Cross-post from the Trade Practitioner Blog: President Trump: “When It Comes to Leverage, Tariffs Are King” – What You Need to Know

By Jordan E. O'Connell on Posted in International, Legal Analysis

Since taking office in January 2017, President Trump has made use of several provisions of US law – including Section 301, targeting unfair trade practices, and Section 232, targeting threats to national security – to bring trading partners to the negotiating table. Major developments over the last two weeks could impact global supply chains across a wide range of industries, including the automotive and manufacturing sectors.  Our colleagues at the Trade Practitioner Blog explain what you need to know below.

Section 301 Tariffs: Escalating Tensions with China

Last year, using the authority granted to the US President under Section 301 of the Trade Act of 1974, the Trump Administration announced three lists of tariffs on Chinese imports. List 1 and List 2 imposed 25% tariffs on US$34 billion and US$16 billion worth of products from China, respectively. List 3 imposed 10% tariffs on US$200 billion worth of products from China. In return, China responded with its own tit-for-tat tariffs on US products. The List 3 tariffs were scheduled to increase to 25% at the end of 2018, but President Trump and Chinese President Xi Jinping struck a deal in early December 2018 to pause the planned increase and begin work on a broader trade deal.

Just a few weeks ago, observers were optimistic that a deal between the two countries was imminent. However, since then, the two sides have taken a series of escalating trade actions against each other that could impact your business.

The Latest

In early May 2019, President Trump unexpectedly announced that he would increase the List 3 tariffs from 10% to 25%, effective May 10, 2019 (note: boats on the water before May 10, 2019 that arrive in the US before June 1, 2019 will still face the lower 10% duty). The Trump Administration also released a draft List 4, which could lead to tariffs of up to 25% on US$300 billion worth of products from China, potentially affecting nearly 4,000 tariff lines that constitute nearly all remaining trade between the two countries. China followed suit by announcing retaliatory tariffs on US$60 billion (or 5,140 tariff lines) worth of US imports.

What Is Next – What You Can Do

Given the sheer volume of the recent tariff actions, virtually any company that imports from or exports to China will be impacted. Fortunately, there are a number of ways you can weigh in to potentially mitigate the costs to your business:

  • List 3 Tariffs Increase Exclusion Process. The Trump Administration plans to announce a product exclusion process for List 3, which will allow companies to request relief from the increased tariffs. Details remain sparse, but we expect the process to be similar to those used for Lists 1 and 2.
  • List 4 Tariffs Public Comments. The Trump Administration is accepting public comments to the proposed List 4, especially how tariffs on these products may impact US businesses and consumers. You can weigh in:
    • By June 10, 2019 – You can request to appear at a hearing on List 4 that is scheduled for June 17, 2019.
    • By June 17, 2019 – Regardless of whether you want to participate in the hearing, you can submit comments on how this action could impact your business.
  • Chinese Tariffs Exclusion Process. China’s Ministry of Finance plans to set up exclusion processes for its retaliatory tariffs. The Chinese Government will accept exclusion requests in two rounds, depending on the tariff line in question. The first round will run from June 3 to July 9, 2019 and the second round will run from September 2 to October 18, 2019.

Section 232 Auto Tariffs: Postponed…For Now

On May 23, 2018, the US Department of Commerce initiated an investigation into the threat of  automotive imports to US national security under Section 232 of the Trade Expansion Act of 1962, as amended. This trade action faced significant opposition from all fronts, on Capitol Hill, across domestic and international auto manufacturers, and among the countless small- and medium-sized US businesses that rely on international inputs for their business operations. The Commerce Department transmitted its report to the President in February 2019, but its contents – including the agency’s recommendations – were kept secret.

The Latest

On May 17, 2019, President Trump signed a Proclamation “Adjusting Imports of Automobiles and Automobile Parts Into the United States.” It confirms that the President concurs with a finding by the Secretary of Commerce that auto/auto parts “are being imported into the United States in such quantities and under such circumstances as to threaten to impair the national security of the United States.” However, the President decided not to implement any import restrictions in the immediate future.

What Is Next

Tariffs are not off the table. In the proclamation, President Trump directed US Trade Representative Robert Lighthizer to lead negotiations with the EU, Japan and “any other country the Trade Representative deems appropriate” to address the threatened impairment of national security with respect to imported autos/auto parts. Ambassador Lighthizer has been directed to update the President on the status of these negotiations within 180 days (by November 13, 2019).

The Trump Administration is beginning talks with the EU and with Japan for new bilateral agreements suggesting this 180-day deadline will put significant pressure on those negotiations. Businesses in auto supply chains must closely monitor these talks and engage with US negotiators on how any limits to trade in autos and auto parts could impact their operations.

Section 232 Steel and Aluminum Tariffs: Canada and Mexico Exempted

On March 8, 2018, President Trump signed proclamations establishing Section 232 tariffs on certain steel and aluminum imports. President Trump enacted a 25% tariff on covered steel imports and a 10% tariff on covered aluminum imports. The Commerce Department subsequently established an exclusion process, under which steel users can request their imports be excluded from the tariffs and through which domestic steel producers can file objections setting out their capacity to manufacture the requested product. Tens of thousands of exclusions have been filed to date and new petitions are submitted daily.

The Latest

In order to pave the way for ratification of the United States-Mexico-Canada Agreement (USMCA), the Administration lifted the Section 232 steel and aluminum tariffs against Canada and Mexico. Canada and Mexico agreed to lift their respective retaliatory tariffs as well, clearing the air for North American businesses that rely on these products. In a separate action, President Trump also signed a proclamation lowering the 232 tariffs on Turkish steel products from 50% back to the original 25% level. In August 2018, President Trump increased Section 232 tariffs on Turkish steel products from the original 25% to 50%, due to bilateral tensions.

What Is Next

Just as the Canada/Mexico tariffs are lifted, pressure is only increasing on companies importing covered goods from the rest of the world. Companies will continue to participate in the 232 tariff and quota exclusion process, especially as some of the earliest granted exclusions are reaching or will soon reach their one-year expiration date.

Reach out to InternationalTradeCompliance@squirepb.com with any question.

Our multipractice, cross-jurisdictional team covering all facets of international business and commerce, including international trade, automotive and global supply chain, have the legal expertise and experience to support you as you analyze how potential impacts to your supply chains could ultimately affect your bottom line. Coupled with our policy acumen and political understanding, we have filed a significant number of Section 232 and 301 exclusion requests, effectively helping clients seek relief from the burdensome tariffs. We have achieved exceptional success as compared to industry average in securing product removals/exclusions from tariff lists. We are on the pulse of international trade negotiations and critical developments, and can help you navigate how proposals may impact your business operations.

Cross-post from the Trade Practitioner Blog: The Real Significance of OFAC’s Sanctions Compliance Guidance

By Jordan E. O'Connell on Posted in Due Diligence, International, Legal Analysis

On May 2, 2019, the US Department of Treasury’s Office of Foreign Assets Control (OFAC) released guidance on effective sanctions compliance programs.  This guidance is useful for any company with an international supply chain, as both U.S. and foreign companies may be subject to, and at risk for violating, U.S. sanctions law.  As a recent example, e.l.f. Cosmetics settled with OFAC in January of 2019 for $996,080 resulting from apparent violations of the North Korea Sanctions Regulations by two of e.l.f.’s Chinese suppliers.  One of the aggravating factors that OFAC considered in that case was that e.l.f.’s OFAC compliance program was “either non-existent or inadequate.”  The new OFAC guidance now provides a roadmap for companies to follow in building a compliance program, and the guidance specifies that OFAC “will consider favorably [companies] that had effective [compliance programs] at the time of an apparent violation.”

Our colleague, Kristina Arianina, recently posted a comprehensive summary of the new OFAC guidance, as well as an analysis of the significance of the guidance and how it relates to similar guidance documents released by the US Department of Justice (DOJ) and the Securities and Exchange Commission (SEC).  That post may be read here.

FDA Guidance on Voluntary Recalls and Smarter Food Safety

By Jordan E. O'Connell on Posted in Food & Drug

Voluntary recalls are a key tool that the Food and Drug Administration (“FDA”), and FDA-regulated companies, use to protect public health.  Voluntary recalls are also a corporate nightmare, and can be extremely taxing on supply chain relationships.  For industries and products where recalls are common – such as food and drugs – supply chain partners should negotiate responsibility for recalls at the start of their relationship and be prepared to act quickly if a recall is initiated.

The Draft Guidance on Initiation of Voluntary Recalls Under 21 CFR Part 7, Subpart C (“Draft Guidance”) is the FDA’s most recent move towards updating the FDA recall process.  In the FDA Statement announcing the Draft Guidance, the FDA explained that, once finalized, it “will provide industry with clear information on ways to prepare, plan, and work with the FDA to ensure voluntary recalls are initiated properly and promptly.”

The Draft Guidance provides recommendations related to training, record keeping, and recall procedures, and outlines specific steps that companies should take to be “recall ready.”  These recommendations are structured as a Q & A, addressing four questions:

  • How should a firm in a product distribution chain prepare to facilitate timely initiation of a voluntary recall?
  • What should a firm do if there is an indication of a problem with a distributed product?
  • How should a firm initiate a voluntary recall?
  • How does FDA work with a recalling firm to initiate a voluntary recall in a timely manner?

Public comments will be accepted until June 24, 2019.  The Draft Guidance, including information for submitting comments, is located here.

The FDA recently issued another Statement “on steps to usher the U.S. into a new era of smarter food safety.”  Pursuant to the 2011 FDA Food Safety Modernization Act (FMSA), the FDA has proposed and finalized regulations establishing “science- and risk-based standards for the production and transportation of domestic and imported foods.”  Recognizing the new opportunities and risks presented by innovation and increasingly global distribution networks, the FDA has announced a “New Era of Smarter Food Safety” with a goal to augment FDA “efforts implementing important FSMA requirements while also leveraging . . . the use of new and emerging technologies.”  As a first step, the FDA intends to create a “Blueprint for a New Era of Smarter Food Safety” that will include issues related to traceability, digital technologies, and evolving food business models.

Cross-Post: DOJ Updates Guidance for Corporate Compliance Programs

By Jordan E. O'Connell on Posted in Legal Analysis

This week, the US Department of Justice (DOJ) announced an update to its 2017 guidance on how the DOJ will evaluate the effectiveness of a company’s corporate compliance program. The updated compliance guideline (Updated Guidance) is twice the length of the original and utilizes a more instructive approach, serving as a roadmap to prosecutors, and prudent companies.

Our colleagues Colin Jennings, Ayako Hobbs, and Elizabeth Weil Shaw have prepared a summary and analysis of the DOJ’s 18-page Updated Guidance, focusing on the important lessons a company can learn about the key elements necessary for a robust and effective compliance program.  You can read and download their summary and analysis here.

President Trump Threatens to Increase Tariffs on $525 Billion of Chinese Goods

By Sarah Rathke on Posted in Legal Analysis

In a series of tweets posted on May 5, President Trump threatened to raise tariffs on $200 billion of Chinese goods from 10% to 25%, effective this Friday, May 10. He further threatened a 25% tariff on an additional $325 billion of Chinese goods that are currently untaxed, stating it could happen “shortly.” It is unclear whether U.S. officials will actually impose the substantial tariff change this coming Friday, or if it is simply a tactic to apply pressure in trade talks. Trump has previously proposed raising tariffs on Chinese goods to 25% but postponed implementation due to progress in trade talks between the two countries (https://www.businessinsider.com/trump-china-tariff-increase-delayed-past-march-1-deadline-2019-2).

Trump stated in his tweets, “The Trade Deal with China continues, but too slowly, as they attempt to renegotiate.” According to a recent WSJ report (https://www.wsj.com/articles/u-s-china-conclude-productive-trade-talks-but-sticking-points-remain-11556718515), the two countries have made significant headway towards a trade deal, but several issues remain including the use of tariffs as an enforcement measure, China’s industrial policy of granting subsidies to certain companies, and intellectual property protection. Chinese negotiators were scheduled to travel to Washington D.C. on May 8 to continue negotiations, but as of Monday, commentators are unsure if Chinese negotiators will keep their plans. It remains to be seen how President Trump’s latest threats will affect the course of negotiations.

US and EU Release Preliminary Tariff Lists Amid WTO Aircraft Subsidies Disputes

By Jordan E. O'Connell on Posted in Aerospace, International, Legal Analysis

As a tactic in the ongoing civilian aircraft subsidies dispute between the US and the EU at the World Trade Organization, the US government has proposed a preliminary list to tax about US$11 billion worth of products exported to the US from the EU.  The product list includes two sections, one focusing specifically on products from France, Germany, Spain and the UK, and the other includes a wide-range of consumer goods (foods, drinks, textiles, handbags, etc.) from all 28 EU member states.  On April 17, 2019, the EU launched a public consultation period on a preliminary list of products from the US to be considered for countermeasures.  The proposed list includes a variety of agri-food products, aircrafts and chemicals, among others, that represent about US$20 billion in US exports to the EU.

Our colleagues Frank R. Samolis, George N. Grammas, Wolfgang A. Maschek, Robert MacLean, Jane Haxby, and Ludmilla L. Kasulke have prepared an update on the proposed tariff lists, including key highlights from the lists, the potential impact of the tariffs to the transatlantic business sectors, next steps in the regulatory process and how we can help.  The update may be read here.

President Trump Signs Memo Focused on Combating Counterfeit Goods, Impacting Supply Chains

By Sarah Rathke and Janine Cerny on Posted in Legal Analysis

On April 3, President Trump signed a memorandum calling for the Department of Homeland Security to prepare a report with recommendations to prevent the trafficking and sale of counterfeit goods in the American marketplace. The Department of Homeland Security is to work with the Commerce Department, the attorney general, and other federal agencies to prepare the report within 210 days. The memorandum requests the report to “identify appropriate administrative, statutory, regulatory, or other changes, including enhanced enforcement actions, that could substantially reduce trafficking in counterfeit and pirated goods or promote more effective law enforcement regarding trafficking in such goods.” Further, the report’s recommendations should be based on available data, but also identify further data to collect and share amongst federal agencies.
Peter Navarro, the director of the White House National Trade Council, commented that the memorandum acts as a “warning shot across the bow,” for e-commerce marketplaces to self-regulate in this area, or otherwise the government will intervene. He stated the memorandum targets third-party marketplaces including eBay, Amazon, and Alibaba, as well as third-party payment processors and customs brokers. According to the memorandum, the Government Accountability Office performed an investigation by purchasing products from third-party marketplaces in categories of frequently counterfeited goods. It found that more than forty percent of the goods were counterfeit. A recent report from the Organization for Economic Co-operation and Development estimates counterfeit and pirated goods account for 3.3% of global trade.
This obviously impacts supply chains. Often, U.S. manufacturers simply assume that the components that go into their finished products are authentic. But the OECD report shows that this is not always the case. Therefore, U.S. manufacturers that import from regions where counterfeiting is prevalent need to take advantage of their contractual inspection and auditing rights. U.S. manufacturers that do not have broad inspection and auditing rights need to insert such rights in their next round of contracting exercises. At the very least, U.S. manufacturers need to ensure that they have robust indemnification provisions that allow them to recover for any counterfeiting violations against component suppliers.

Brexit: Deal or “No Deal”? Preparing for a “No Deal” Brexit

By Jordan E. O'Connell on Posted in International, Legal Analysis

Our colleagues Matthew Lewis, Matthew Kirk, and Robert MacLean have prepared another in-depth analysis of the current status of Brexit.  You can read and download the full update here.
The range of options, and timescales, days after the UK should have left the EU, remains as wide as ever. We are still some way from knowing what future trading relationships will look like. Any final “no deal” preparatory steps should be taken between now and 12 April – it is not our predicted outcome, but the chances of it happening have increased. Our pulse update focuses on:
What Could Happen?
The effective deadline for the UK government and Parliament to decide a way forward is Friday 5 April, possibly slipping to Monday 8 April. The European Council will meet on 10 April to assess the situation and decide whether to extend the Article 50 deadline beyond 12 April. It is impossible to predict what governmental and parliamentary manoeuvres will lead to this week.
Top 10 Impacts of Tariffs on Imports
Changes to UK import policy in the event of a “no deal” Brexit will mean an increase in tariff costs on a range of imports from the EU (including some important products for retailers such as meat, dairy, fish, clothing and ceramics) and a reduction in tariff costs on a much wider range of products from outside the EU.
Impact of a “No Deal” on UK/ EU Borders
A “no deal” Brexit will mean a sharp end to “free circulation” of goods inside the EU’s single market, with goods traded between the EU and UK being treated as “imports” and “exports”. This will involve a complete reconfiguration of existing customs formalities carried out at EU and UK borders, with the introduction of import declarations, customs checks and – potentially – customs duties.

When Politics Affects Supply Chains

By Sarah Rathke on Posted in International, Legal Analysis

According to recent WSJ reporting , immigration issues at the Mexico-US border are disrupting commercial trade, as US Customs and Border Patrol agents who typically handle trade traffic have been redirected to migrant issues. This redistribution of resources has reportedly caused a pile up of truck traffic and delay of inspections for agricultural and automotive components. This has reportedly resulted in an estimated tens of millions of dollars in losses for supply chain partners. Who is saddled with the risk of loss when politics impacts the flow of goods at international borders?
This complicated question involves the convergence of trade policy, supply chain contract rights, and insurance coverage, such that each instance of loss must be determined on a case-by-case basis. If trade partners have force majeure provisions in their contracts – and even if they don’t! – suppliers may be excused temporarily or permanently by border actions beyond their control. (In the US, courts do not take a uniform view as to whether political risk constitutes a force majeure event.) On the other hand, carriers may be looped into the equation, if their carrier agreements broadly assign them risk of loss during transit. In addition, smart shippers will require carriers to have insurance coverage for situations such as this – so in some instances, insurance companies (and their reinsurers) may bear the ultimate risk.
As border tensions heat up, we expect more impacts to North American supply chains. Supply chain partners should develop multi-tiered strategies to minimize loss, allocate risk, and cover potential liabilities.

US Supply Chains Face Tariff Increase on Beef Exports to Japan, Unlike Member Countries of the CPTPP

By Janine Cerny on Posted in Food & Drug, International

Cows

US beef companies shipping to Japan likely will have to pay higher tariffs beginning in May due to the United States’ rejection of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). To protect its own beef industry, Japan increases tariffs on frozen beef imports if import volumes pass a certain threshold, which Japan is now approaching. However, Japan exempts CPTPP members from the tariff increases. Hence, most major beef exporters to Japan, such as Canada, New Zealand, and Mexico will be exempt from the tariff increases.
The United States therefore faces a tariff increase from 38.5% to 50% on beef exports through March 2020 (relative to the 26.6% tariff imposed on CPTPP members). To some extent, this has happened before; Japan’s tariff increase on beef was most recently triggered in 2017. However, at that time, the United States’ main beef competitors were subject to the same increase as non-US suppliers.
This also may be the tip of the iceberg. CPTPP members may have a competitive tariff advantage over US suppliers in Japan for other food products, including wheat and pork. These issues will likely loom over the upcoming trade talks between the United States and Japan. Negotiations regarding a free trade agreement between the US and Japan are set to begin in April, and President Trump plans to visit Japan in May.

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