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Trump Administration Trade Battles Continue

Trump Administration Trade Battles Continue

There have been several important developments in regard to (1) U.S. use of Section 301 of the Trade Act of 1974 to restrict imports of various products from China and (2) U.S. imposition of global trade restrictions on steel and aluminum imports pursuant to Section 232 of the Trade Expansion Act of 1962.  The Trump Administration asserts that the former are justified as a result of unfair intellectual property policies and practices maintained by China and that the latter are necessary to prevent emerging threats to U.S. national security.  As summarized below, the conflict between the United States and China continues to intensify, but there are signs that the Administration is looking to de-escalate the global conflict over steel and aluminum.

Developments in the U.S.-China Trade Relationship

On June 15, the Office of the U.S. Trade Representative (“USTR”) issued two lists of Chinese goods that would be subject to a 25 percent tariff surcharge as a result of its Section 301 investigation.  The first list covered approximately $34 billion in goods and was comprised of machinery and mechanical appliances; electrical equipment; vehicles, aircraft, vessels, associated transport equipment, and parts thereof; and measuring, checking, precision, medical or surgical instruments.  The second list covered approximately $16 billion in goods and was comprised of lubricants; plastics; machinery and mechanical appliances; electrical equipment; locomotives, vehicles, and parts thereof; and measuring instruments.  The duties for the goods on the first list were imposed starting July 6, while those for the goods on the second list were imposed starting August 23.

Shortly after USTR’s June 15 announcement, China announced its intention to retaliate against the United States by imposing a 25 percent tariff surcharge on certain U.S. goods being imported into China.  China issued two lists of targeted goods, with the first list covering agricultural products, cars, and aquatic products, and the second list covering mineral fuels, chemical products, and medical machinery.  The duties for the goods on those lists were imposed starting July 6 and August 23, respectively.

President Trump responded to China’s retaliatory measures by ordering USTR to develop an additional list of $200 billion worth of imports from China to be subject to a 10 percent tariff surcharge.  Shortly after that announcement, China promised to fight back with “qualitative” and “quantitative” measures.  On August 3, China announced new duties in the range of 5-10 percent on imports from the United States valued at $60 billion, and those duties were imposed starting September 24.

On September 18, USTR issued its third list of Section 301 tariffs, covering approximately $200 billion worth of imports from China, dwarfing the value of imports covered by the first and second lists.  The products targeted are subject to an additional tariff of 10 percent, effective September 24, which increases to 25 percent starting January 1.  The list contains 5745 tariff lines, covering a wide range of products, including live animals and animal products; vegetable products; prepared foodstuffs; mineral products; chemical products; plastics and rubbers; rawhides, skins, and articles thereof; wood and articles of wood; paper; textile articles; headgear; articles of stone, ceramic, and glass; pearls; base metals and articles thereof; mechanical and electrical equipment; vehicle parts; photographic and cinematographic equipment; and miscellaneous manufactured articles.  On October 12, U.S. Customs and Border Protection (“CBP”) confirmed that imports from China that qualify for reduced or suspended duties under the recently signed Miscellaneous Tariff Bill will still face the specified Section 301 tariffs.

USTR has established a process by which U.S. stakeholders (such as purchasers or importers) may request the exclusion of particular products from Section 301 tariffs covered by the first two tranches.  Notably, the notice for the third list did not indicate that there would be an exclusion process.

The deadline for requests regarding the first list lapsed on October 9, but the deadline for the second list is December 18.  USTR prefers electronic submissions made through the Federal eRulemarking Portal: www.regulations.gov.  Exclusion requests should include certain information, including the following: the applicable 10-digit subheading of the HTSUS; physical characteristics that distinguish the proposed excluded product from other products within the covered 8-digit subheading; the ability of CBP to administer the exclusion; the annual quantity and value of the Chinese-origin product that the requester has purchased in each of the last three years; and the percentage of total gross sales in 2017 accounted for by sales of the Chinese origin product.

Section 232 Tariffs on Steel and Aluminum

In March of this year, the Administration announced global tariffs on imports that it found to threaten U.S. national security – a 25 percent tariff on steel and a 10 percent tariff on aluminum.  Several countries negotiated their own deals to avoid the tariffs.  Australia is exempt entirely but is likely to be monitored for import surges.  Argentina, Brazil, and South Korea are subject to quotas (not tariffs) on steel.  Argentina has a quota for aluminum, but Brazil and South Korea did not reach a similar agreement and therefore are subject to the tariff on aluminum without any quantitative restriction.

The original, global Section 232 actions can be adjusted on a country-by-country basis.  For example, in August, the tariff for imports of steel from Turkey was increased to 50 percent in response to the depreciation of the Turkish lira – the concern there was that the depreciation of the lira had made imports of Turkish products less costly and thereby undermined the effectiveness of the original Section 232 tariffs.  Canada and Mexico are reportedly negotiating for quotas to replace the Section 232 tariffs as early as this November.  And the Administration recently notified Congress of its intent to negotiate trade agreements with Japan and the European Union, which could involve quotas to replace Section 232 tariffs.

The product exclusion process has been a key focus since imposition of the Section 232 measures.  Product exclusions may be requested by U.S. stakeholders on a rolling basis.  According to the Commerce Department, a product exclusion will be granted if the article is not produced in the United States in a sufficient and reasonably available amount or at a satisfactory level of quality, or if there is a specific national security consideration warranting exclusion.  The product exclusion process was recently extended to imports from the quota countries.

The Administration has made some important changes to the product exclusion process since it was established.  First, domestic companies can seek “expedited relief from quantitative limits” for existing supply contracts.  Second, since early September, rebuttals (responses to objections) and surrebuttals (responses to rebuttals) are allowed and the Commerce Department has facilitated tracking of requests through its website (www.commerce.gov/page/section-…).  Third, parties are now permitted to submit confidential business information in support of requests or comments.  These last two changes were implemented in response to significant criticism of the process from companies and Congress.

At present, over 3,500 exclusions for steel and aluminum products have been granted (about 10 percent of posted requests).  In all but a few cases, the exclusions that were granted had been unopposed.

How Does a Company Take Advantage of a Product Exclusion?

As of today, the Administration has not granted any requests for exclusion from the Section 301 tariffs on imports from China.  The Administration has, however, indicated that such exclusions would be effective for one year upon publication of the exclusion determination in the Federal Register, apply retroactively to July 6 for products on the first list and to August 23 for products on the second list, and cover all imports of the product in question.  (As mentioned above, no product exclusions are planned for the third list, but Congress is raising concerns with the Administration on this point.)

For product exclusions from the Section 232 measures, requestors must closely track the regulations.gov dockets (Steel 232 docket BIS-2018-0006 and Aluminum 232 docket BIS-2018-0002) for the status of requests.  Once granted, an exclusion is valid for one year and is limited to the product description, quantity, supplier(s), and country(ies) of origin as defined in the request.

After a decision is posted, the Commerce Department notifies CBP, but the importer of record is nevertheless required to inform CBP in advance of importation.  More specific guidance on claiming an exclusion can be found at CSMS #18-000378.  If an exclusion is granted, companies are eligible for a retroactive refund of Section 232 tariffs back to the date the request for exclusion was posted for public comment at regulations.gov.

It is especially important to remember that, other than with respect to the first list of products covered by the Section 301 tariffs, U.S. stakeholders who believe a product should be excluded from the application of Section 232 or Section 301 tariffs may still be able to file an exclusion request.

 

Written by:  Matthew R. Nicely, Dean A. Pinkert, Julia K. Eppard and James Ton-that at Hughes Hubbard & Reed LLP

 

Withdrawal of US from JCPOA will impact shipments of export cargo and import cargo in international trade.

Withdrawal from Iran Nuclear Deal

Fulfilling what he has long promised to do, on May 8, 2018, President Trump announced that the United States will no longer participate in the Joint Comprehensive Plan of Action (JCPOA), also known as the Iran nuclear deal.  In a televised briefing and National Security Presidential Memorandum (NSPM), the President directed the US State and Treasury Departments to re-impose sanctions that were lifted or waived as part of the JCPOA by no later than November 4, 2018.  While the President hinted at the possibility of negotiating a new deal, he also threatened new sanctions against Iran or any party that assisted them in the continued development of its nuclear or ballistic missile program.  In the meantime, US and non-US parties that have relied on the JCPOA waivers will need to quickly assess how the snapback of sanctions may affect them, and how they will respond.

Sanctions Snapback and Wind-Down Periods

The May 8, 2018 NSPM directs the Secretary of State and Secretary of Treasury to “immediately begin taking steps to re-impose all United States sanctions lifted or waived in connection with the JCPOA.”  In Frequently Asked   Questions (FAQs) issued by the US Department of Treasury, Office of Foreign Assets Control (OFAC) immediately following the President’s announcement, OFAC clarified that the US government would establish two periods, of 90 days and 180 days, for parties to winddown activities involving Iran that would be prohibited under the re-imposed sanctions.  The dual-track wind-down periods differs from prior OFAC guidance, which had contemplated a 180-day window to wind-down all activities were there to be a snapback.  Additional guidance is likely forthcoming regarding permissible and impermissible activities during the wind-down periods.

90-Day Wind-Down Period

Under the 90-day wind-down period, on August 6, 2018, the US government will re-impose sanctions related to: the purchase or acquisition of US dollar banknotes by the Government of Iran; Iran’s trade in gold or precious metals; graphite, raw, or semi-finished metals such as aluminum and steel, coal, and software for integrating industrial processes; purchase, sale, or maintenance of funds in Iranian rails; Iranian sovereign debt; and Iran’s automotive sector.

The US government will also revoke on August 6, 2018 JCPOA-related authorizations involving: import of Iranian-origin carpets and foodstuffs and related financial transactions; specific licenses issued under the Statement of Licensing Policy for Activities Related to the Export or Re-export to Iran of Commercial Passenger Aircraft and Related Parts and Services (JCPOA SLP); and activities undertaken pursuant to General License I regarding contingent contracts related to the JCPOA SLP.

To the extent that any specific licenses issued under the JCPOA SLP have not expired, OFAC expects to revoke those authorizations and re-issue new authorizations to provide for a wind-down period until August 6, 2018.

180-Day Wind-Down Period

Under the 180-day wind-down period, on November 4, 2018, the US government will re-impose sanctions related to: Iran’s port operators, and shipping and shipbuilding sectors; petroleum-related transactions; transactions by foreign financial institutions with the Central Bank of Iran and providing specialized financial messaging services to the Central Bank of Iran; providing underwriting services, insurance, or reinsurance; and Iran’s energy sector.

On or before November 5, 2018, OFAC will also re-impose “as appropriate” sanctions on Iranian entities that were removed from the Specially Designated Nationals (“SDN”) list on January 16, 2016 (but that were still “blocked” for US persons).  OFAC specifically indicated that it would re-add to the SDN list persons meeting the definition of “Government of Iran” or “Iranian financial institution” no later than November 5, 2018.  This will mean that non-US companies that were able to deal with such persons without being subject to the threat of sanctions for dealing with SDNs will face that threat again.

Revocation of General Licenses

OFAC’s FAQs make clear that the general license authorizations for certain civil aircraft trade under General License I, and activities by non-US companies owned or controlled by US persons under General License H, will not survive the withdrawal from the JCPOA.  Authorizations for certain transactions related to Iranian-origin carpets and foodstuffs will also be terminated.  OFAC has indicated that as soon as feasible, it will replace those authorizations with narrower authorizations limited to transactions ordinarily incident and necessary to wind down activities that were previously authorized.

Non-US parties that are owed payment from Iranian counterparts for services rendered, or are owed repayment from Iranian counterparts for loans or credits, may still receive those payments in accordance with the written contracts, even if the payments are made after the wind-down period.  However, the payments must otherwise be consistent with US sanctions policy (i.e., not involve US persons or the US financial systems without specific authorization).

Possible New Sanctions or New Iran Deal

In his May 8, 2018 press briefing, President Trump hinted at possible new sanctions, promising to implement “the highest level of economic sanction” and warning that “any country that helps Iran in its quest for nuclear weapons could also be strongly sanctioned by the United States.”  OFAC’s FAQs also state that OFAC will “target aggressively anyone who engages in . . . sanctionable activity, regardless of whether the individual or entity was removed from the SDN List on Implementation Day.”

While opening the door to new sanctions, President Trump also indicated that he was open to negotiating a new deal with Iran regarding its nuclear development program.  Specifically, the President said he was “ready, willing and able” to negotiate a new deal, and promised that “great things can happen” in Iran and the Middle East if a new deal could be reached.

Effect of the Exit from the JCPOA

If President Trump is serious about wanting to negotiate a new deal with Iran, and is able to do so before the end of the wind-down periods, parties engaging in activities involving Iran could potentially stay in the market (if not fully wound down by the time of the new deal) or could re-enter the market.  Because of this uncertainty, close observation of the United States’ and other JCPOA parties’ (China, France, Russia, UK, and Germany) engagement with Iran in the coming weeks is critical.

Nevertheless, parties involved in activities involving Iran that would be affected by the sanctions snapback risk potential future enforcement action if they delay their wind-down, or fail to wind down at all.  OFAC’s FAQs state that enforcement actions after the wind-down periods will consider “efforts and steps taken to wind down activities and will assess whether any new business was entered into involving Iran during the applicable wind-down period.”  It would be prudent, therefore, to begin wind-down activities well in advance of the end of the wind-down periods.

Parties engaging in wind-down activities should also be vigilant that all activities are consistent with US sanctions policy.  Because OFAC could, prior to the end of the wind-down periods, add new sanctions altogether, parties engaged in wind-down activities should carefully monitor updates to the SDN list and other OFAC actions regarding Iran.  Enhanced screening of business partners, for example, should be conducted to ensure that wind-down activities would not lead to a sanctions violation.

Ryan Fayhee, Alan G. Kashdan, and Tyler Grove practice law in the areas of international trade and sanctions, export controls, and anti-money laundering at Hughes Hubbard & Reed.