On July 1, 2020, the U.S. Departments of State, Commerce, Homeland Security and the Treasury issued an advisory detailing the risk of exposure to businesses with supply chain entities that engage in human rights abuses, including forced labor in Xinjiang and elsewhere in China.

Key Notes:

  • The departments’ joint “Xinjiang Supply Chain Business Advisory” urges U.S. companies to monitor their activities in China, particularly in the Xinjiang region, where the Chinese government is repressing ethnic minorities and committing human rights abuses
  • S. businesses, individuals, academic institutions, service providers, investors and others operating in this region could face significant reputational, economic and legal risk if sufficient due diligence of supply chain activity in China is not conducted
  • S. agencies will increase enforcement against businesses in the United States who violate the law by contributing to human rights abuses in Xinjiang and elsewhere in China

Continue reading: view this client update in HTML or PDF format.

On July 14, 2020, a three-judge panel of the U.S. Court of International Trade (CIT) ruled in Slip Opinion 20-98 that a proclamation President Donald Trump issued increasing Section 232 duties on steel imports from Turkey beyond those previously implemented under a prior proclamation violates statutorily-mandated procedures and the Constitution’s guarantee of equal protection under law. Lead plaintiff Transpacific Steel LLC (Transpacific) argued that it should be refunded additional tariffs paid pursuant to Presidential Proclamation 9772 on certain imports of Turkish steel. This proclamation solely affected Turkish steel – raising the duty rate from 25 percent to 50 percent – and was issued well after the Section 232 national security investigation of steel imports had concluded and well after President Trump issued his initial Presidential Proclamation 9705 imposing a 25 percent tariff duty on steel products from several countries.

Transpacific argued that the statute requires the President to make a decision within 90 days of receipt of the Secretary of Commerce’s report and recommendation and to implement any chosen action within 15 days of that decision. The first proclamation was issued on March 8, 2018. The second proclamation was issued on August 10, 2018, which was outside of the statutory time period and was not the result of any formal Department of Commerce report. Attorneys for the U.S. government argued that Congress “inten[ded] to confer continuing authority and flexibility on the President to counter the threat identified” as confirmed by the “language, long-standing congressional understanding, and the purpose of the statute . . .” The three-judge panel agreed with the plaintiffs that the statutory language is clear and that Proclamation 9772 “was issued far beyond this temporal window.” The opinion notes that there is nothing in the statute to support the continuing authority to modify proclamations outside of the stated timelines and that the government offered “no citation to the statute nor to the recent legislative history to support” its theory that the President is permitted to modify his previous proclamation under the provisions of Section 232 of the Trade Expansion Act of 1962, as amended. The CIT also found that, in addition to acting outside of the statutory time limitations, President Trump acted “without a proper report and recommendation by the Secretary on the national security threat posed by imports of steel products from Turkey.”

The plaintiffs also raised a Fifth Amendment equal protection challenge to Proclamation 9772, arguing that the second proclamation discriminates between similarly situated importers based on the origin of their imports “without rational justification” and “that the government has offered no sensible reason for targeting imports from Turkey and that no reasonable rationale is apparent.” While the ruling found that national security is a legitimate purpose, it concluded that “[s]ingling out steel products from Turkey is not a rational means of addressing that concern. Section 232 does not ban the President from addressing concerns by focusing on particular exporters, but the decision to increase the tariffs on imported steel products from Turkey, and Turkey alone, without any justification, is arbitrary and irrational.” As a result, the CIT determined, Proclamation 9772 denied the plaintiffs equal protection under law.

On July 10, 2020, The Office of the U.S. Trade Representative (USTR) announced the imposition of a 25 percent import duty on French products in response to France’s Digital Services Tax (DST).  This action is the result of a Section 301 investigation initiated on July 10, 2019, after the French government passed a tax on revenues generated by certain companies involved in the digital services industry (see Trump and Trade Update of July 11, 2019).  According to the USTR, France’s 3 percent DST covers transactions of U.S. companies with estimated revenues of approximately $15 billion in 2020, with expected collections of approximately $450 million in taxes from U.S. companies for activities during 2020 and over $500 million for activities during 2021. On December 6, 2019, based on the information obtained during the investigation, and as reflected in its December 2, 2019 investigation report, the USTR determined that France’s DST is unreasonable or discriminatory, burdens or restricts U.S. commerce and is actionable under Section 301 of the Trade Act of 1974.  See Trump and Trade Update of December 3, 2019.

As a result, beginning on January 6, 2021, the USTR will take retaliatory action in the form of additional duties of 25 percent on items covered by 21 Harmonized Tariff Schedule (HTS) subheadings listed in Annex A to the July 10, 2020 announcement.  The products are contained in HTS Chapters 33 (Essential oils and resinoids; perfumery, cosmetic or toilet preparations), 34 (Soap, organic surface-active agents, washing preparations, lubricating preparations, artificial waxes, prepared waxes, polishing or scouring preparations, candles and similar articles, modeling pastes, “dental waxes” and dental preparations with a basis of plaster), and 42 (Articles of leather; saddlery and harness; travel goods, handbags and similar containers; articles of animal gut (other than silkworm gut).  The announcement provides an illustrative and informational product list in Annex B but notes that the formal language of Annex A governs any tariff treatment.  Examples of affected French products include: lip and eye-make-up; certain soaps and skin wash products; and certain French handbags.  Specified products will be subject upon entry for consumption to an additional ad valorem duty of 25 percent. The additional duties will apply in addition to all other applicable duties, fees, exactions and charges.

The USTR has stated that it will continue to monitor the effects of this trade action and progress with France toward resolution of this dispute.  President Donald Trump and French President Emmanuel Macron agreed to a delay in the imposition of U.S. tariffs while France deferred collection of the tax.  Notably, the USTR announced in early June 2020 that it was also initiating a Section 301 investigation into DST of European Union (EU) member countries and other nations (see Trump and Trade Update of June 4, 2020).  That investigation is ongoing, and the USTR is accepting public comments on it until July 15, 2020.  USTR Robert Lighthizer has indicated in recent press reports a desire to negotiate a settlement not only with France but also with the rest of the EU on this international tax structure.

 

On July 8, 2020, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) published guidance relating to the U.S. Department of State’s final rule amending the International Traffic in Arms Regulations (“ITAR”) and related BIS final rule, to transfer export controls of certain firearms, armament and ammunition from the U.S. Munitions List (“USML”) to the Commerce Control List (“CCL”).  Through 107 Frequently Asked Questions, the guidance outlines Commerce’s approach to the controls including, recordkeeping, registering and applying for licenses, brokering controls, license exceptions, and clearance requirements.  It also defines certain key terms to distinguish, among other things, additive manufacturing and 3D printing.

The final rules, which became effective on March 9, 2020, are based on an interagency review and determination by President Trump that certain articles no longer warrant control under USML Category I (Firearms, Close Assault Weapons and Combat Shotguns), Category II (Guns and Armament) and Category III (Ammunition/Ordnance), as they do not provide a “critical military or intelligence advantage to the United States and, in the case of firearms, do not have an inherently military function.”   Further, since there is a “significant worldwide market for items in connection with civil and recreational activities such as hunting, marksmanship, competitive shooting, and other non-military activities,” the CCL of the Export Administration Regulations (“EAR”) “is the appropriate source of authority to control these firearms, ammunition, and other articles.”

The Office of the U.S. Trade Representative (USTR) has published a Federal Register notice granting a limited number of product exclusion extensions from the Section 301 tariff for four imported Chinese products appearing on the first list/tranche of goods valued at $34 billion. In July 2019, the USTR granted 110 specially-prepared exclusion requests with an expiration date of July 9, 2020. See Trump and Trade Update of July 9, 2019. In April 2020, interested parties were invited to comment on whether to extend by up to 12 months any of these exclusions that had been granted. See Trump and Trade Update of April 29, 2020.

For the July 2019 exclusions, USTR has granted only 12 extensions. The product descriptions are: certain direct acting and spring return pneumatic actuators; certain pump casings and bodies; certain pump covers and parts; certain compressors; structural components for industrial furnaces; certain aluminum electrolytic capacitors; certain rotary switches; zinc anodes for use with machines and apparatus for electroplating, electrolysis or electrophoresis; certain weather station sets; and multi-leaf collimators of radiotherapy systems based on the use of X-ray. All other product exclusions granted in July 2019 will expire as of July 9, 2020.

These product exclusion extensions will apply as of July 9, 2020, and extend through December 31, 2020. U.S. Customs and Border Protection will soon issue instructions on entry guidance and implementation.

Each exclusion continues to be governed by the scope of the HTS heading and the product description appearing in the annex of the exclusion extension notice; it is not governed by the product description set out in any particular exclusion request. U.S. Customs and Border Protection will soon issue instructions on entry guidance and implementation.

The U.S. Trade Representative (USTR) has issued a Federal Register notice exempting Section 301 tariffs for certain List 4A products (imports from China with an annual trade value of $300 billion). The exemptions cover 61 specially prepared product descriptions, covering a total of 86 separate exclusion requests. These exclusions will apply from September 1, 2019, through September 1, 2020, and apply to any product that satisfies the description in the annex of the Federal Register notice, regardless of whether the company using the exclusion filed the request. Each exclusion is governed by the scope of the HTS heading and the product description appearing in the annex of the exclusion notice; it is not governed by the product description set out in any particular exclusion request.

The product exclusions include: cynomolgus macaques; certain feathers used for stuffing; silicone baby bottle nipples; certain compressive eye masks; certain plastic shower heads; certain A-frame or sandwich board signs; certain tapered sound-dampening ear plugs; certain types of wallpaper; certain printed art or pictorial books of limited value; certain dust, pillow, comforter or other fabric covers or shells; certain bike helmets; certain bars, rods, tubes of stainless steel; certain household sewing machines; certain gas- or propane-powered augers; certain digital cameras; certain protective eyeglasses or other non-prescription spectacles; certain prism binoculars; rotary microtomes; certain acoustic upright and grand pianos; certain acoustic guitars with soundboards; harp sharping levers of steel; certain parts of child safety seats; pillow shells and quilted pillow shells of cotton or man-made fibers; arrowheads of metal; certain spinning, spincast or baitcast fishing reels; certain hand paintings or drawings; certain original engravings, prints and lithographs; certain sculptures and statuary; postage stamps; certain collections of historical or mineralogical interest; and antique silverware and furniture of an age exceeding 100 years.

U.S. Customs and Border Protection will soon issue instructions on entry guidance and implementation. The USTR will continue to issue determinations on pending requests on a periodic basis.

The U.S. International Trade Commission (USITC) has announced the initiation of an investigation into the economic impact on the United States of all trade agreements. The investigation, Economic Impact of Trade Agreements Implemented Under Trade Authorities Procedures, 2021 Report, is required by section 105(f)(2) of the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 and will cover all trade agreements implemented since January 1, 1984. The USITC’s report will cover the Uruguay Round Agreements; the North American Free Trade Agreement (and its successor, the United States-Mexico-Canada Agreement (USMCA)); and U.S. free trade agreements (FTAs) with Australia, Bahrain, Canada, Chile, Colombia, the Dominican Republic and five Central American countries (Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua), Israel, Jordan, Korea, Morocco, Oman, Panama, Peru and Singapore.

As required by the statute, the USITC, will submit its report to the U.S. House of Representatives Committee on Ways and Means and the U.S. Senate Committee on Finance by June 29, 2021. In order to prepare the report, the USITC is seeking comment from all interested parties. The USITC will also hold a public hearing in connection with the investigation on October 6, 2020. Below are key dates for this investigation:

  • September 21, 2020 – Submission of requests to appear at the hearing.
  • September 25, 2020 – Submission of prehearing briefs and statements.
  • October 6, 2020 – Public hearing.
  • October 23, 2020 – Submission of post-hearing briefs and statements.
  • November 6, 2020 – Submission of all other written comments for the record.

All written submissions, except for confidential business information, will be available for public inspection. Any confidential business information received in this investigation and used in preparing the report will not be published in a manner revealing the operations of the company supplying the information. Filings must be made through the USITC’s Electronic Document Information System (EDIS) at https://edis.usitc.gov. No in-person paper-based filings or paper copies of any electronic filings will be accepted until further notice.

The Committee on Foreign Investment in the United States (CFIUS), an inter-agency committee headed by the Department of the Treasury, has released its annual report for 2018. CFIUS is authorized to review transactions that could result in the control of U.S. businesses by foreign persons or companies, as well as non-controlling investments by foreign persons or companies in certain U.S. businesses, in order to determine the effect of such transactions on the national security of the United States. CFIUS has become more widely known in the past decade amid growing concern over foreign investment in the United States and the potential security implications of certain foreign entities owning and controlling U.S. companies and/or technology. The Defense Production Act of 1950, as amended in August 2018 by the Foreign Investment Risk Review Modernization Act (FIRRMA), requires CFIUS to provide an annual report to Congress containing various cumulative and summary information related to transaction filings.

The report notes that for 2018, CFIUS conducted a first-stage review of 229 notices of covered transactions, and that more formal second-stage investigations were undertaken with respect to 158 of those 229 notices. CFIUS concluded action on 29 of the 229 notices (approximately 13% of the notices filed) after adopting mitigation measures in order to resolve national security concerns. This equals the number of mitigation measures implemented in 2017, and continues the significant uptick in CFIUS agencies’ interest in assuring national security provisions are implemented when necessary as the 2017-2018 mitigation actions total all of those taken from 2013 to 2016.

Ultimately, the parties to 66 of the 229 transactions withdrew their notices, with 34 parties later refiling a new notice in 2019. The report notes that for 18 of the withdrawn notices, the parties either abandoned the transaction after either CFIUS informed them that it was unable to identify mitigation measures that would resolve its national security concerns or it proposed mitigation measures that the parties chose not to accept. For 2018, CFIUS referred one transaction to President Donald Trump, in which the president issued an order prohibiting the acquisition of Qualcomm Incorporated by Broadcom Limited.

The overall data provided in this annual report shows a continuing upward trend in the number of notifications filed with CFIUS from 2010 to 2018. The number of notices subject to CFIUS jurisdiction increased from 93 in 2010 to 229 in 2018; however, the filings in 2018 represent a slight decrease from the 237 notices filed in 2017. Since CFIUS notices are highly confidential, the report provides only cumulative data on various industry sectors (and based upon NAICS codes) and notes that for 2018: 35% of the filings involved manufacturing; 38% related to finance, information and services; 21% involved mining, utilities and construction; and, 7% involved entities in the wholesale trade, retail trade or transportation.

Unsurprisingly, acquisitions involving Chinese investors accounted for the largest proportion of CFIUS notices filed in 2018, accounting for 55 of the 229 notices filed. Investments from Japan (31), Canada (29), France (21) and Germany (12) rounded out the top five foreign investor countries. For the 29 notices in which mitigation measures were put in place and agreed to by the involved parties in 2018, a wide variety of specific and verifiable mitigating actions were taken. These actions range from prohibiting or limiting the transfer or sharing of certain intellectual property and ensuring that only U.S. citizens handle certain products and services, to excluding certain sensitive assets from a transaction or even requiring the divestiture of all or part of the involved U.S. business.

The pilot program implemented pursuant to FIRRMA requiring declarations for certain transactions involving critical technologies was in place only in November and December of 2018. A declaration is a short form filing, for which CFIUS is not required to make a definitive determination. Parties facing a mandatory declaration may choose to submit a full notice. During this time, the annual report notes that CFIUS conducted an assessment on 21 declarations that were filed. CFIUS cleared two transactions, requested the parties to five transaction declarations to file a full written notice, determined that it could not conclude action on 11 transaction declarations, and found that one declaration was not subject to the jurisdiction of the pilot program. The parties withdrew one declaration for business reasons. Investors will continue to watch the treatment of declarations in the coming year in order to determine whether this is a viable alternative to submitting a full notice.

In collaboration with our foreign law firm partners, we continue to update our chart of COVID-19 measures taken by governments around the world. The government measures in the chart include economic, labor and employment, health and safety, and export and import measures. Below is a list of the updated countries and a summary of the changes we are seeing.

View/Download the Country Guide: Government Measures in Response to COVID-19

This week’s update includes new information as of the last week of June 2020 for Chile, China, France, Germany, Guatemala, India, Indonesia, Israel, Italy, Japan, Mexico, Philippines, Poland, Russia, South Africa, South Korea, Spain, Thailand, Turkey, United Kingdom, United States and Vietnam. The updates are in bold on the chart for ease of reference.

In the Americas and Europe, recent changes involve the easing of stricter health and safety measures including curfews, stay-at-home orders, and domestic travel restrictions. \ In the United States some states have pulled back on easing certain restrictions. In Asia, governments continue to lift lock-down measures and implement technology-based health measures such as temperature checks and contact tracing applications. Most governments have used a phased approach to re-opening businesses previously closed in response to the pandemic. Finally, most governments continue to maintain new export controls and import facilitation measures involving COVID-19-related health and medical goods.

Please see our Trump and Trade Update of April 7 for a discussion of this initiative.

On June 29, 2020, Secretary of State Mike Pompeo announced that the United States was ending exports of U.S.-origin defense equipment to Hong Kong and “will take steps toward imposing the same restrictions on U.S. defense and dual-use technologies to Hong Kong as it does for China.” The secretary noted that the United States “can no longer distinguish between the export of controlled items to Hong Kong or to mainland China. We cannot risk these items falling into the hands of the People’s Liberation Army.” Since China’s actions in June 2019 to crack down on Hong Kong protests (see Trump and Trade Update of June 1, 2020), Pompeo stated that because “Beijing now treats Hong Kong as ‘One Country, One System,’ so must we.” While no formal notice of a regulatory change has been posted to date by the Department of State’s Directorate of Defense Trade Controls (DDTC), all interested parties must assume that as of June 30, 2020, all exports of defense/military articles under the International Traffic in Arms Regulations (ITAR) will be reviewed for export licenses under a general policy of denial.

Similarly, Secretary of Commerce Wilbur Ross has announced that with China’s imposition of new security measures on Hong Kong, “the risk that sensitive U.S. technology will be diverted to the People’s Liberation Army or Ministry of State Security has increased.” As a result, he stated that Commerce Department regulations providing preferential trade and export control treatment to Hong Kong, including the availability of export license exceptions, have been suspended. On June 30, 2020, the Department’s Bureau of Industry and Security (BIS) posted an announcement noting that effective immediately, “BIS is hereby suspending any License Exceptions for exports to Hong Kong, reexports to Hong Kong, and transfers (in-country) within Hong Kong of items subject to the Export Administration Regulations (EAR), 15 CFR Parts 730-774, that provide differential treatment than those available to the People’s Republic of China.” As a result of this action, no items subject to the EAR may be exported to Hong Kong based upon a license exception (except for transactions that would otherwise be eligible for a license exception if exported to China).

BIS has clarified that any shipments of items to Hong Kong that were on dock for loading, on lighter, laden aboard an exporting or transferring carrier, or en route aboard a carrier to a port of export or reexport on June 30, 2020, may proceed to their destination under any previous license exception eligibility. Further, deemed export/reexport transactions involving Hong Kong persons authorized due to license exception eligibility prior to June 30, 2020 may continue to be authorized under such provision until August 28, 2020, after which such transactions will require a license.