More than a year after government officials from the United States, Mexico and Canada signed a new trade agreement (see Trump and Trade Update of November 30, 2018), and after numerous rounds of negotiations between congressional Democrats and the Office of the U.S. Trade Representative (USTR), it was announced today that the United States-Mexico-Canada Trade Agreement (USMCA) has been finalized. Various labor and environmental provisions of the original text of the agreement had presented major obstacles in the Democratic-controlled House of Representatives. House Ways & Means Committee Chairman Richard Neal, D-Mass., stated, “Today’s agreement is the culmination of months of House Democrats’ work to transform the new NAFTA into a deal that respects the dignity of workers, contains meaningful enforcement provisions, and prioritizes environmental protection and remediation. Our purposeful efforts produced changes to the USMCA that earned the endorsement of the AFL-CIO and will set a new standard for U.S. trade agreements moving forward.”

USTR Robert Lighthizer released a brief statement, agreeing that “[t]his will be a model for American trade deals going forward.” With these revisions, there is now strong bipartisan support for the USMCA in both the House and the Senate. The House is expected to vote and approve the USMCA next week; the Senate vote will not likely occur until early 2020.

While the text of the revised USMCA has not been released, the Ways & Means Committee issued a Fact Sheet providing details on the negotiated changes. These revisions cover: (1) enforcement mechanisms and dispute settlement; (2) labor and workers’ rights rules, including monitoring mechanisms and streamlined enforcement procedures; (3) environmental standards and a commitment to seven multilateral environmental agreements; and (4) the removal of certain provisions regarding prescription drugs and exclusivity as well as addressing the need for balance between competition and incentives for innovation.

The Office of the U.S. Trade Representative (USTR) has prepared a Federal Register notice seeking public comment on potential enforcement of U.S. retaliatory rights in the long-running World Trade Organization (WTO) dispute between the United States and the European Union (EU) over EU subsidies for large civil aircraft manufacturers. This action stems from an October 2019 WTO arbitrator ruling (see Trump and Trade Update of October 4, 2019) and a second ruling earlier this month (see Trump and Trade Update of December 3, 2019) supporting U.S. retaliation as a result of the WTO Dispute Settlement Body (DSB) ruling that the EU has continued to provide subsidy support to Airbus for its A350 and A380 jets. These subsidies have distorted the large civil aircraft market and placed U.S. aircraft manufacturers at an unfair disadvantage.

The USTR has already imposed a 10 percent tariff on imported EU aircraft and a 25 percent tariff on certain agricultural and industrial EU goods as a result of the October 2019 WTO ruling. The December WTO ruling allows the United States to take further action. In the latest Federal Register notice, USTR has announced that it is considering (1) whether products on the October 2019 list currently subject to additional duties should be removed or remain on the list, and if the additional duties on specific products on this list should be increased up to a level as high as 100 percent, and (2) whether additional duties should be placed on specific products on a second list and the suggested duty rate for such products. The lists of products are included as Annex I and Annex II in the notice. The newly proposed list (i.e., Annex II) is broken down into various sections indicating the EU countries to which any additional duties would be applied and covers far more products than the tariffs already in place (i.e., Annex I).

The USTR invites interested persons to comment on:

  • Whether maintaining or imposing additional duties on a specific product of one or more specific EU member states would be appropriate to enforce U.S. WTO rights or to obtain the elimination of the EU’s WTO-inconsistent measures, and/or would be likely to result in the EU implementing the DSB recommendations in the aircraft subsidy dispute or in achieving a mutually satisfactory solution.
  • Whether maintaining or imposing additional duties on specific products of one or more specific EU member states would cause disproportionate economic harm to U.S. interests, including small or medium-sized businesses and consumers.

Any public comments on the proposed additional duties must be submitted to the USTR by January 13, 2020. Electronic submissions must be made via the Federal Rulemaking Portal, https://www.regulations.gov, using docket number USTR-2019-0003. A process is available for submitting comments containing business confidential information.

In the continuing, long-running trade dispute between the United States and the European Union (EU) over aircraft subsidies, the World Trade Organization (WTO) on December 2, 2019, again ruled that the EU, despite earlier decisions instructing the EU to remove or alter its aircraft subsidies, has continued to provide support for the Airbus A350 and A380 jets which, in turn, has distorted the large civil aircraft market and placed U.S. aircraft manufacturers at an unfair disadvantage.

In October 2019, the WTO valued the harm of this subsidy program at $7.5 billion and allowed the United States to impose tariffs on EU products (see Trump and Trade Update of October 4, 2019). According to the Office of the U.S. Trade Representative (USTR), this most recent WTO ruling marks the sixth time that the WTO has found EU subsidies to Airbus violating WTO rules. In a press statement, USTR Robert Lighthizer said, “the EU tried yet again to show that minor changes to its Airbus subsidization package were enough to eliminate the WTO inconsistencies identified in the past. The WTO panel again rejected all of these claims and instead found that European governments had extended the subsidies by renegotiating the launch aid in a way even more favorable to Airbus.”

Given this most recent ruling by the WTO Dispute Settlement Body, the USTR announced that it will publish a Federal Register notice in the near future initiating a process to assess increasing the tariffs of 10 percent on large civil aircraft and 25 percent on agricultural and other products originating from EU countries that were implemented on October 18, 2019. This notice is likely to include additional EU products that could be subject to the tariffs.

The U.S. Trade Representative (USTR) issued its Section 301 investigation report this week on France’s digital services tax (DST), finding that the tax discriminates against U.S. companies, is inconsistent with prevailing principles of international tax policy, and is unusually burdensome for affected U.S. companies. The report notes that the French DST is inconsistent with prevailing tax principles because of its unusual and inconsistent retroactivity, its application to revenue rather than income, its extraterritorial application to revenues unconnected to a presence in France, and its purpose of deliberately targeting and penalizing particular U.S. technology companies (such as Google, Apple, Facebook and Amazon).

Background

In July 2019, 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). The resulting digital services tax imposed a 3 percent levy on gross revenues generated by companies providing two categories of digital services – “digital interface” services and “targeted advertising” services – to, or aimed at, persons in France. The DST, however, applies only to companies that generate total annual revenues from the covered digital services of at least €750 million globally and €25 million in France. The DST applies retroactively, beginning January 1, 2019. At the time of the DST’s enactment, the U.S. government expressed its concern that the tax unfairly targeted U.S. companies and launched in response on July 10, 2019, an investigation of the French DST pursuant to Section 301 of the Trade Act of 1974, which included a public hearing on August 19, 2019 (see Trump and Trade Update of August 19, 2019).

Proposed Retaliatory Action

In a forthcoming Federal Register notice, the USTR is proposing action in the form of additional ad valorem duties of up to 100 percent on products of France to be drawn from a preliminary list covering 63 Harmonized Tariff Schedule (HTS) subheadings, with an estimated import trade value for calendar year 2018 of approximately $2.4 billion. The proposed list includes goods from Chapters 4, 22, 33, 34, 42, 69 and 73 of the HTS, including cheese and dairy products, sparkling wine, cosmetics, soaps, handbags, porcelain or china household table and kitchen products, and certain cast iron kitchen products.

In determining the appropriate retaliatory action, the USTR “may take account of the level of harm to the U.S. economy caused by France’s DST” and is seeking public comment on the level of harm, “including DST payments owed by U.S. companies, the annual growth rate of such payments, and other effects, such as compliance costs.” Comments by interested parties must be submitted by January 6, 2020, prior to a January 7, 2020 public hearing at 9:30 a.m. at the U.S. International Trade Commission, 500 E Street SW, Washington, D.C. 20436. Any final post-hearing rebuttal comments must be filed by January 14, 2020. Written comments should be submitted via the Federal eRulemaking Portal at http://www.regulations.gov, on Docket Number USTR-2019-0009. There are specific procedures for filing comments that contain business confidential information.

In a brief statement to the press, USTR Robert Lighthizer noted that the United States “will take action against digital tax regimes that discriminate or otherwise impose undue burdens on U.S. companies,” adding that the USTR is considering opening similar Section 301 investigations into the digital services taxes of Austria, Italy and Turkey.

On November 27, 2019, the Department of Commerce published in the Federal Register proposed regulations for its review and potential blocking of transactions involving the information and communications technology and services supply chain (ICTS Supply Chain). The notice follows President Donald Trump’s Executive Order of May 15, 2019, “Securing the Information and Communications Technology and Services Supply Chain,” which required Commerce to implement regulations governing the process and procedures that will be used to “identify, assess, and address certain information and communications technology and services transactions that pose an undue risk to critical infrastructure or the digital economy in the United States, or an unacceptable risk to U.S. national security or the safety of United States persons.” See Trump and Trade Update of May 16, 2019.

The May 2019 executive order prohibits transactions that involve information and communications technology or services designed, developed, manufactured or supplied by persons owned by, controlled by or subject to the jurisdiction or direction of a foreign adversary whenever the secretary of commerce determines that a transaction would pose a threat to national security. The executive order grants the commerce secretary the authority to prohibit any acquisition, importation, transfer, installation, dealing in, or use of any information and communications technology or service when it is determined that the transaction: (i) involves property in which a foreign country or national has an interest; (ii) includes information and communications technology or services designed, developed, manufactured or supplied by persons owned by, controlled by or subject to the jurisdiction or direction of a foreign adversary; and (iii) poses certain undue risks to critical infrastructure or the digital economy in the United States or certain unacceptable risk to U.S. national security or U.S. persons.

The proposed regulations make clear that the determination of a “foreign adversary” is a matter of executive branch discretion to be made solely by the secretary of commerce in consultation with other agencies. Commerce will also rely on the Office of the Director of National Intelligence (ODNI) and the Department of Homeland Security (DHS) to prepare an initial threat assessment and vulnerability assessment for any transactions of concern. The commerce secretary will then, on a case-by-case basis and in a fact-specific manner, review the transaction and determine whether the ICTS Supply Chain transaction should be prohibited or mitigated. Under the procedures set forth in the proposed regulations, parties to any particular transaction would be informed of the review and the preliminary determination and provided an opportunity to comment and provide supporting information before any final determination. If it is determined that a transaction presents an undue or unacceptable national security risk, Commerce is authorized to require measures to mitigate the transaction’s identified risks or the secretary of commerce may fully prohibit the transaction. An unclassified, written final determination will be provided to the parties that, to the extent possible, explains how the decision is consistent with the terms of the executive order, and a summary of the final determination, as appropriate, will also be made publicly available.

The proposed regulations define “information and communications technology or services” as “any hardware, software, or other product or service primarily intended to fulfill or enable the function of information or data processing, storage, retrieval, or communication by electronic means, including through transmission, storage, or display.” Commerce has opened a public comment period on the proposed regulations and notes that the following entities could potentially be affected: (1) telecommunications service providers; (2) internet and digital service providers; and (3) supporting vendors and equipment manufacturers. Written comments must be submitted no later than December 27, 2019 via the Federal eRulemaking Portal at http://www.regulations.gov with docket number DOC-2019-0005. Comments may also be submitted via email to ICTsupplychain@doc.gov with “RIN 0605-AA51” in the subject line.

While no formal notice has been published by the Department of Commerce yet, President Donald Trump tweeted today that Section 232 tariffs will be re-imposed on imports of steel and aluminum products from Argentina and Brazil. In an early morning tweet, the president announced that “Brazil and Argentina have been presiding over a massive devaluation of their currencies, which is not good for our farmers. Therefore, effective immediately, I will restore the Tariffs on all Steel & Aluminum that is shipped into the U.S. from those countries.”

It appears that both Trump administration and industry officials were surprised by the announcement. Argentina and Brazil were excluded from these tariffs early in the Section 232 process when both agreed to voluntary quotas on their imports, and Trump stated that measures were in place to address the impairment to national security threatened by imports of steel and aluminum from Argentina, Brazil and Australia (see Trump and Trade Updates of June 1, 2018 and August 31, 2018).

The Office of the U.S. Trade Representative (USTR) has announced additional Section 301 tariff exclusions for certain imported Chinese products appearing on List 3. These products have been subject to Section 301 tariffs since September 24, 2018, when President Donald Trump announced additional import duties on Chinese goods with an annual trade value of approximately $200 billion.

This batch of approved product exclusions covers 32 specially-prepared product descriptions covering 39 separately filed exclusion requests. These products include: candy lollipops; bulk sodium metal; certain plastic trays; grinding beads of yttria-stabilized zirconia; certain tubes and pipe sleeves of alloy or galvanized steel; foldable stepladders made of steel; electric display cases incorporating refrigerating equipment designed for commercial use; certain vacuum cleaners; certain starter motors used in the lawn, automotive, watercraft, motorcycle, industrial and garden industries; certain bicycles; certain types of carts (other than industrial hand trucks and portable luggage); canoes; certain types of folding chairs, cots and tables; and certain electric household floor-standing, table or desk lamps.

These product exclusions will be retroactive to September 24, 2018, and remain in effect until August 7, 2020. These exclusions apply to any product that satisfies the description in the annexes 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 Harmonized Tariff Schedule 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. U.S. Customs and Border Protection will soon issue instructions on entry guidance and implementation. USTR will continue to issue determinations on pending requests on a periodic basis.

The Committee on Foreign Investment in the United States (CFIUS), an inter-agency committee headed by the Department of the Treasury, is authorized to review transactions that could result in the control of U.S. businesses by foreign persons or companies 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.

In August 2018, the Foreign Investment Risk Review Modernization Act (FIRRMA) became law, making certain amendments to the CFIUS review process and further increasing the need for U.S. companies to consider filing a CFIUS notification when contemplating a merger or acquisition involving foreign direct investment (see Trump and Trade Updates of August 16, 2018, October 19, 2018 and September 24, 2019).

The recently released CFIUS Annual Report to Congress for Calendar Years 2016 and 2017 describes the review process before FIRRMA but nevertheless indicates several interesting trends:

  • During 2016, CFIUS conducted a 30-day review of 172 notices and conducted further – more formal – 45-day investigations of 79 of these proposed transactions. CFIUS referred one proposed transaction to the president for review. In a transaction involving the acquisition of the U.S. business of Aixtron SE, a Germany company, by Grand Chip Investment GmbH, another German company, whose ultimate parent was Fujian Grand Chip Investment Fund LP, a Chinese company, the president issued an order prohibiting the acquisition.
  • During 2017, CFIUS conducted a 30-day review of 237 notices and conducted further investigations of 172 of these proposed transactions. CFIUS referred one proposed transaction to the president for review. In a transaction involving the acquisition of Lattice Semiconductor Corporations by Canyon Bridge Merger Sub, Inc., a U.S. company ultimately owned by China Venture Capital Fund Corporation Ltd, a Chinese corporation owned by several state-owned entities, the president issued an order prohibiting the acquisition.

The overall data provided in this annual report shows a continuing upward trend in the number of notifications filed with CFIUS. For the 2016-2017 period, the number of filings in the finance, information and services sectors amounted to the greatest number of voluntary notifications, while the number of filings covering the manufacturing sector decreased slightly. Unsurprisingly, acquisitions involving Chinese investors accounted for the largest proportion of CFIUS notices filed for the 2015-2017 period, amounting to almost 26 percent of all filed notices (143 filings). Investments from Canada, Japan and the United Kingdom accounted for the second, third and fourth most notices, respectively.

It appears that the use of mitigating measures to obtain CFIUS approval is increasing. In 2016, CFIUS and the involved parties entered into mitigation agreements involving 18 transactions and, in 2017, mitigation agreements were issued for 29 transactions. Mitigation measures are adopted when the involved CFIUS agencies feel that certain procedures and processes must be put in place to ensure compliance and to mitigate any potential risk to U.S. national security. Another interesting trend for this two-year period was the number of withdrawn notices. In 2016, of the 172 notices, six were withdrawn during the review period and 21 were withdrawn in the more formal investigation phase of CFIUS review. In 2017, these numbers increased to seven and 67, respectively. In some instances, the parties filed a new, revised notice, but in other instances, the parties abandoned the proposed transaction after they were unable to satisfy CFIUS concerns or when proposed mitigation measures were unacceptable.

The number of CFIUS notices in 2018, reportedly 229 filings, was similar to the number of filings in 2017. With the enactment of FIRRMA, and its full implementation in 2020, CFIUS filings are expected to continue to increase – particularly since non-controlling investments in critical technology and investments in certain real estate transactions will now require CFIUS notification.

The Department of Commerce’s Bureau of Industry and Security (BIS) announced this week that it will again extend the temporary general license it issued in May 2019 (see Trump and Trade Update of May 21, 2019 and August 19, 2019) that partially continued the availability of exports under the Export Administration Regulations (EAR) for exports, reexports and transfers (in-country) to Huawei Technologies Co., Ltd. and 114 of its non-U.S. affiliates. The temporary general license had been extended through November 18, 2019, and will now be extended another 90 days until February 16, 2020. 

 In its Federal Register notice to be published November 20, 2019, BIS reminds exporters, reexporters, and transferors subject to the notice that they are required to maintain certifications and other records, to be made available when requested by BIS, regarding their use of the temporary general license.  This temporary general license does not relieve parties of other EAR obligations as to other licensing requirements for exports to the People’s Republic of China.  When not covered by the scope of the temporary general license, exports to listed Huawei entities will require a license and “license applications will continue to be reviewed under a presumption of denial.”

The Office of the U.S. Trade Representative (USTR) announced today more Section 301 tariff exclusions for certain imported Chinese products appearing on List 3. These products have been subject to Section 301 tariffs since September 24, 2018. The USTR determined that two 10-digit subheadings will be excluded in their entirety:

  • 8409.91.3000: Parts suitable for use solely or principally with the engines of heading 8407 or 8408: Suitable for use solely or principally with spark-ignition internal combustion piston engines (including rotary engines): Aluminum cylinder heads; and
  • 8708.50.9500: Parts and accessories of the motor vehicles of headings 8701 to 8705: Drive-axles with differential, whether or not provided with other transmission components, and non-driving axles; parts thereof: Other: Half-shafts.

The USTR will also exclude products within 34 specially prepared product descriptions, which cover products such as various types of floor coverings; dog and cat leashes; certain silk fabrics; high-tenacity single yarn of polyester multifilament; static converters designed for wireless (inductive) charging of telecommunication devices; certain extension cords; bicycle speedometers; certain folding chairs/stools; certain tools and cutting pliers; certain ultrasonic cleaners; certain drive shafts mainly for use in recreation off-road vehicles; and certain tension pole shower caddies.

These product exclusions will be retroactive to September 24, 2018, and remain in effect until August 7, 2020. These exclusions apply to any product that satisfies the description in the annexes 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 Harmonized Tariff Schedule 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. U.S. Customs and Border Protection will soon issue instructions on entry guidance and implementation. USTR will continue to issue determinations on pending requests on a periodic basis.