The Federal Trade Commission (FTC) is soliciting comments on its 1997 Enforcement Policy Statement on U.S. Origin Claims and its ongoing enforcement of that policy. On September 26, 2019, the FTC held a workshop with key stakeholders to discuss how consumers perceive “Made in USA” claims, how advertisers and marketers comply with the standard, and whether the FTC’s current enforcement strategy is effective.

At the outset of the Workshop, the FTC raised the possibility of engaging in formal rulemaking, noting that 15 USC §45a gives it limited authority to promulgate rules for “Made in USA” claims that is less cumbersome than the typical rulemaking procedure, including the appropriate percentage of important components that would still be consistent with such a claim. However, the FTC’s primary focus throughout the workshop was to understand how consumers perceive Made in USA claims—both what it means for a product to be “Made in USA” and what messages a “Made in USA” claim communicates to consumers. The FTC was particularly interested in understanding whether consumers’ perceptions regarding the accuracy of a “Made in USA” claim might differ depending on the unavailability of materials in the United States, the specific product at issue, the sales platform, the identity of the competitors, and whether the competitors are using more or less foreign content or are bringing or removing jobs from the United States. In addition the FTC was interested in learning why stakeholders were generally reluctant to use qualifications (e.g. “Made in USA with fabric imported from Mexico.”)

The Current “Made in USA” Policy: How Well Does it Work?

Under the current FTC policy, to make an unqualified Made in USA claim, the product must be “all or virtually all” made in the United States. This includes both labor and raw materials. In enforcing this policy, the FTC has not articulated any particular percentage of content that is sufficient to satisfy the “all or virtually all” standard. Instead, the FTC has given guidance primarily through public closing letters as well as informal counseling. The FTC noted that it has issued 154 closing letters from 2010 to date. While there have been 27 court actions in the last two decades, enforcement activity is reserved for the worst offenders.

Stakeholders participating in the workshop expressed frustration with the vagueness of the FTC’s standards as well as the difficulty in complying with that standard. They advocated for bright line rules that they can easily apply to determine whether they can make an unqualified Made in USA claim.

In addition, the stakeholders also expressed frustration with conflicting frameworks within the United States such as the Made in USA standard in California, the Buy America Act and the implementation of that Act by federal agencies, and U.S. Customs laws. As one workshop participant pointed out, for some products, a product is considered to be made in the United States for Customs purposes, requiring the company to pay all applicable VAT and duties when exporting because the last substantial transformation occurred in the United States. However, that same product cannot be marked as “Made in USA” in the United States because the FTC’s standard is so strict. In the case of the jewelry industry, for example, it is often impossible to identify the original source of the raw materials.

How Can the FTC Improve its “Made in USA” Policy?

The FTC made clear that any rules it adopts must comport with consumer expectations as to what “Made in USA” means and how consumers interpret those claims. The FTC was skeptical of the feasibility of implementing a bright line rule that would apply across the board, noting that a claim can be false or misleading if a substantial minority of consumers are misled (which the FTC identified as low as approximately 10.5% net of control). Citing consumer research, the FTC found that there are two distinct views among consumers as to when a product can be considered made in the United States: (1) nearly all of the costs or parts must be from the United States for the product to qualify as made in the United States and (2) a high percentage of costs or parts must be made in the United States. The second group constitutes the majority of consumers, but the first group still constitutes a substantial minority.

The FTC also queried whether perceptions of Made in USA claims have changed in the past several years. The FTC noted that the impact of globalization and current political sentiments is unclear and requested that stakeholders submit recent consumer survey evidence in their written comments.

The FTC raised the possibility that different standards may apply to different products. The FTC noted that this was possible even under the current framework. For example, if a product is designed and produced in the United States but where the raw materials are sourced abroad, the FTC recommended that the stakeholder submit a survey showing that an unqualified “Made in USA” claim was consistent with consumer expectations. However, in developing updated Rules, the FTC was interested in learning whether factors such as the unavailability of resources in the United States and efforts to repatriate jobs to the United States may impact how consumers perceive a “Made in USA” claim for a particular product or in a particular category.

How is the FTC’s Current Enforcement Strategy Working?

Finally, the FTC asked the participants whether they felt that the FTC’s current approach to enforcing the Made in USA policy was effective. While the stakeholders felt that the Policy was difficult to apply, the stakeholders also almost universally stated that the FTC’s current enforcement efforts sent mixed messages to bad actors. The panelists felt that harsher penalties should be imposed on bad actors, citing the Patriot Puck case as an example of a “slap on the wrist” that does little to deter bad behavior.

While the FTC praised the low recidivism rate of companies that have received closing letters, some of the panelists disagreed with this assessment, observing that some recipients of closing letters have continued to make mistakes years later. In addition, some panelists expressed frustration with well-known companies that claim that their products are “Made in USA” when it is well known that the products contain a high percentage of foreign sources.

Closing Thoughts

“Made in USA” claims are popular among marketers. American consumers want products made in America for a wide variety of reasons, transcending political divides. For many consumers, buying “Made in USA” products signifies attributes such as higher quality, no human rights abuses, no child labor, responsible sourcing, as well as protecting US jobs. Given the importance of these claims, the FTC has been under increased pressure to increase enforcement of deceptive “Made in USA” claims. However, marketers struggle to interpret the FTC’s abstract “all or virtually all” standard while also reconciling it with competing standards that paradoxically render a product of US origin when exported, but not within the United States. The time is ripe for the FTC to take another look at its “Made in USA” policy.

Marketers making “Made in USA” claims should consider submitting comments before October 11, 2019. The FTC’s list of questions is available here.

On September 30, 2019, U.S. Customs and Border Protection (CBP) issued five Withhold Release Orders (WROs). CBP issued a statement that the WROs were based on information obtained and reviewed by CBP that indicated that the products are produced, in whole or in part, using forced labor.

The following WROs are effective immediately:

  • Garments produced by Hetian Taida Apparel Co., Ltd. in Xinjiang, China; produced with prison or forced labor.
  • Disposable rubber gloves produced in Malaysia by WRP Asia Pacific Sdn. Bhd.; produced with forced labor.
  • Gold mined in artisanal small mines (ASM) in eastern Democratic Republic of the Congo (DRC); mined from forced labor.
  • Rough diamonds from the Marange Diamond Fields in Zimbabwe; mined from forced labor.
  • Bone black manufactured in Brazil by Bonechar Carvão Ativado Do Brasil Ltda; produced with forced labor.

The Trade Facilitation and Trade Enforcement Act of 2015 (“TFTEA”) changed forced labor enforcement by CBP. Specifically, TFTEA law repealed the “consumptive demand” exception in 19 U.S.C. § 1307. The exception had allowed importation of certain forced labor-produced goods if the goods were not produced “in such quantities in the United States as to meet the “consumptive demands” of the United States.” Section 307 of the Tariff Act of 1930 now prohibits the importation of merchandise mined, produced or manufactured, wholly or in part, in any foreign country by forced or indentured child labor – including forced child labor and provides no exceptions. Such merchandise is subject to exclusion and/or seizure, and may lead to criminal investigation of the importer. This means if any part of a good is fabricated, mined, produced, manufactured, farmed, etc. using forced labor it is prohibited from entering the commerce of the United States.

Importing into the United States is a privilege and not a right. Buttfield v. Stranahan, 192 U.S. 470, 493 (1904).  Accordingly, when information reasonably but not conclusively indicates that merchandise within the purview of this provision is being imported, the Commissioner of CBP may issue withhold release orders and detain merchandise pursuant to 19 C.F.R. § 12.42(e). If the Commissioner is provided with information sufficient to make a determination that the goods in question are subject to the provisions of 19 U.S.C. § 1307, the Commissioner will publish a formal finding to that effect in the Customs Bulletin and in the Federal Register pursuant to 19 C.F.R. §12.42(f). Importers have the opportunity to either re-export the detained shipments at any time or to submit information to CBP demonstrating that the goods are not in violation.

International standards on child labor and forced labor were developed by the International Labor Organization (“ILO”), a specialized United Nation’s agency that brings together governments, employers’, and workers’ representatives of 187 member states to set international labor standards, develop policies, and devise programs to promote rights at work and decent work for all persons. The internationally recognized definition of forced or compulsory labor is found in ILO Convention 29. According to this Convention, forced or compulsory labor is “all work or service which is exacted from any person under the menace of any penalty and for which the said person has not offered himself voluntarily.” There are four key elements to this definition, and indicators related to each element. The combination of indicators for each situation must be analyzed in order to determine whether the situation is one of forced labor or not.

  • All work or service: This includes all types of work, service and employment, regardless of the industry, sector or occupation within which it is found, and encompasses legal and formal employment as well as illegal and informal work.
  • Any person: This refers to adults and children.
  • Menace of any penalty: This refers to a worker believing he or she will face a penalty if they refuse to work. “Menace” means the penalty need not be exacted, but rather, that threats of penalty may be sufficient, if the employee believes the employer will exact the penalty. A wide variety of penalties, such as confinement to the workplace, violence against workers or family members, retention of identity documents, dismissal from employment, and non-payment of wages, denunciation to authorities, or other loss of rights or privileges, may be sufficient to fulfill this element of the test for forced labor.
  • Voluntary: This refers to workers’ consent to enter into employment and their freedom to leave the employment at any time, with reasonable notice in accordance with national law or collective agreements. In essence, persons are in a forced labor situation if they enter work or service against their free choice, and cannot leave it without penalty or the threat of penalty. Involuntariness does not have to result from physical punishment or constraint; it can also stem from other forms of retaliation, such as the loss of rights or privileges or non-payment of wages owed. Note that a worker can be considered to be in forced labor even if his or her consent was given, if that consent was obtained through the use of force, abduction, fraud, deception or the abuse of power or a position of vulnerability, or if the consent has been revoked.

ILO Convention 105, another convention on forced labor, specifies that forced labor should never be used for the purpose of economic development or as a means of political coercion, discrimination, labor discipline or punishment for having participated in labor strikes.

CBP receives allegations of forced labor from a variety of sources, including from the general public. CBP uses the ILO definitions when determining whether imported goods were manufactured using Forced Labor.

 

On Wednesday, October 2, 2019, the World Trade Organization (WTO) allowed the U.S. to set duties on $7.5 billion worth of European Union (EU) goods as a consequence of the long-running legal battle over subsidies to Airbus. The U.S. originally asked for authorization to impose duties on $11 billion of EU goods; the WTO arbitrator has calculated the lower $7.5 billion amount for the actual retaliation.  A series of WTO panels have been examining the details since 2004 and determined that the EU illegally subsidized the launch of the Airbus A350 and A380 twin-aisle jets. The EU is seeking a similar ruling in its parallel case against U.S. subsidies granted to Boeing. It has requested the WTO to authorize duties on $12 billion worth of U.S. goods, an action which could be finalized next spring.

This ruling from the WTO against Airbus allows President Trump’s administration to set increased import duties on large civil aircraft and parts imported from the EU, as well as EU wines, cheeses, motorcycles and apparel luxury items such as men’s suits and handbags.

On September 20, 2019, the U.S. Department of Treasury’s Office of Foreign Assets Control designated the Central Bank of Iran, the National Development Fund of Iran, and the Etemad Tejarat Pars Co. under Executive Order 13224, OFAC’s counter-terrorism authority (E.O. 13224). The U.S. pointed to attacks on Saudi Arabia’s oil fields as the catalyst for this designation.

With respect to the Central Bank of Iran’s counter-terrorism designation, OFAC finds that the Central Bank of Iran provided material support, specifically facilitating financial transfers for the Iranian Revolutionary Guard’s Quds Forces (IRGC-QF) and Hizballah. The material financial support included providing the IRGC-QF extensive access to foreign currency in the amount of several billions of U.S. dollars and euros, and facilitation of IRGC-QF transfers to Hezbollah.

We highlight the Central Bank of Iran’s designation as this is the most commercially significant. While the Central Bank of Iran is already blocked under U.S. sanctions as it is a part of the Government of Iran, that did not subject transactions with it to U.S. secondary sanctions but the September 20th 2019 counter terrorism designation does. Now, non-U.S. persons are subject to designation risk if their transactions with the Central Bank of Iran are deemed a “knowingly significant transaction” involving the Central Bank of Iran. For non-U.S. banks providing significant financial services for entities designated under E.O. 13244, this can also potentially subject that bank to U.S. correspondent account or payable-through account sanctions.

OFAC Frequently Asked Question (FAQ) 636 provides insight on just how broad OFAC interprets the world of potentially significant transactions noting that the mere involvement of a designated bank, other than banks only blocked because of their Government of Iran status, may lead OFAC to determine a transaction is significant. With such a broad interpretation of a signification transaction, if banks were already somewhat apprehensive to assist with receipt of payments for business activity with Iran, this is only going to make this challenge greater as the Central Bank of Iran often plays a less obvious role in many of those transactions.

For example, in the humanitarian trade context [agricultural, medicine, and medical device sales] the Central Bank of Iran might take a financing or foreign currency provision role. Now such a Central Bank of Iran role might be enough of a hook to expose the whole transaction to U.S. secondary sanctions risk. While the September 20, 2019 designation came with a press release statement noting that the U.S. “has a long standing policy of allowing for the sale of [humanitarian trade] and OFAC will continue to consider [such] requests related to humanitarian trade with Iran as appropriate,” practically banks may still not be willing to service humanitarian trade transactions, or generally any other transactions that the Central Bank of Iran might “touch,” directly or indirectly without additional OFAC guidance, or potentially an OFAC license.

The ability to get paid for business activity with Iran just starkly increased in difficulty.

Trade talks between the United States and China are set to resume on October 10, 2019 in Washington, D.C., in order to determine if the two countries can make a plan to lead them out of the current trade war. On Wednesday, September 25, 2019, President Trump said that a deal to end the nearly 15-month trade war with China could happen sooner than people think. He also indicated that the Chinese were making significant agricultural purchases from the United States, including purchases of beef and pork. Chinese commerce ministry spokesman, Mr. Gao Feng, confirmed that China had purchased pork and soybeans from the United States.

So far, over 30,000 exclusion requests have been filed by importers and companies with the US Trade Representative for the Section 301 China Tariffs (Lists 1-3).

Lists 1-3 Combined
Total Requests: 30,000
Granted: 3,150
Denied: 8,443
Approval Rate: 27.2%

Simultaneously, China is creating internal procedures for rolling out an “unreliable entity list.” This will be used by China to punish companies that it believes have undermined China’s national interests. This is viewed as a convenient tool for retaliating against U.S. sanctions on Chinese tech firms such as Huawei.

In ruling NY N305648, Customs and Border Protection (CBP) determined the classification of a wireless charging station from China. It is described as an inductive charging device for cell phones measuring 18.5 cm x 17 cm x 13.5 cm. The item, the Spansive Source Wireless Phone Charger, converts mains voltage to an inductive charging field, and consists of a charging base having two USB charging ports, a status indicator, a Wi-Fi button, and two charging stands where users place their personal electronics to receive a wireless charge. CBP notes that the Wi-Fi button allows the Source to receive program updates and does not provide any external data communication to other devices or networks.

CBP determined that the applicable subheading for the Spansive Source Wireless Phone Charger will be 8504.40.8500, HTSUS, which provides for “Electric transformers, static converters (for example rectifiers) and inductors; parts thereof: Static converters: For telecommunication apparatus.” The general rate of duty will be Free.

Products of China classified under subheading 8504.40.8500, HTSUS, unless specifically excluded, are subject to the additional List 3 25% ad valorem rate of duty. At the time of importation, the Chapter 99 subheading, 9903.88.03, in addition to subheading 8504.40.8500 must be reported.

 

The Department of the Treasury has released the long-awaited proposed rules that would complete implementation of the Foreign Investment Risk Review Modernization Act (FIRRMA) of 2018 that expanded the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS) to review investments by foreign persons. One proposed rule will revise and restate the general CFIUS regulations, 31 C.F.R. Part 800, while the second proposed rule will provide a separate process, 31 C.F.R. Part 802, for CFIUS review of certain real estate transactions that do not involve acquisition of a U.S. business. Among the key elements of FIRRMA addressed in the proposed rules are:

  • Expanded jurisdiction to review non-controlling investments in so-called “TID U.S. businesses”; i.e., companies involved in certain technology, infrastructure or data.
  • Extended mandatory review over acquisition of a “substantial interest” in a “TID U.S. business” by a foreign person in which a foreign government has a “substantial interest.”
  • Exemption of investments by certain foreign persons from certain foreign states (to be identified separately) from CFIUS jurisdiction over “covered investments.”
  • Provision of an option to initiate CFIUS review via a short-form voluntary declaration in lieu of a joint voluntary notice.

The current proposals do not yet seek to implement the statutory authority to impose a fee in connection with CFIUS reviews.

The proposed rules are scheduled to be published in the Federal Register on September 24, 2019, which will trigger a compressed 30-day time frame to submit comments (during which Treasury has suggested it may hold a teleconference with interested participants). The Interim Rule establishing the mandatory declaration under the Critical Technologies Pilot Program remains in effect and both prior comments and any new comments submitted will be addressed when Treasury publishes its final rule.

In ruling NY N305669, Customs and Border Protection (CBP) determined the classification of the LARQ Water Bottle System from China. The item is a stainless steel vacuum seal bottle, complete with a cap containing a UV-C LED chip and lithium-polymer 3.7v battery. The bottle keeps 500 mL of water cold for up to twenty-four hours or hot for up to twelve hours. The cap, designed to work exclusively with the LARQ bottle, uses a patented UV-C technology to purify both water and the interior of the bottle. To operate, the user will press the button on the cap and then shake the bottle for sixty seconds. The cap also has the ability to automatically turn on every two hours to ensure fresh water.

Heading 8421 specifically provides for purifiers of all types, including small domestic appliances, Note II of the Explanatory Notes to heading 8421 noted. Therefore, CBP determined that the applicable subheading for the stainless steel vacuum sealed bottle with cap is 8421.21.0000, HTSUS, which provides for “Centrifuges, including centrifugal dryers; filtering or purifying machinery and apparatus, for liquids or gases; parts thereof: Filtering or purifying machinery and apparatus for liquids: For filtering or purifying water.” The rate of duty will be free.

Products of China classified under subheading 8421.21.0000, HTSUS, unless specifically excluded, are subject to Section 301 List 1 25% ad valorem rate of duty. At the time of importation, 9903.88.01 in addition to subheading 8421.21.0000 must be reported.

 

On September 9, 2019, the U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”) published amendments to the Cuban Assets Control Regulations (the “Cuba Sanctions”) to limit “U-turn” transactions and remittances.

“U-turn” transaction is a reference to a Cuba Sanctions authorization (31 CFR § 515.584(d)) for banking institutions subject to U.S. jurisdiction to process transactions prohibited by the Cuba Sanctions if the transaction originated and terminated outside the United States, and the originator and the beneficiary of the funds transfer are not persons subject to U.S. jurisdiction. This “U-turn” authorization had the net effect of enabling non-U.S. persons to conduct U.S. dollar denominated transactions with Cuban persons or involving a benefit in Cuba, even though those transactions were processed or cleared through a U.S. financial institution (“USFI”).  Now, pursuant to the amended Cuba Sanctions, USFIs will be required to reject and report such transactions to OFAC. These Cuba Sanctions changes will take effect on October 9, 2019.

Practical Points for Consideration

As a reminder, on June 21, 2019 OFAC expanded its reporting requirements (31 CFR § 501.604(a)) to now require any “U.S. person (or person subject to U.S. jurisdiction)” to file an OFAC reject report within 10 business days of rejecting any transaction that would be prohibited by U.S. sanctions.  OFAC has not provided new industries now captured by the rejecting reporting requirements with guidance on the type of activity OFAC is expecting such industries to report as rejected.

If you have any questions on how to interpret your company’s potential new reject requirements under the revised Cuba Sanctions, the attorneys below would be happy to assist.

For additional information on other Cuba Sanctions changes effective October 9, 2019, including remittances, OFAC updated its Frequently Asked Questions Related to Cuba which may be found here: https://www.treasury.gov/resource-center/sanctions/Programs/Documents/cuba_faqs_new.pdf

As a “gesture of good will”, President Trump this week announced a two-week delay on the planned 5% increase in tariffs on $250 billion (Lists 1-3) of Chinese goods.

The tariffs on items included on Lists 1-3 were slated to increase from 25% to 30% on October 1st. The increase is now set for October 15th.

Trade negotiations between the U.S. and China resume next month.