On April 8, Senate Foreign Relations Committee Chairman Bob Menendez (D-NJ) and Ranking Member Jim Risch (R-ID) announced a bipartisan agreement on a wide-ranging strategic approach towards China.  The Strategic Competition Act of 2021 addresses economic competition with China, as well as humanitarian, national security, and democracy-related issues.  Most significantly, the bill, if enacted, stands to significantly impact U.S. trade with China and other partners.

Notably, the bill – scheduled to be marked up by the committee on April 21 – seeks to shore up the competitiveness of U.S. companies operating in China by:

  • Promoting diverse global supply chains.  Section 101 directs the Secretary of State, with the Secretary of Commerce, to help U.S. persons and companies to move supply chains outside of China and identify alternative markets.

In addition, the bill requires U.S. agencies to gather information and monitor Chinese anti-competitive practices and violations of U.S. law by:

  • Tracking intellectual property (“IP”) violations by Chinese state-owned enterprises (“SOEs”).  Section 402 directs the Secretary of State, in coordination with other agencies, to publish an annual list of SOEs that have either stolen U.S. companies’ IP or forced technology transfer.  The list will also describe, without disclosing IP or trade secrets, the economic advantage obtained by the SOE.
  • Reporting on Chinese subsidies.  Section 403 requires the Secretary of State, in coordination with the U.S. Trade Representative and Secretary of Commerce, to publish a list of all subsidies provided by the Chinese government to Chinese enterprises and identify how that treatment discriminates against foreign market participants.  Subsidies to be included extend beyond the traditional definition in the WTO Agreement on Subsidies and Countervailing Measures; the list encompasses measures and policies that shield SOEs from competition.
  • Monitoring the use of Hong Kong to circumvent U.S. export controls.  Section 406 directs the Secretary of State to report on the extent to which China uses Hong Kong to get around U.S. restrictions placed on certain exports.

The bill also penalizes Chinese officials for their involvement in Uyghur forced labor by:

  • Imposing sanctions with respect to human rights violations in Xinjiang.  Sections 302 and 303 would extend the reach of the Uyghur Human Rights Policy Act, passed last year, by allowing the U.S. government to impose economic sanctions against Chinese officials for their involvement in Uyghur forced labor and other abuses.

Finally, the bill aims to enhance U.S. relationships with trading partners through new trade agreements on, for example, digital services; renewed participation in various international organizations; and, investing in global infrastructure, like 5G mobile networks and undersea cables.

The Strategic Competition Act is one component of a larger, bipartisan legislative effort being championed by Senate Majority Leader Schumer (D-NY) to “outcompete China and create new America jobs.”  Earlier this year, Schumer directed eight relevant Senate committees to begin drafting the broader China bill, with the bipartisan Endless Frontier Act (which invests in ten key technology areas, including semiconductors, AI and machine learning, and advanced energy technology) – itself the subject of an April 14 Senate Commerce Committee hearing – as its centerpiece. The comprehensive legislation could be on the Senate floor later this spring.

The Kelley Drye trade team will be actively monitoring the bill and providing updates.  Should you have any questions, please contact the authors.

Today, the Department of Defense (“DoD”) published in the Federal Register a request for comments on risks in the supply chain for strategic and critical materials. DoD’s request stems from an Executive Order signed in February by President Biden, which directed the DoD and three other federal agencies to closely examine America’s supply chains in four critical industries.  Additional information concerning President Biden’s executive order and requests for comments on the supply chains for semiconductors and advanced packaging and high-capacity batteries are available here and here.

DoD’s report will include an update to an ongoing inquiry initiated by President Trump at the end of last year concerning imports of “critical minerals,” which include the following 35 minerals as identified by the Department of the Interior:

Aluminum (bauxite), antimony, arsenic, barite, beryllium, bismuth, cesium, chromium, cobalt,  fluorspar, gallium, germanium, graphite (natural), hafnium, helium, indium, lithium, magnesium, manganese, niobium, platinum group metals, potash, the rare earth elements group, rhenium, rubidium, scandium, strontium, tantalum, tellurium, tin, titanium, tungsten, uranium, vanadium, and zirconium.

DoD’s request for comments will also focus on a broader range of critical materials so parties involved in defense-related supply chains with interests outside of the 35 identified critical minerals should consider submitting their views.

Like President Biden’s order, DoD’s request for comments signal’s a potentially broader approach to supply chains than the approach taken by President Trump.  In particular, DoD is specifically requesting comments and information related to “diversifying sources of supply for strategic and critical materials, including domestic sources and foreign allies / partners.”

All members of the supply chain, including consumers and producers of both upstream and downstream products, are encouraged to participate. The deadline to file comments is Wednesday, April 28, 2021.

Last Friday, the Office of the United States Trade Representative (“USTR”) issued lists of products from six countries that may be subject to additional 25 percent tariffs.  The proposed product lists identified by USTR are designed to offset digital services taxes (“DST”)[1] imposed by Austria, India, Italy, Spain, Turkey and the United Kingdom, and that USTR has determined violate Section 301 of the Trade Act of 1974 (19 U.S.C. § 2411). Additional information on USTR’s investigations can be found here.

The initial Section 301 action was brought against 10 countries, however, USTR also announced it was formally terminating cases against Brazil, the Czech Republic, the European Union and Indonesia because these countries had not implemented or adopted any digital service taxes. USTR’s announcement did not address a separate Section 301 digital services action brought against France, covering $1.3 billion worth of French goods that was suspended by the previous administration.

For the cases going forward, each of USTR’s notices requests comments and information from parties on whether action is appropriate, and if so, the appropriate action to be taken.  In particular, USTR seeks comments on:

  • The level of the burden or restriction on U.S. commerce resulting from the country at issue’s DST.
  • The appropriate aggregate level of trade to be covered by additional duties.
  • The specific products to be subject to increased duties, including whether USTR’s proposed lists should be retained or removed, or whether tariff subheadings not currently on the list should be added.
  • The level of the increase, if any, in the rate of duty on items covered.

USTR will hold a hearing regarding the proposed remedy for each of the six subject countries, as well as a “multi-jurisdictional” hearing for issues that concern more than one country.  Requests to appear at each hearing (including a summary of the testimony to be given) must be submitted to USTR by April 21, 2021, and written submissions must be submitted by April 30, 2021.

USTR’s federal register notices, and prior relevant documents concerning the agency’s investigations, are available at the agency’s website.  Among the products identified on USTR’s six lists are seafood, children’s clothing, jewelry, and certain furniture items.  If you require assistance responding to USTR’s request, please don’t hesitate to contact Kelley Drye’s international trade team.


[1] Digital service taxes apply to revenues that certain companies generate overseas from the provision of digital services to, or aimed at, users in those jurisdictions.  Taxable digital services might include providing digital interface, targeted advertising, and the transmission of data collected about users for advertising purposes.  The goods identified on USTRs list are not specifically linked to services subject to the relevant DSTs.

As discussed earlier this month here, President Biden issued Executive Order 14017 (“EO 14017”) establishing a wide-ranging evaluation of America’s supply chains that will take place over the next twelve months. This post provides updates with respect to two of the 100-day supply-chain specific reviews.

As previously reported, the Commerce Department’s Bureau of Industry and Security (“BIS”) published a federal register notice establishing a formal notice and comment period for industry participants to provide information on semiconductor manufacturing and advanced packaging supply chains.  BIS has also now announced that it will conduct a virtual forum that will allow industry participants to provide their views orally.  The forum will take place on Thursday, April 8, 2021 from 2:00 pm EST to 5:00 pm EST, but interested parties must submit a request to appear at the forum by Thursday, April 1, 2021 at 5:00 pm EST.  The virtual forum is in addition to (not a substitution) for public comments.

The Department of Energy’s (“DOE”) Office of Energy Efficiency and Renewable Energy has also now published a federal register notice requesting information from industry participants on the high-capacity batteries (including electrical vehicle batteries) supply chain.  Critical materials identified by the DOE include battery grade nickel, cobalt, and lithium.  Industry participants throughout the supply chain should consider expressing their views to the DOE but the agency’s notice specifically calls out extraction of raw materials, refining, separators, collectors and recyclers, among other supply-chain participants.  Responses to the agency’s request for information are due on April 14, 2021.

 

Today, the Bureau of Industry & Security (BIS) is amending the Export Administration Regulations (EAR) to eliminate most reporting requirements related to open source encryption software and certain “mass market” encryption items.  Today’s rule also revises the Commerce Control List (CCL) to implement updates from the December 2019 Wassenaar Arrangement (WA) Plenary meeting.

Open source software changes

Previously, software source code published online that called, contained, or used encryption functionality often remained subject to the EAR (and its licensing requirements) until the author of the code submitted an email notification report to the U.S. government.  Today’s amendment eliminates the reporting requirement for source code that uses standard cryptography, releasing source code from the EAR’s licensing requirements once the code is published online.  Under the new rules, only source code that implements proprietary or unpublished encryption must be reported to the U.S. government before being formally released from control under the EAR.  The change should substantially reduce the reporting burden for companies that frequently publish open source software online.

Changes to “mass market” reporting and classification requirements

 Today’s amendment eliminates the requirement that exporters submit an annual report to BIS for most “mass market” encryption items (e.g., software and other items generally available for sale to the public).  Under the revised rules, annual reports will only be required for a limited set of mass market items described in § 740.17(e)(3).  These items, including certain chips, chipsets, electronic assemblies, field programmable logic devices, and associated executable software, previously required the submission of a formal classification request to BIS before they could be exported as mass market items.  Pursuant to today’s updates, these items will be eligible for export following self-classification, but will be subject to an annual reporting requirement.

Wassenaar Arrangement updates

 Also included in today’s amendments are technical updates to the CCL agreed to at the December 2019 WA Plenary meeting.  The amendments modify about two dozen Export Control Classification Numbers (ECCNs) in CCL Categories 0-3, 5 (Part 2), 6, and 9. Exporters should examine these updates to determine whether the changes alert the classification of their products.

 

Today, the U.S. Department of the Treasury’s Office of Foreign Asset Control (“OFAC”) further escalated sanctions on Burma by adding two large Burmese military holding companies to its List of Specially Designated Nationals (“SDNs”).  Myanmar Economic Holdings Public Company Limited (“MEHL”) and Myanmar Economic Corporation Limited (“MEC”) both dominate large sectors of the Burmese economy, with vast business interests.  MEHL operates in the banking, trade, logistics, construction, mining, tourism, agriculture, tobacco, food, and beverage sectors, while MEC has interests in mining, manufacturing, and telecommunications.

Until June 22, 2021, companies are permitted to wind-down any transactions with MEHL or MEC or any entities owned 50 percent or more by the two companies. After that date, U.S. persons are broadly prohibited from doing business with either entity or with any company owned 50 percent or more by the sanctioned holding companies.  Any of the sanctioned companies’ property or interests in property in the United States or within the possession or control of U.S. persons must be formally blocked and reported to OFAC.

OFAC also issued several general licenses authorizing activities related to the official business of the United States government, activities of international organizations and entities, and transactions in support of non-governmental organizations.

Companies doing business in Burma should carefully review their business relationships for the involvement of sanctioned parties.  Please reach out to the authors with questions.

 

 

Last week, the Office of Foreign Assets Control (OFAC) announced a settlement agreement with UniControl, Inc. (UniControl or “the company”) for shipping goods to European trading partners when UniControl knew or should have known that some of its products would ultimately be re-exported to Iran.  The enforcement action is a reminder that OFAC expects U.S. companies to perform appropriate due diligence when exporting products to intermediary parties like resellers and distributors.

According to OFAC, the Cleveland, Ohio-based manufacturer of process control products made 21 shipments of airflow pressure switches with a total value of $687,189 to European trading partners that were ultimately reexported to Iran in violation of U.S. law.  OFAC indicated that UniControl ignored or failed to respond to several red flags that its switches could be diverted to Iran by its European partners:

  • Intermediaries conveyed interest from Iran: UniControl’s European trading partners inquired whether the company would supply products into the Iranian market, given the significant market opportunity there.  Although UniControl declined the inquiry, the company did not later ensure that products sold to the European customers were not diverted to Iran.
  • Sales agreement included Iran:  Despite early warnings that its partners were interested in the Iranian market, UniControl and one of its European partners entered into a “Sales Representative Agreement” that listed Iran as a country where that trading partner could resell UniControl goods.  (This is a reminder for all U.S. companies that distribution and sales agreements should exclude Iran and other sanctioned jurisdictions from the authorized sales territory specified in any agreement.)
  • Obscured end user identity:  A European trading partner rebuffed UniContol’s offer to drop ship products directly to a purported European end user when the trading partner was facing shipment delays.   OFAC chided UniControl for failing to question the trading partner on its refusal to allow drop shipments or otherwise reach out directly to the end user, which presumably would have revealed that the end user was located in Iran, not Europe.
  • Meeting with prospective Iranian customers at trade show: Between 2012 and 2017, UniControl management and employees attended trade shows in Europe.  At a 2016 trade conference, UniControl managers met with Iranian visitors at a European trade partner’s booth.  According to OFAC, UniControl did not question why Iranians were interested in the company’s products.
  • Removal of a “Made in USA” label:  In one instance, a European trade partner requested that UniControl remove its “Made in USA” label so that, as the European trade partner explained, an Iranian end user could avoid problems with the stated origin of the product.  Although UniControl sought guidance from outside counsel, UniControl subsequently shipped switches to the same European trade partner that were ultimately re-exported to Iran.

Since UniControl voluntarily self-disclosed the apparent violations of OFAC’s regulations and the agency considered this to be a “non-egregious” case (e.g., the transactions did not involve willful or reckless conduct and did not present serious harm to sanctions program objectives), OFAC assessed a maximum civil penalty of one half the transaction value for each violation (i.e., each shipment).  OFAC further found several mitigating factors, such as ceasing trade with its European trading partners and strengthening its compliance program, that decreased the penalty amount to $216,464.  OFAC specifically cited UniControl’s adoption of end user certificates from secondary and tertiary buyers of its reexported products as well as the addition of a “Destination Control Statement” to documents like sales orders and invoices to remind end users of trade restrictions.

This case is a reminder that U.S. companies need to be vigilant for red flags of possible diversion to Iran or other sanctioned territories by intermediary parties.  Furthermore, once red flags are identified, U.S. companies must take action to investigate and remediate the issue through enhanced compliance checks and due diligence requirements on intermediary parties.

On February 24, 2021, President Biden issued Executive Order 14017 (“EO 14017”) establishing a wide-ranging evaluation of America’s supply chains that will take place over the next twelve months.  The assessment will follow two tracks.

The first is a 100-day review involving four specific supply chains:

  • semiconductors and advanced packaging;
  • high-capacity batteries;
  • critical minerals and other identified strategic materials; and
  • active pharmaceutical ingredients.

The second is a year-long review of six sectors:

  • defense industrial base;
  • public health and biological preparedness industrial base;
  • information and communications technology (ICT) industrial base;
  • energy sector industrial base;
  • transportation industrial base;
  • agricultural commodities and food products.

Each supply chain review will result in the preparation of a report by the head of a designated federal agency that will be provided to the President through the Assistant to the President for National Security Affairs (“APNSA”) and the Assistant to the President for Economic Policy (“APEP”).

Industry participants will have a role in shaping these reports, though the order does not specify whether communications will be on the record through notice and comment or through informal contacts.  On March 15, 2021, however, the Commerce Department’s Bureau of Industry and Security published a federal register notice establishing a formal notice and comment period for industry participants to provide information on semiconductor manufacturing and advanced packaging supply chains.  The deadline to file comments is April 5, 2021, so industry participants will need to mobilize quickly.   Regardless of the process used for each industry and sector, these reviews provide an opportunity for industry participants to shape policy with respect to their respective supply chains in a variety of ways.

President Biden’s order is a continuation of the prior administration’s focus on supply chains, including an evaluation of the United States’ reliance on imports of critical minerals.  A summary analysis of President Trump’s executive order is available here.  EO 14017, however, provides some hints at differences in the approach the new administration might take.  For example, while President’s Trump’ order focused on alleviating the threat to national security posed by imports of critical minerals from adversaries, President Biden’s order appears to take a broader approach to supply chains.  In particular, as part of its statement on policy, EO 14017 states that “close cooperation on resilient supply chains with allies and partners who share our values will foster collective economic and national security and strengthen the capacity to respond to international disasters and emergencies.”  The focus on strengthening supply chains with allies and partners is somewhat a departure from the prior administration.

In a press briefing last Friday, White House National Security Adviser Jake Sullivan, in discussing an upcoming meeting with representatives of China, noted that before the administration undertakes a point by point discussion on tariffs and export controls, the U.S. has “more work to do with our allies and partners to come up with a common approach, a joint approach.”  This comment again demonstrates the Biden  administration’s departure from the Trump administrations go-it-alone approach.

In the coming days, the Kelly Drye team will continue to monitor the federal register and provide updates for industry participants on how they can engage in shaping policy concerning their supply chains.

 

On March 10, 2021, the United States Trade Representative (USTR) published an extension of the COVID-19 related medical-care and response product exclusions from Section 301 duties covering imports from China. The agency determined it would be inappropriate to allow the exclusions to lapse in consideration of the ongoing efforts to combat the COVID-19 pandemic. The extensions are effective for six months through September 30, 2021.

USTR originally extended the Section 301 exclusions for these 99 products on December 29, 2020. The extensions were set to expire on March 31, 2021. The list of products for which exclusions are being extended is included in the annex of the December 29, 2020 notice. The list of products includes x-ray equipment, oxygen tubes, hand soap, hand sanitizer, and personal protective equipment, among others.

USTR has made no announcement regarding plans to extend other non-COVID-19 related exclusions that expired on December 31, 2020, or earlier.

If you have any questions, please contact:  Jennifer McCadney or Matthew Pereira.

On March 1, 2021, the U.S. Court of International Trade (CIT) issued a decision with important ramifications for any company that uses “first sale” to reduce customs duty liability for goods imported into the United States.  The CIT’s ruling in Meyer Corp., U.S. v. United States calls into question the continued viability of first sale for suppliers located in non-market economies. This development has meaningfully altered the risk profile associated with using first sale for transactions in China and Vietnam.  All companies relying on first sale should review their first sale programs to evaluate the impact of this ruling and take adequate precautions.

The First Sale Rule

The first sale rule permits importers to declare a lower customs value—and by extension, to lower the customs duty liability—for certain types of qualifying importations. To be eligible, an importation must involve a multi-tiered transaction (i.e., there must be three or more parties involved in the sequence of sales leading to the importer). Under U.S. law, the earliest sale in such a sequence of transactions may be declared as the customs value provided that the goods are clearly destined for the United States at the time of such sale and the first sale value otherwise satisfies the requirements applicable to any transaction value (i.e., it must be a bona fide sale that has been conducted at arm’s length).

First sale is thus commonly described as having “three elements”: the first sale in a multi-tiered transaction may be used as a customs value provided (1) it is a bona fide sale, (2) the goods are clearly destined for the United States at the time of the transaction, and (3) the value is an arm’s length price.

Meyer v. United States

The CIT’s decision in Meyer hinges on additional language from the seminal 30-year-old case that established first sale as a viable basis for customs valuation—language that has frequently been quoted, but seldom, if ever, scrutinized for meaning.  The CIT interpreted that language to impose an overlooked requirement, namely that any legitimate first sale must be (4) absent any distortive non-market influences. While the first three requirements for the use of first sale are frequently assessed and litigated, the fourth requirement, the CIT notes, “has generally been neglected.” Continue Reading U.S. Importers Should Reevaluate “First Sale” Customs Programs