapter 19 dispute settlement, which requires NAFTA parties to adjudicate anti-dumping/countervailing duties through a special tribunal rather than their domestic courts. Both Canada and Mexico have also indicated their opposition to the 12-year exclusivity rule for biologics. Neither of these issues is likely to reach a quick resolution.

Moreover, two issues that are likely to be especially controversial for U.S. industry going forward are investor-state dispute settlement (ISDS) and the rule of origin for automobiles.

During the first round, the media reported the United States was internally considering a system whereby NAFTA countries would have to “opt-in” to ISDS on a case-by-case basis. This triggered immediate and forceful pushback from U.S. industry groups. Such a measure would likely also face significant opposition in Congress. No investment texts have yet been tabled, and the Trump administration has not clarified its policy position on ISDS.

During the second round, U.S. negotiators reportedly engaged their Mexican and Canadian counterparts on increasing the regional value content requirement for automobiles as well as establishing a national content requirement, without proposing specific requirements or rules. Many U.S. automakers have opposed substantial changes to the automotive rules of origin due to the potential for disruption to current supply chains, which would likely result in higher costs and production shifts.

Progress on NAFTA talks continued at the working level despite threats from President Trump throughout August that the United States could withdraw from NAFTA. In a press conference on August 28, for example, he said that the U.S. “will either terminate or renegotiate” NAFTA, stating that Mexico was being “difficult” in the negotiations. Although many consider the President’s statements to be an attempt to create leverage for U.S. negotiating positions (unilateral withdrawal remains unlikely in the face of agriculture, industry, and Congressional opposition), his response to the uncertain pace of negotiations will no doubt be a factor to monitor as talks continue. Both the Canadian and Mexican delegations privately expressed frustration with the President’s statements.

For more information, contact:
Robert Holleyman, Melissa Morris, Evan Yu