The United Kingdom will need a new most favored nation tariff regime as early as January 2021 when the current Brexit transition could come to an end and is calling on businesses, consumers, and others to advise which tariffs should be eliminated or reduced.

The EU’s Common External Tariff, which currently applies to all imports into the UK from non-EU countries, will essentially be marked up to create the new UK Global Tariff (UKGT). Guiding principles for the UK’s forthcoming independent trade policy already are enshrined in UK law and focus on the interests of UK consumers and producers and the general promotion of free trade.

The UK proposes to simplify and tailor tariffs in the interest of UK businesses and households by:

  • Eliminating “nuisance tariffs”, i.e., tariffs of less than 2.5%, to reduce administrative burden on business;
  • Rounding other tariffs down to the nearest standardized 2.5%, 5% or 10% band to make the system easier for businesses to use; and
  • Removing tariffs on key inputs to production or where the UK has zero or limited domestic production to reduce costs for UK manufacturers and lower prices for consumers.

Conveniently, the UK has created interesting menus of goods for which there may be reduction or elimination of tariffs. These lists include:

  • Broad Economic Categories, such as valves; pulleys and flywheels; graphite electrodes; aluminum, copper, and various iron and steel products; and parts for metal-rolling mills;
  • Tariff Suspensions, such as mushrooms; valves; polyethylene terephthalate (PET); and iron, steel, and stainless steel products; and
  • Inward Processing, such as PET; valves; and iron, steel, aluminum, and titanium products.

The foregoing proposals are not exhaustive, however. Suggestions are invited for other goods that should be considered as candidates for reduced or removed tariffs. The UKGT will apply to all goods imported into the UK from 1 January 2021 (or a later date if the UK and EU agreed to extend the transition period) except for goods from developing countries under the WTO Generalised Systems of Preferences or those governed by the free trade agreements the UK expects to negotiate in the coming months.

Stakeholders have until 5 March 2020 to send in their wish lists.

The United States and India are working to complete a limited trade deal later this month. U.S. Trade Representative Robert Lighthizer will travel to India to finalize the agreement in the coming weeks. President Trump is expected to sign the agreement when he visits India around February 24-25, his first trip to India as president. The agreement should quell trade tensions between the two nations, which have been rising since they failed to reach a deal late last year.

The United States will restore India’s benefits under the Generalized System of Preferences (“GSP”) as part of the deal. The GSP program eliminates duties on a range of products for certain developing countries designated by the United States. President Trump removed India from the program in June 2019, citing various trade barriers and market access issues faced by U.S. companies in India. India’s benefits under the program are valued at $6.4 billion.

Also as part of the deal, India will (1) remove price controls on medical devices, including heart stents and knee implants, (2) improve market access for agriculture and dairy products, and (3) add intellectual property protections. The agricultural products benefiting from greater market access include almonds, cherries, pork, hay, and dried grains. The benefits accruing to the United States from these commitments will match the $6.4 billion benefit India would gain under the GSP program.

Both sides hope to incorporate tariff reductions, which could include reductions for duties on U.S. information and communication technology goods and Harley-Davidson motorcycles. It is unclear at this point if U.S. duties on Indian steel and aluminum under Section 232 will be affected.

Although this pact is relatively limited in scope, it represents the first step towards a more comprehensive trade agreement between the two nations.

Late last Friday evening, President Trump issued a proclamation imposing duties on imports of certain derivatives of steel and aluminum articles that have been found to threaten the national security.  The proclamation specifically identified products that were subject to the new duties (effective February 8, 2020), but it was unclear whether two yet-to-be-released Annexes would identify a more expansive list of products.

Yesterday, the proclamation and accompanying annexes were published in the Federal Register revealing that the list of products covered by the new duties was extremely limited.  It is unclear, however, whether the criteria laid out in the President’s proclamation will be used to apply duties to additional derivative steel and aluminum articles in the future.

For additional information regarding the President’s proclamation, please click here.

For a copy of the proclamation and accompanying annexes, please click here.

On January 17, the U.S. Treasury Department issued final rules implementing the Foreign Investment Risk Review Modernization Act (“FIRRMA”), which expanded and clarified the jurisdiction of the Committee on Foreign Investment in the United States (“CFIUS”) (an additional final rule regarding real estate transactions was published the same day and will be the subject of an additional alert).  These final rules, which are effective on February 13, 2020, generally reflect the rules that were proposed in September 2019.  However, the final rules include some marginal changes and provide significant additional context and examples.

The primary jurisdictional expansion in FIRRMA is CFIUS jurisdiction over certain non-controlling investments in technology, infrastructure, and data U.S. businesses (“TID U.S. businesses”), including U.S. businesses that: 1) produce, design, test, manufacture, fabricate, or developed a “critical technology”; 2) own, operate, manufacture, supply, or service “critical infrastructure”; or 3) maintain or collect “sensitive personal data” of U.S. citizens.

The final rules maintain the pilot program mandatory declaration concept for critical technology investments, with a few changes (including by moving the rules from 31 C.F.R. Part 801 to 31 C.F.R. Part 800).  For example, the final rules include the following exceptions from the mandatory filing requirements: 1) transactions involving excepted investors (excepted investors include a foreign national who is a national of one or more “excepted foreign states,” among other specified entities); 2) transactions involving encryption technologies that qualify for license exception ENC under 15 C.F.R. Part 740 of the Export Administration Regulations; 3) entities that are already subject to a foreign ownership, control, or influence mitigation agreement pursuant to the National Industrial Security Program regulations; and 4) transactions involving investment funds managed by a U.S. general partner, managing member, or equivalent that is either not a foreign person or is ultimately under U.S.-person control; among other exceptions.  “Critical technology” includes technology controlled for export under the International Traffic in Arms Regulations, Export Administration Regulations, or is designated as an emerging or foundational technology, among other related controls.  Further, the final rule anticipates a future rulemaking that changes the jurisdictional hook from industry designations determined by reference to NAICS codes to a focus on export control requirements.

The final rules also modified some of the proposed rules’ treatment of “sensitive personal data.” The treatment of genetic information as a subset of sensitive personal data has generally become more permissive in the final rule by stating that covered genetic information must be “identifiable data,” or traceable to a specific individual.

Finally, broad exceptions are available to “excepted foreign states” and “excepted investors.”  Beginning on the effective date, Australia, Canada, and the United Kingdom will qualify as excepted foreign states, and qualifying investors from those countries are free from FIRRMA’s broadened jurisdiction related to non-controlling investments.  This list may expand in the future.

These final rules expand and substantially complicate CFIUS jurisdictional analysis.  The regulations include significant detailed guidance regarding the rules’ interpretation and implementation, which often limits what appears to be very general applicability.  Further, certain aspects of FIRRMA implementation remain incomplete (including the ultimate scope of “critical technologies”), even after this final rule, and CFIUS acknowledges in the rulemaking that periodic review and amendment of these rules will be appropriate.  Accordingly, careful review and analysis of the new rules is vital when assessing potential transactions from a CFIUS perspective.

On Friday, January 24, 2020, President Trump issued a proclamation expanding duties imposed on steel and aluminum articles pursuant to Section 232 of the Trade Expansion Act, commonly referred to as “Section 232 duties,” to certain downstream steel and aluminum “derivatives.”

Application of 232 duties to “derivative articles” is authorized by statute.  Indeed, while the scope of a 232 investigation is limited to certain “articles,” a remedy may be imposed on the articles subject to the investigation as well as their derivatives.  19 U.S.C. § 1862(b)-(c); see also 15 C.F.R. §§ 705.2 – 705.3.

The Trade Expansion Act of 1958 added the “derivative articles” language to the statute in order to prevent imports of derivative articles from undermining remedies imposed on imports of articles found to threaten the national security.  The President’s proclamation indicates that the determination to expand Section 232 duties was taken for this very reason – to address foreign producers’ circumvention of Section 232 duties by increasing shipments of derivative articles to the United States and because “imports of these derivative articles threaten to undermine the actions taken to address the risk to the national security of the United States.”

Products covered by the President’s proclamation are those “derivatives” of steel and aluminum articles that meet the following three criteria:

  1. the aluminum article or steel article represents, on average, two-thirds or more of the total cost of materials of the derivative article;
  2. import volumes of such derivative article increased year-to-year since June 1, 2018, following the imposition of the Section 232 duties, in comparison to import volumes of such derivative article during the 2 preceding years; and
  3. import volumes of such derivative article following the imposition of the tariffs exceeded the 4 percent average increase in the total volume of goods imported into the United States during the same period since June 1, 2018.

The proclamation also specifically identifies “steel nails, tacks, drawing pins, corrugated nails, staples, and similar derivative articles,” “aluminum stranded wire, cables, plaited bands, and the like (including slings and similar derivative articles),” and “bumper and body stampings of aluminum and steel for motor vehicles and tractors” as being covered, though it is unclear if two yet-to-be-released Annexes will identify a more expansive list of products.

Effective February 8, 2020, derivative steel articles will be subject to a 25 percent tariff, but imports from Argentina, Australia, Brazil, Canada, Mexico, and South Korea are exempted.  Similarly, derivative aluminum articles will be subject to a 10 percent tariff, but imports from Argentina, Australia, Canada, and Mexico are exempted. In the event of a surge of imports of any identified derivative article from an exempted country, however, the Secretary of Commerce is authorized extend tariffs to imports from that country or apply an alternative remedy.

The proclamation also authorizes Secretary Ross to establish an exclusion process from the additional duties “for any derivative article determined not to be produced in the United States in a sufficient and reasonably available amount or of a satisfactory quality” as well as “upon specific national security considerations.”

We will continue to monitor this important issue in the coming days and weeks as more details become available concerning the Proclamation’s coverage as well as any exclusion process established.

On January 15, 2019, President Trump and Chinese Vice Premier Liu He signed the long-awaited “phase one” trade deal at the White House. The deal represents the first step towards a comprehensive agreement between the two nations and progress in the U.S.-China relationship. The deal will help ease trade tensions signaling a truce in the trade war, at least for a while.  The signing also marks the beginning of “phase two” negotiations, which will almost certainly be more contentious. “Phase two” will not be completed before the November election.

The Agreement

The agreement has eight chapters, including chapters on (1) intellectual property, (2) technology transfer, (3) agriculture, (4) financial services, (5) macroeconomic policies and exchange rate matters and transparency, (6) expanding trade, and (7) bilateral evaluation and dispute resolution.

As part of the agreement, the United States has already postponed a 15 percent tariff that was scheduled to be imposed December 15th on $160 billion of Chinese imports. The United States has also agreed to reduce tariffs on an additional $120 billion of Chinese imports from 15 percent to 7.5 percent. The reduction is set to take place February 14, 2020, according to a draft Federal Register notice from the United States Trade Representative. The agreement commits China to increase purchases of U.S. goods and services by $200 billion over 2017 levels. This includes $77 billion in manufactured goods, $32 billion in agricultural goods, $52 billion in energy, and $37 billion in services over the next two years. All purchases will be at market prices, and market conditions will dictate the timing of purchases.

The intellectual property chapter covers trade secrets, pharmaceuticals, patents, trademarks, geographical indications, and the enforcement of pirated and counterfeit goods. Specifically, it expands the scope of trade secret misappropriation liability, shifts the burden of proof requirements in civil cases, and adds criminal penalties for willful misappropriation. It also creates a mechanism to resolve pharmaceutical patent disputes early in the process and extends the effective patent term of patents experiencing delays in the Chinese approval process. The agreement requires that China increase its civil and criminal penalties to levels sufficient to deter intellectual property violations.

The technology transfer chapter covers various practices the United States determined to be unreasonable or discriminatory. China has agreed to end the practice of forcing foreign companies to transfer their technologies to Chinese firms as a condition for obtaining market access and administrative approvals. The chapter requires China to enforce its technology transfer laws in an impartial, fair, transparent, and non-discriminatory manner. China must publish the rules of procedure, provide parties adequate notice, allow parties to review evidence and respond, and allow parties to have legal counsel for the proceedings.

The agriculture chapter covers structural barriers to trade separate from China’s increased purchase obligations.  The provisions should increase U.S. food, agriculture, and seafood exports and market access. The provisions aim to increase American farm and fishery income and promote job growth nationwide. The deal removes barriers for U.S. beef, pork, poultry, processed meat, rice, seafood, and pet food, among others.

The financial services chapter allows U.S. financial service providers to compete fairly and expand in the Chinese market. The chapter covers a broad range of financial services including banking, insurance, securities, and credit rating services, easing restrictions U.S. firms currently face in China. The provisions of this chapter also require China to eliminate foreign equity limits for securities companies, fund management companies, and U.S. life, health, and pension insurance providers.

The macroeconomic policies and exchange rate matters and transparency (currency) chapter requires both parties to refrain from competitive devaluations and targeting exchange rates for competitive reasons. The chapter also reaffirms the parties’ commitments to disclose relevant data publicly and refers conflicts on these issues to the dispute resolution system. The United States removed China’s currency manipulator designation earlier this week.

The agreement also includes a chapter on dispute resolution. Enforcement has always been problematic in agreements between the United States and China.  The chapter creates a Trade Framework Group to discuss high-level implementation issues and a Bilateral Evaluation and Dispute Resolution Office in each country to deal with low-level implementation issues and settle disputes. The dispute resolution process begins with the complaining party launching an appeal.  Designated officials from the opposing party’s Bilateral Evaluation and Dispute Resolution Office then assess the appeal. If those officials cannot resolve the issue, the appeal escalates to the Deputy United States Trade Representative and the designated Vice Minister, and then to the United States Trade Representative and the designated Chinese Vice Premier. If they cannot resolve the dispute, the complaining party can suspend obligations under the agreement or adopt a proportionate remedial measure. If the suspension or remedial measure was made in good faith, retaliation is not allowed. The parties may withdraw from the agreement if they believe the action is taken in bad faith.

Next Steps

While the agreement is a step in the right direction, the trade war is far from over. According to President Trump, the “phase one” agreement only covers about half of the relevant issues both sides wish to see addressed.  Many of the “phase two” issues are more complex and controversial. These issues include Chinese government subsidies, intellectual property theft, state control of the Chinese market, and discrimination against foreign firms. In the meantime, U.S. tariffs will remain in place on approximately $370 billion of Chinese goods. Both sides will be extremely reluctant to give ground on many of these issues without gaining significant benefits.

“Phase two” negotiations are set to begin shortly now that “phase one” has concluded. The President noted, however, that the United States and China would not complete the agreement before the upcoming November election.

The success of “phase two” will depend in part on how the United States and China implement the “phase one” agreement. If both countries keep up their end of the bargain and the enforcement provisions effectively resolve any disputes, negotiations will likely continue in earnest. If the parties ignore their commitments and the dispute resolution process proves toothless, the chances of concluding a comprehensive “phase two” agreement will diminish significantly.

There are also concerns that some of China’s commitments are infeasible. The commitment to purchase an additional $32 billion in agricultural products, for example, represents a massive increase over the highest level of trade between the United States and China. China’s ability to purchase such a large amount of agricultural products is uncertain. To do so, China would likely have to divert imports from current sources, distorting trade worldwide. The language of the agreement seems to contemplate this. It notes that Chinese purchases are subject to market conditions and WTO rules. It also notes that the United States must ensure that it will make available enough goods and services to allow China to meet its purchase obligations. This suggests that parties may view these amounts as ambitious targets, not ironclad purchase commitments.

The other purchase requirements also raise questions about implementation including questions such as how much, to whom and when? Many details need to be addressed before progress on “phase two” can be expected.

With the “phase one” agreement complete, tensions should ease for now. This first step towards ending the trade war is an important one, but implementation will be the true judge of its success.

On October 18, 2019, the United States Trade Representative (USTR) announced an exclusion process for products included on China Section 301 List 4A, which covers approximately $120 billion of imports. Imported products on this list are presently subject to an additional 15 percent duty, which went into effect September 1, 2019 – that duty rate is scheduled to be reduced by half starting in mid-February.

Importers of products on List 4A must file exclusion requests with the agency by January 31, 2020. Once USTR posts a request, there is a 14-day comment period for interested stakeholders to oppose or support, followed by a 7-day rebuttal period for the requestor to respond. USTR will grant approvals and denials on a rolling basis.

If granted, any importer of a product may utilize an exclusion, which would apply retroactively to the September 1, 2019 effective date. Importers may use an exclusion going forward, and also may seek duty refunds through U.S. Customs and Border Protection. USTR has set a uniform expiration date of September 1, 2020 for List 4A exclusions, regardless of the date they are granted.

Pursuant to the U.S.-China Phase One trade deal signed January 15, tariffs on List 4A products will be reduced to 7.5 percent from 15 percent. According to a draft Federal Register Notice made available this week, the effective date of the roll back is February 14, 2020. The rate reduction is not retroactive from September 1, 2019.

The exclusion process does not cover products on List 4B, which were scheduled to be assessed an additional 15 percent duty effective December 15, 2019.  As a result of the Phase One negotiations and agreement, the President suspended indefinitely the application of additional 301 tariffs on List 4B products.

Today the president signed a new Executive Order (E.O.) announcing expanded primary and secondary sanctions on Iran, focused on the construction, mining, manufacturing, and textile industries.  OFAC also sanctioned a significant segment of the Iranian metals industry today, targeting the largest iron, steel, aluminum, and copper producers in Iran under an existing sanctions authority focused on the metals industry.  The actions are the latest move by the United States to expand sanctions on Iran and present new risks for global companies that conduct business in the metals, construction, mining, manufacturing, and textile industries in Iran, particularly given heightened tensions between Iran and the United States.

First, the new E.O. authorizes the Office of Foreign Assets Control (OFAC) to designate as an Specially Designated National (SDN) any person that operates in the construction, mining, manufacturing, or textiles sectors of the Iranian economy.  The E.O. also authorizes OFAC to sanction any person – including those outside of Iran – that that engages in a transaction for the sale, supply, or transfer of significant goods or services to or from Iran used in connection with the Iranian construction, mining, manufacturing, or textile industries.  In other words, non-U.S. companies that engage in significant transactions related to these sectors of the Iranian economy are at risk of being sanctioned by the United States.  U.S. persons, including other companies and U.S. banks, cannot do business with SDN’s.  Moreover, many global banks will not do business with SDN’s, even if U.S. sanctions jurisdiction does not apply to the particular transaction.  When a person or entity is designated as an SDN, bank accounts and other assets in the U.S. are blocked – essentially frozen.

Section 2 of the E.O. authorizes correspondent account and payable-through account restrictions on non-U.S. financial institutions that process or facilitate significant transactions related to these sectors. The E.O. also allows OFAC to expand the list of industries subject to sanctions under the E.O.

Second, OFAC designated the 13 largest steel and iron manufactures in Iran and the largest copper and aluminum manufacturers in Iran as SDNs today, a major step in imposing sanctions on the metals sector in Iran.  Under E.O. 13871, non-U.S. companies that conduct significant transactions with any of these new SDNs could be subject to sanctions from OFAC.

Today OFAC also sanctioned two Chinese entities for engaging in significant transactions related to the Iranian metals industry, including the purchase of substantial quantities of steel from Iran, the sale of carbon blocks, cathode blocks, and graphite electrodes to Iran for use in metals production, and the facilitation of sales of Iranian-origin copper to a customer in China.   The designation of the Chinese entities is an example of OFAC’s authority to sanction non-U.S. firms that conduct significant business involving Iran.

Please contact us with any questions on these developments.

 

 

Late last month, the Directorate of Defense Trade Controls issued a long-awaited interim final rule regarding what qualifies as the export, re-export, or transfer of technical data (a “controlled event”) under the International Traffic in Arms Regulations (“ITAR”). Specifically, in 2016, the Bureau of Industry and Security (“BIS”) issued a final rule clarifying that the transmission of technology outside of the U.S. using end-to-end encryption did not qualify as a controlled movement, provided that the technology is encrypted up to a specified standard. DDTC did not adopt an equivalent provision in its version of an overlapping final rule, creating significant compliance and logistical considerations for companies falling under the jurisdiction of both entities, especially those entities for which it was impractical to consolidate all IT infrastructure within the U.S.

In the interim final rule, DDTC is largely aligning its rules regarding “controlled events” with BIS’s rules, making DDTC’s treatment of technical data much more permissive than it is currently. Provided that all of the following are satisfied, sending/storing technical data will not qualify as an export: 1) the technical data is unclassified; 2) it is secured using end-to-end encryption; 3) it is secured using cryptographic modules compliant with FIPS 140-2 or equivalent standard; 4) it is not intentionally sent to a person or stored in a proscribed country (i.e., listed in ITAR 126.1) or the Russian Federation; 5) it is not sent from a proscribed country. These amendments are included in a new section of the ITAR, located at 22 C.F.R. 120.54.

Although this alignment does simplify companies’ responsibilities regarding the storage and transmission of technical data, compliance concerns remain that must be mitigated. First, if the technical data is decrypted by someone other than the sender, a U.S. person in the U.S., or a person otherwise authorized to receive the technical data, then the technical data is not secured using end-to-end encryption and the original transmission will be deemed a controlled event. Further, DDTC declined to create a safe harbor under which companies would only have to seek contractual assurance from cloud providers that technical data would not be stored in a 126.1 country or the Russian Federation to satisfy the ITAR provision. Instead, DDTC specifies in the rule that it will continue to evaluate potential violations related to technical data release under a totality of the circumstances framework.

As an interim final rule, DDTC is accepting public comments until January 27, 2020. The rule becomes effective on March 25, 2020.

Last week, the United States and China reached an agreement on the long-awaited “phase one” trade deal.  The deal, originally announced in October, will include tariff reductions by the United States and a $200 billion increase of U.S. good purchases by China. According to U.S. Trade Representative Robert Lighthizer, the 86-page agreement is currently being translated and undergoing legal review, but the terms are agreed to.  The parties expect to sign the deal in early January.

As part of the agreement, the United States indefinitely postponed a 15 percent tariff that was scheduled to be imposed December 15th on $160 billion of Chinese imports. The United States also expects to reduce tariffs on an additional $120 billion of Chinese imports from 15 percent to 7.5 percent.  Over the next two years, China has agreed to increase purchases of U.S. goods and services by $200 billion over 2017 levels, including $40 to $50 billion annually in agricultural products.

Additionally, the deal will cover intellectual property, technology transfer, agriculture (structural barriers), financial services, and dispute resolution, according to the Fact Sheet released by USTR.  The intellectual property chapter will address longstanding issues such as trade secrets and pharmaceutical intellectual property protections. The financial services chapter should allow U.S. financial service firms to compete more effectively in the Chinese market.

The technology transfer chapter will include “binding and enforceable obligations,” with China agreeing to end its controversial practice of forcing foreign companies to transfer their technologies to Chinese firms as a condition for obtaining market access. China has also commit to “provide transparency, fairness, and due process in administrative proceedings and to have technology transfer and licensing take place on market terms.” The technology transfer chapter is notable because earlier reports indicated that it would not be included in the deal.

The agreement also contains a dispute resolution chapter. Enforceability is a longstanding issue in previous agreements between the United States and China.  This chapter will provide both sides with a mechanism to ensure the implementation of and compliance with the agreement. It will also allow both sides to take “proportionate responsive actions” when deemed appropriate. While specific procedures have not been released, the inclusion of a dispute resolution chapter will go a long way towards quelling the fears of some that China will not follow through on its obligations.