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Free Trade Agreements: Is There a Trade Lane Left Without One?

trade

Free Trade Agreements: Is There a Trade Lane Left Without One?

Since the first Free Trade Agreement (FTA) in 1860, a lot has happened. A solid 160 years will do that for you. On the FTA front specifically, the focus has also shifted: what used to be an opportunity for significant duty reduction and, therefore, a more competitive position in the FTA partner’s home market has turned into a tool for faster access to the market and control of a trading relationship. With the applied, weighted, mean duty rates globally down to 2.59% from 8.57% in 1994 (Source: macrotrends.net based on World Trade Organization (WTO) data), the importance of duty rate reduction has been marginalized—so why is there still such a strong movement towards adding more FTAs to an already considerable total worldwide?

Some Recent Developments

Trade agreements are not only about duty rates anymore; the collaboration and facilitation part is just as, if not more, important. That means trading partners make efforts to reduce the paperwork on the trade lane, give priority to incoming shipments, and collaborate on data exchange and simplification of procedures. In today’s economies, these elements are just as crucial as a few duty points. In addition to the facilitation, environmental clauses are included in new FTAs. Got to start somewhere. Customs unions (like the EU) take it one step further—they usually allow for goods to move freely between member states and have a single common tariff for the outside world.

In a similar fashion, the FTA accounts for financial and administrative arrangements that are not limited to duty rates and import documents. In a broader scope, abolishing of export subsidies, transparency with added value calculations, investigative cooperations, etc. are part of the package and simplify the use and verification of FTA claims.

Perhaps not a trend (yet?), but the Pan-Euro-Mediterranean is loosening its Rules of Origin (likely in effect in 2021). Rules of Origin set forth the requirements that need to be met to benefit from FTA arrangements (i.e., qualify for preferential treatment). Typically, Rules of Origin encompass a required tariff shift (i.e., a substantial transformation needs to take place) and/or a value-added component (i.e., the value add of locally sourced parts, materials, labor, etc. needs to exceed a specific threshold). The value-added thresholds have historically been relatively high (60% and up) and loosening those requirements will simply allow more products to qualify, which will give developing countries especially more opportunities to qualify their exports for preferential treatment.

Per the WTO, over 300 Regional Trade Agreements (RTA) are currently in force. This number only reflects agreements that include preferential duty rate schemes, as agreements such as bilateral investment treaties or Joint Commissions would increase this number two- or three-fold. The RTA number includes bilateral/local agreements as well as ‘monster trade pacts’ such as the EU, USMCA or ASEAN – China agreements. It has been a steady growth of FTAs since the 1990s, with a peak in the action between 2003 and 2011. And (see below) there is no end in sight.

What’s Next?

Go big or go home is what the EU is thinking. Agreements are in place with around 40 countries, ratification in progress for agreements with around 30 countries, and agreements with another 20 countries are waiting to be signed. For any countries left behind, it seems that there are ongoing negotiations (e.g., Australia, New Zealand) or plans to negotiate. Don’t despair.

Never-ending speculation on a Trans Atlantic agreement (US – EU) or a Trans-Pacific Partnership (TPP) including the US will not be put to rest until actually completed and in force (the US withdrew from the TPP in 2017). The US currently has 14 FTAs with 20 countries, re-did the USMCA in 2020, and negotiations with Kenya and Taiwan seem to be in the works.

Lastly, with Brexit in its final stages, the UK is also breaking off FTA relationships with EU partners. That means the UK will have to create separate FTAs with these countries. Practically, not all of the EU FTAs will have a UK equivalent by January 1, 2021, and some may never be in place. This means regular (Most Favored Nations – MFN) rates will apply come January 1 unless another preferential program (like the Generalized System of Preferences) applies. But with the UK exit comes an opportunity for Britain to conclude agreements the EU has not been able to pull off. Perhaps a US – UK FTA is nearer than thought. Let’s check the odds on that!

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Anne van de Heetkamp is VP of Product Management and Global Trade Content at Descartes and is an international trade expert with 20+ years of industry experience. Previously he served as Director for global trade compliance/management company, TradeBeam.

tariffs

WTO Rules that U.S. Section 301 Tariffs on Chinese Imports Violate International Trade Rules

The World Trade Organization (WTO) dispute settlement body ruled that the tariffs imposed by the U.S. on imports from China are inconsistent with the General Agreement on Tariffs and Trade (GATT), and recommended that the U.S. “bring its measures into conformity” with its obligations under the GATT. Beginning in 2018, at the direction of President Trump, the U.S. imposed tariffs on $400 billion worth of imports from China over 4 different lists or tranches. The U.S. and China negotiated a “phase one” trade deal earlier this year, however, most of the tariffs were still left in place.

The WTO panel concluded that the U.S. failed to demonstrate that the tariff measures are justified under Article XX(a) of the GATT 1994.  As a result, the panel found the U.S. tariff measures to be inconsistent with Articles I:1, II:1(a) and II:1(b) of GATT 1994. In other words, the WTO found that the U.S. tariffs on China were discriminatory and excessive, and the U.S. failed to present justification for an exemption that could have legally allowed for the tariffs.

Despite the WTO’s recommendation, its ruling is highly unlikely to sway the course of U.S. trade policy. This is not only because of the limited authority of the WTO, but also because the administration has argued that the tariffs are justified under U.S. law. Section 301 of the Trade Act of 1974 provides the U.S. government with the authority to impose trade sanctions on countries that violate trade agreements or engage in unfair trade practices, of which the U.S. has frequently accused China.

The WTO’s ruling is likely to increase the current U.S. administration’s distrust of the WTO. U.S. Trade Representative Robert Lighthizer criticized the ruling, saying “the United States must be allowed to defend itself against unfair trade practices…” and that “[the WTO’s] decision shows that the WTO provides no remedy for such misconduct” by China.

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Nithya Nagarajan is a Washington-based partner with the law firm Husch Blackwell LLP. She practices in the International Trade & Supply Chain group of the firm’s Technology, Manufacturing & Transportation industry team.

Camron Greer is an Assistant Trade Analyst in Husch Blackwell LLP’s Washington D.C. office.

tariffs

Court of International Trade Receives its First Complaint Against Section 301 China Tariffs

On September 10, 2020, HMTX Industries LLC, along with Halstead New England Corporation, and Metroflor Corporation (importers of vinyl tile) filed a complaint (Ct. No. 20-00177) at the Court of International Trade (CIT) challenging both the substantive and procedural processes followed by the United States Trade Representative (USTR) when instituting Section 301 Tariffs on imports from China under List 3.

The List 3 tariffs went into effect on September 24, 2018. This is the first challenge of its kind filed against the administration’s use of Section 301 Tariffs in the ongoing trade war between the United States and China.

The complaint alleges that USTR’s institution of List 3 tariffs violated the Trade Act of 1974 on the grounds that USTR failed to make a determination or finding that there was an unfair trade practice that required a remedy and moreover, that List 3 tariffs were instituted beyond the 12-month time limit provided for in the governing statute (19 U.S.C. § 2414). The complaint also argues that the manner in which in the List 3 tariff action was implemented violated the Administrative Procedures Act (APA).

According to the complainants, USTR failed to provide adequate opportunity for comments, failed to consider relevant factors when making its decision (e.g. no analysis of increased burden on U.S. commerce from unfair trade practices), and failed to connect the record facts to the choices it made by not explaining how the comments received by USTR came to shape the final implementation of List 3.

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Nithya Nagarajan is a Washington-based partner with the law firm Husch Blackwell LLP. She practices in the International Trade & Supply Chain group of the firm’s Technology, Manufacturing & Transportation industry team.

Julia Banegas is an attorney in Husch Blackwell LLP’s Washington, D.C. office.

Turner Kim is an Assistant Trade Analyst in Husch Blackwell LLP’s Washington, D.C. office.

Camron Greer is an Assistant Trade Analyst in Husch Blackwell LLP’s Washington D.C. office.

corruption

TACKLING CORRUPTION IN THE TRADING SYSTEM THROUGH A CULTURE OF INTEGRITY

No Disagreement Here

For decades, economists have extolled the virtues of the rule of law as a critical factor in leveling the playing field through a framework of rules and regulations that are easy to understand and evenly, logically and fairly applied to all participants in an economic system. This central premise is reflected in the principle of “predictability through transparency,” one of three pillars of the World Trade Organization (WTO) and the global trading system. At the heart of this focus has been an emphasis on reducing the role that corruption can play in the administration of laws, function of government, conduct of business, and protection of citizen rights.

Back in an October 1996 address to the Board of Governors at the Annual Meetings of the World Bank and the International Monetary Fund, then World Bank President James Wolfensohn gave a groundbreaking speech in which he described corruption as a cancer and committed the Bank to strengthen its internal controls and supporting the international fight against corruption.

“…corruption diverts resources from the poor to the rich, increases the cost of running businesses, distorts public expenditures, and deters foreign investors…it erodes the constituency for aid programs and humanitarian relief.”

– James Wolfensohn, President of the World Bank, October 1996

The Heavy Toll of Corruption

Significant attention has been paid to the goal of reducing corruption, particularly for emerging economies. The World Economic Forum calculates the global cost of corruption is at least $2.6 trillion, or roughly 5 percent of global GDP. For emerging economies alone, the UN estimates that corruption costs these countries some $1.2 trillion annually through bribery, theft and tax evasion.

Cost of Corruption

It is also widely recognized that global corruption can undermine the benefits of agreements negotiated to introduce predictability and transparency into the trading system. Former WTO Director-General Pascal Lamy described corruption in the international trading system as tantamount to “a hidden increase of the cost of trade.” Within the UN Sustainable Development Goals, the global community identified the promotion of the rule of law as a key priority for development through Goal 16, which is dedicated to promote just, peaceful and inclusive societies, and to achieve this goal by 2030.

Given the consensus among stakeholders within the international trade community, the question is: how to effectively combat corruption to achieve our shared goals of rules and laws that are applied objectively, consistently and equitably to all?

Since the time of Wolfensohn’s catalyzing speech, governments, the business community, civil society and international institutions have rallied around global efforts to create initiatives and mechanisms to mitigate the scourge of corruption. Member states and international organizations drafted and signed anti-corruption conventions through the Organization for Economic Cooperation and Development (OECD) and the United Nations (UN), and established regional conventions and working groups in Africa, the Americas and Asia.

Corruption Agreements Table

A Comprehensive Approach to Dismantling Corruption

In spite of the proliferation of anti-corruption instruments in regional and international organizations, the issue of corruption persists as a challenge. Punitive measures only go so far in achieving anti-corruption aims. A more comprehensive approach to dismantling corruption centers on enhancing integrity and ethics in an effort to affect the cultural practices and norms that perpetuate corruption.

This change was reflected in the 2017 OECD Recommendation of the Council on Public Integrity that reframed the anti-corruption strategy to focus on promoting the essential societal pillar of integrity as a sustainable response to the global problem of corruption. The adoption of these recommendations was part of a deliberate shift to go beyond ad hoc efforts toward a more comprehensive and strategic approach to promoting integrity through systems, culture, and accountability.

Defining Public Integrity

The OECD defines the term public integrity as “a consistent alignment of, and adherence to, shared ethical values, principles and norms for upholding and prioritizing the public interest.” Consistent with describing public integrity as an aspirational goal (versus the punitive connotation of combatting corruption), this definition grounds the work of promoting integrity in global efforts to make government functions more effective, economies more accountable, and societies more inclusive by involving all stakeholders in the effort to improve governance and strengthen the rule of law.

In May, the OECD took the next step in publishing the OECD Public Integrity Handbook. The handbook details best practices, principles and concrete actions for promoting a culture of integrity in government functions with an emphasis on generating dialogue between business, government and civil society to promote greater stakeholder collaboration in upholding public integrity values. The report expands on the 13 public integrity recommendations articulated in 2017 and goes a step further by translating those principles into practical measures governments can implement to institute change.

The OECD describes the handbook as a roadmap to help governments identify what integrity looks like and why it is important to take a whole-of-society approach in building public trust. The handbook can thus be viewed as a toolkit that helps anti-corruption advocates undertake the hard work of creating the ‘right relationship’ between government, citizens, business, and civil society.

Public Integrity

Public Integrity is Important to Trade and Investment Flows

International organizations and governments are not the only institutions concerned about combatting corruption, creating a culture of integrity, and strengthening the rule of law.

These issues are equally significant for the private sector in an increasingly globalized world as they are determinant of the business environment. This is why trade agreements have been grounded in rule of law principles, and have incorporated transparency and anti-corruption components to instill investors with greater confidence they can compete and operate in global markets. As noted by The World Justice Project, “uneven enforcement of regulations, corruption, insecure property rights, and ineffective means to settle disputes undermine legitimate business and deter both domestic and foreign investment.”

Companies make trade and investment decisions based on where they have confidence in the integrity of public and private institutions and where there is fairness, enforcement and proper adjudication of the law. In a 2017 Business Pulse Survey conducted by the U.S. Chamber of Commerce and the Association of American Chambers of Commerce in Latin America and the Caribbean, 31 percent of respondents described the rule of law as the “most important” issue to address for business, while 45 percent of executives characterized strengthening the rule of law and fighting corruption as the most important issues to be addressed to enhance economic growth in the region.

Corruption Quote

It is this emphasis on promoting public integrity that underpinned the inclusion of an anti-corruption chapter in the United States-Mexico-Canada Agreement (USMCA) that entered into force on July 1, 2020, representing one of the first times governments have formally committed to combat bribery and corruption in a trade agreement. The private sector has also prioritized an anti-corruption component in the bilateral trade negotiations now underway between Brazil and the United States.

Given the private sector’s interest in eliminating corruption from global trade, the U.S. Chamber recently co-hosted a public forum with the OECD entitled “The Role of Public Integrity in Promoting the Rule of Law” to examine the importance of the public integrity movement for global commerce. Julio Bacio Terracino, Acting Head of the OECD’s Public Sector Integrity Division, joined government officials, senior executives and the U.S. Chamber for a dialogue to review the OECD recommendations, discuss practical considerations outlined in the new handbook, and examine how tools like this are helpful in creating trade and investment conditions that enable business success.

Public Integrity through the Private Sector Prism

There are a number of public-private interactions the OECD has flagged as vulnerable to corruption or solicitation of bribes, notably in customs clearance and trade facilitation, public procurement, licensing and permitting processes, and public infrastructure contracting. During the forum, executives highlighted the critical role that governments play in creating the conditions for trade and investment by leveling the playing field for all actors, creating certainty, operating transparently, upholding the sanctity of contracts, and enabling access to justice.

Through its Coalition for the Rule of Law in Global Markets, the U.S. Chamber defines the concept of the rule of law through the prism of the private sector by articulating the five factors that determine the ability of any business to make good investment and operating decisions. These elements are transparency, predictability, stability, accountability and due process — each of which requires adherence to the shared ethical values, principles and norms that define public integrity.

The whole-of-society focus of the OECD Public Integrity Handbook recognizes the private sector’s role as a co-creator of the rule of law and acknowledges that all facets of society must commit and contribute to building a culture of integrity. This approach aligns with the Coalition’s vision of business working in concert with governments, civil society, and international organizations to promote remedies that will advance the rule of law.

Fostering a culture of integrity in the global trading system that enables inclusive economic growth requires all actors to take concrete steps to maintain open, transparent and meritocratic environments where there is proper enforcement and adjudication of the law. These actions include addressing structural obstacles to trade and investment, simplifying regulatory frameworks, harnessing technology to increase transparency in public functions like procurement, permitting and licensing processes, supporting trade facilitation efforts that strengthen and make customs regimes more efficient, and extending legal investment protections. It is only through this collaborative action and partnership among all stakeholders that a world where corruption is vanquished and a culture of integrity thrives can truly be possible.

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Kendra Gaither

Kendra Gaither is the Executive Director of the Coalition for the Rule of Law in Global Markets at the U.S. Chamber of Commerce. Over her career spanning two decades, Kendra has specialized in international trade and investment as a career diplomat with the State Department focused working in Sub-Saharan Africa and the Americas, and global public policy innovation through strategic partnerships at Carnegie Mellon University.

This article originally appeared on TradeVistas.org. Republished with permission.

foundational technologies

BIS Seeks Comments on Identifying “Foundational Technologies”

The U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) recently published an Advanced Notice of Proposed Rulemaking (“ANPRM”) regarding the identification and review of controls for certain “foundational technologies.” This ANPRM represents another step toward implementation of the “emerging and foundational technology” provisions set forth in the Export Control Reform Act (“ECRA”) of 2018, which has been slow to get off the ground. Section 1758 of the ECRA requires that “foundational technologies” be identified and that BIS establish appropriate controls for that technology under the Export Administration Regulations (“EAR”).

The ANPRM solicits public comments concerning the definition of and criteria for identifying “foundational technologies” in order to apply controls to “emerging technologies” and “foundational technologies” which are essential to U.S. national security, pursuant to the ECRA. Specifically, BIS is asking interested parties to submit comments by October 26, 2020, responding to the following topics:

-How to further define foundational technology to assist in the identification of such items;

-sources to identify such items;

-criteria to determine whether controlled items identified in AT level Export Control Classification Numbers (ECCNs), in whole or in part, or covered by EAR99 categories, for which a license is not required to countries subject to a U.S. arms embargo, are essential to U.S. national security;

-the status of development of foundational technologies in the United States and other countries;

-the impact specific foundational technology controls may have on the development of such technologies in the U.S.;

-examples of implementing controls based on end-use and/or end-user rather than, or in addition to, technology-based controls;

-any enabling technologies, including tooling, testing, and certification equipment, that should be included within the scope of a foundational technology; and

-any other approaches to the issue of identifying foundational technologies important to U.S. national security, including the stage of development or maturity level of a foundational technology that would warrant consideration for export control.

BIS explained that it does not seek to expand jurisdiction over technologies that are not already subject to the EAR. BIS, through an interagency process, seeks to determine whether there are specific foundational technologies that warrant more restrictive controls.  Interested parties may submit comments through the federal rulemaking portal (regulations.gov) or via mail to BIS.

Husch Blackwell encourages clients and companies to review the recent ANPRM for applicability.

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Cortney O’Toole Morgan is a Washington D.C.-based partner with the law firm Husch Blackwell LLP. She leads the firm’s International Trade & Supply Chain group.

Julia Banegas is an attorney in Husch Blackwell LLP’s Washington, D.C. office.

Camron Greer is an Assistant Trade Analyst in Husch Blackwell LLP’s Washington D.C. office.

export controls

UNPACKING US-CHINA SANCTIONS AND EXPORT CONTROL REGULATIONS: HUAWEI

This is the first in a series of articles by Eversheds Sutherland partners Ginger Faulk and Jeff Bialos explaining the legal and regulatory impacts of certain recent US sanctions and export control actions targeting various Chinese entities. Each article focuses on a different aspect of a recent US sanctions or export control regulatory action targeting China and explains in-depth the regulatory context. Recognizing that this is a highly charged political topic, the article does not condone or promote any governmental actions discussed here but is only explanatory in nature.

You undoubtedly will have heard by now that the United States has effectively blocked Huawei’s access to US exports of goods, software and technology, handicapping a giant in the global battle for 5G dominance, upsetting telecom supply chains and setting off a telecom cybersecurity crisis of conscience among many of the world’s developed and developing nations. As a result of Huawei’s designation on the US Department of Commerce’s “Entity List” in May 2019, all companies – no matter where they are – are prohibited under US law from exporting, re-exporting or transferring items that are “subject to the [US] Export Administration Regulations (EAR)” to 152 non-US Huawei affiliates. As a result, hundreds of telecommunication and software companies in third world countries are faced with the binary choice of whether to source technology and software from the United States or to transact business with Huawei.

The US government apparently concluded that this move alone did not work to prevent Huawei from benefiting from US-origin 5G semiconductor technology. Thus, more than a year later, recent rules have expanded the definition of what is “subject to the EAR,” with respect to Huawei specifically, to include offshore semiconductor production based on US technology. The changes to the rule demonstrate how US export controls are evolving to address perceived national security threats in the telecom sector writ large.

All of this is occurring against the backdrop of the US seeking to encourage friends and allies in Europe and beyond to eliminate or at least restrict the role of Huawei in their domestic telecom network infrastructure. This effort is based on concerns over the risk that Huawei theoretically could, at the behest of the Chinese government, either disrupt such infrastructure during periods of exigency or use their access to these platforms to conduct surveillance. In this regard, the new and more restrictive US regulatory approach to Huawei’s access to offshore semiconductor chips appears to have been effective. The UK has reportedly restricted its engagement with Huawei in 5G, apparently as a consequence of supply chain risks resulting from the new US rules, in other words, out of concern that Huawei might not have sufficient access to necessary semiconductor chips to meet the UK’s telecom needs. Whether other US friends and allies will do likewise remains to be seen.

 1. The initial Huawei ban

Since May 2019, the Export Administration Regulations have prohibited US and non-US persons and companies from exporting, re-exporting or transferring in the country, or causing, aiding, abetting or soliciting the export, re-export or transfer of, any item that is “subject to the EAR” to the designated Huawei affiliates.

Items that are “subject to the EAR”[1] include all commodities, software and technology, regardless of their sensitivity, that are:

1. a) in the US (even temporarily);

2. b) produced in the US, or

3. c) exported from the US.

The EAR state further that “items subject to the EAR” include all hardware, software and technology that meet the definition of that term, whether or not the items are listed on the Commerce Control List (CCL) in Part 774 of the EAR. Items subject to the EAR that are not listed in the CCL are designated as “EAR99,” which serves as a catchall category.

Non-US-origin items produced and sold from outside the US also may be subject to the EAR in the following ways:

(a)   Under the “De minimis Rule,” non-US items subject to the EAR include items anywhere in the world that contain more than a certain percentage (25% in most cases) US-origin content by value based on fair market price.

(b)  Under the “Direct Product Rule,” foreign items that:

(i)  are the direct product of certain “National Security”-controlled US technology, software, or

(ii)  are the direct product of a factory or major component of a factory (such as, chip manufacturing equipment) that is itself the direct product of specified controlled technology or software that may be subject to the EAR.

The Entity List designation created challenges for numerous US companies that are suppliers to Huawei or that afford it access to their technology platforms, such as Google’s Android operating system. Following the BIS designation, some of these US technology companies – including Google, Intel, Qualcomm and Broadcom – announced they would cease doing business with Huawei, effective immediately. Specifically, Google announced it would cut off Huawei’s access to the Google Play Store and to the core components of the Android ecosystem that are built by Google (i.e., not those distributed under the Android Open Source Project (AOSP)). Given that many third-party apps rely on Google Maps, this restricted the offerings of Huawei handsets, especially in the European markets. The chips manufacturers also were forced to shift outside of the US manufacturing and processing of silicon wafers that would ultimately be sold to Huawei.

Shortly after Huawei’s designation, in response to clamoring by industry, a Temporary General License (TGL) was issued to authorize the continued operation of existing networks and equipment, continued support to existing Huawei personal devices and equipment and cybersecurity research and vulnerability disclosures. It also authorized engagement with Huawei companies for the development of 5G standards. The goal of the TGL was to allow time in which to phase in the application of the designation for US firms with pre-existing arrangements with Huawei and allow them time to plan for an appropriate transition.

2. What was the perceived “loophole” in the rule?

Meanwhile, chipmaking factories outside of the United States, including Taiwan-based manufacturers, apparently continued to fabricate cutting-edge chips for Huawei using certain equipment that was designed, in part, based on US-origin technology.

This is because, for the first year of the rule (until May 16, 2020), whether intentionally or not, chips manufactured outside of the United States – even those designed or produced using US technology – appeared to fall outside of the EAR’s jurisdiction. Indeed, for purposes of determining US content value, the value of technology incorporated into a software or hardware component or used to design chip manufacturing equipment is not valued. As such, the “direct product rule” (prior to May 15, 2020) applied only to certain types of controlled technology to certain countries and did not extend to reexports to China of non-US-manufactured semiconductors not containing US-manufactured components.

3. How did US regulators fill in the loophole?

On May 15, 2020, almost exactly a year after the Entity List ban came into place, a new “footnote 1” was added to the Entity List banning the unlicensed export specifically to listed Huawei entities (but not to others on the Entity List) of a broad spectrum of foreign-produced telecom and computer components and equipment that are (i) the “direct product” of US technology or US software, or (ii) are the “direct product of manufacturing equipment that itself is a direct product of US technology or software. This extended the ban to, for example, semiconductor designs – and chipsets produced from those designs – that are developed on the basis of US software or technology. It also extended the ban to chipsets produced using semiconductor manufacturing equipment, even in Taiwan, if that equipment was designed on the basis of US-origin technology. According to industry experts, this seems to cover almost any chip currently in production. “To prevent immediate adverse economic impacts on foreign foundries utilizing US semiconductor manufacturing equipment that have initiated any production step,” the US provided a 120-day grace period for exports to Huawei of items based on (US-derived) Huawei design specifications as of May 15, 2020.

Under this revised rule, foreign-produced chips are prohibited for export or re-export when there is “knowledge [including awareness of a high probability] that they are destined for re-export, export from abroad, or transfer (in-country) to Huawei or any of its affiliates on the Entity List.” This change threatens to impact Huawei’s access to 5G microprocessors and appears to have caused the UK to rethink the role of Huawei in its developing 5G network. The US work to close the loophole was not yet complete, however…

4. The grip tightens…

The most recent rule change on August 20 ended the Temporary General License and also further tightened the screws on Huawei by clarifying that the ban applies (1) not only when a listed Huawei affiliate is the destination for or receives an item but also whenever it is an indirect party to a transaction involving a subject item, e.g., as a “purchaser,” “intermediate consignee,” “ultimate consignee” or “end-user,” and (2) when the foreign-produced item will be incorporated into or used in the production or development of any part, component or equipment produced, purchased or ordered by a listed Huawei entity. These changes were principally designed to address concerns raised by public commenters that Huawei could continue to procure US manufactured items through third-parties who incorporate the subject US-controlled component into a system that is ultimately sold to Huawei.

Critics of the rule have commented that the new rule will encourage China to develop its own computer and telecom system chips and technologies in order to support Huawei and other Chinese companies that rely on such chips for their products. Others have voiced concerns that – without US security patches and software updates permitted under the TGL – overseas consumers and operators will be vulnerable to severe disruptions and cyber-security risks.

Meanwhile, the global telecom sector is carefully watching countries like Germany, which is deciding the role that Huawei will play in domestic telecoms infrastructure. These decisions will signal whether continental Europe and other US friends and allies in Asia and elsewhere will fall in line behind US efforts to exclude Huawei from global networks – thereby decoupling US-China telecom supply chains. Or alternatively, whether these countries will assert their own “digital sovereignty” and allow Huawei a continued role – with attendant repercussions on their security relationships with the United States.

Meanwhile, the Department of Commerce enjoys the latitude to issue specific export licenses to firms that request to keep supplying Huawei with software or components. The stage is set for the battle to continue as China is reportedly considering retaliatory measures of its own, possibly to include its own export controls.

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Ginger T. Faulk, partner at Eversheds Sutherland, represents multinational companies in matters involving US government regulation of foreign trade and investment. She has extensive experience advising and representing global companies, counseling clients in matters arising under US sanctions, export controls, import and other national security and foreign policy trade-related regulations.

Jeffrey P.  Bialos, partner at Eversheds Sutherland, assists clients in making multi-faceted business decisions, structuring transactions and complying with complex regulatory requirements. As former Deputy Under Secretary of Defense for Industrial Affairs, he brings deep experience in defense, homeland security and national security matters, including antitrust, procurement, export controls, industrial security and the Foreign Corrupt Practices Act.

[1] See generally 15 CFR Parts 732 and 734.

agriculture

USTR, DOC, and Department of Agriculture Issue Plan to Investigate Foreign Imports of Certain Perishable Produce

On September 1, 2020 the Office of the United States Trade Representative (USTR), Department of Agriculture, and Department of Commerce issued a 32-page report outlining the Trump Administration’s plan to address increased foreign imports of perishable fruits and vegetables. Following the public hearings held in August, the Administration published this report in hopes to open a dialogue with senior Mexican Government officials over the next 90 days regarding specific produce.

The USTR requested that the U.S. International Trade Commission (ITC) formally initiate an investigation under Section 201of the Trade Act of 1974 (Global Safeguard Investigation) with respect to imports of blueberries. Additionally, USTR intends to request that the ITC monitor and investigate imports of strawberries and bell peppers, which could lead to an expedited Section 201 investigations later this year.

The USTR is separately pursuing negotiations with the Mexican government to address U.S. industry concerns over imports of strawberries, bell peppers, and other perishable products. Section 201 investigations occur when a country experiences an unexpected surge in the import quantity of a certain product. The most recent Section 201 investigation was used to limit imports of solar panels and washing machines in 2018.

Other initiatives include the Department of Commerce improving communication with U.S. farmers responsible for growing the subject produce and assisting them in understanding trade remedy laws and procedures.

Similarly, the Department of Agriculture will develop a market promotion strategy for domestically produced produce and work with producers to maximize the use of existing agriculture programs. USTR, the Department of Commerce, and the Department of Agriculture will establish an interagency working group to monitor seasonal and perishable fruit and vegetable products, coordinate as appropriate regarding future investigations and trade actions, and provide technical assistance to Congress in developing legislation on this issue.

The interagency announcement regarding imports of certain fruits and vegetables follows media reports that U.S. farmers are on track to receive a record $37.2 billion in subsidies from the government this year.

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Stephen Brophy is an attorney in Husch Blackwell LLP’s Washington, D.C. office focusing on international trade.

Turner Kim is an Assistant Trade Analyst in Husch Blackwell LLP’s Washington, D.C. office.

Camron Greer is an Assistant Trade Analyst in Husch Blackwell LLP’s Washington, D.C. office.

customs bonds

Understanding Customs Bonds

When you’re constantly plagued by bureaucracy and inventory management in the world of shipping, there’s one moment that makes it all worth it: importing the goods. However, that process has one extra step before it’s finalized — obtaining a customs bond. But what does this actually entail? Why must you even have a customs bond? And which one should you get? Don’t worry — we’ll help you with understanding customs bonds right here!

Bonds, Customs Bonds

First of all, we should note that all information found here is valid for the ocean ports and other import points in the United States. The notion of a customs bond originated here. To define it in the simplest possible terms, a customs bond is something like an insurance policy during the import process. But not for you — for the government of the United States. It’s a guarantee that all import taxes and duties will be paid. In the professional world of shipping between leading ports, this is simply called a “bond”.

But why must importers have one in the first place? To paraphrase Benjamin Franklin’s famous quote, the only two things that are sure in the world of importing and exporting are taxes and duties. If you have a customs bond, the government has a solid guarantee that it will receive its taxes and duties; even in a force majeure event that leaves your logistics company helpless to pay.

In other words, if an import company goes bankrupt, this bond will cover the air and/or ocean shipments in terms of duties and taxes. This is something that you’ll simply be required to have if you want to import anything into the United States; it’s all within the price of doing business. And bear in mind that these bonds expire as well, so don’t expect to hold onto the same one forever.

Bond Requirements

So, when do you need a customs bond? Mainly, when you’re trying to import goods for commercial purposes with an estimated value of more than $2,500. Apart from this, there may be other requirements for particular goods posed by different agencies of the United States government.

As an example — if you’re importing food items, you will be required to obtain a customs bond regardless of the amount or value of the items. You will also need to comply with other FDA regulations.

When it comes to the different types of bonds that you can have as an importer, there are two primary ones. There are continuous bonds and single-entry bonds. Their names are pretty self-explanatory — the latter only covers a single import shipment, while the former is valid for multiple shipments in a certain time period. Usually, we’re talking about twelve months.

So, which one should you get? This largely depends on the nature of your business. If you’re someone who only imports goods on a rare occasion, like a couple of times a year, you may not need anything more than a single-entry bond.

Obviously, a continuous bond represents a far better option if you’re going to be shipping regularly. And this type of bond has another benefit; when you’re completing the Importer Security Filing information, you won’t have to buy additional bonds. This is data that you need to submit in advance before you load any goods on a ship in a country of origin that’s headed for the United States. Having this information allows the CBP enough time to judge if your cargo poses any security or safety risks.

Bond Expenses

Now that we’ve explained the nature of customs bonds, the question that must be on your minds is — how much do they actually cost? Well, you need to look at customs bonds like any other kind of insurance policy. In the sense that, when you purchase a bond, it’s valid for a specific level of coverage. And naturally, the cost of continuous and single-entry bonds differs.

Single-entry ones can be quite tricky. The minimum amount that you’ll pay for the bond can’t be lower than the estimated monetary worth of the goods plus the taxes that you’d have to pay for their import.

And if these goods have to comply with other agency regulations as well, the initial value is raised to three times their estimated value; that would be the case with the above-mentioned food items, for instance.

When it comes to continuous bonds, the situation is far simpler. The minimal amount is $50,000 — alternatively, it can be ten percent of all the fees and taxes for imports that you’ve paid during the previous fiscal year. That means that the expenses for the bonds can vary, but they’re still far more cost-effective if you’re someone who regularly ships things between ports.

And finally — how do you actually obtain a bond in practice? The easiest method is going through a freight forwarder or a customs broker, that will deal with all of the assorted paperwork. On the other hand, if you’re going to do so yourself — the Treasury Department issues licenses to sureties that will sell you a bond.

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Samwell Stein is a freelance author and logistics advisor. He frequently cooperates with professional shipping and moving companies like Transparent International and advises them on the best industry practices.

Huawei

U.S. Adds 38 New Huawei Affiliates to Entity List While Again Expanding Foreign-Produced Direct Product Rule

The U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) has announced that it is further restricting access by Huawei Technologies Co. Ltd. and its designated non-U.S. affiliates (“Huawei”) to U.S.-produced technology and software. BIS first added Huawei to its Entity List on May 15, 2019 and has continued to impose additional export restrictions on Huawei under the U.S. Export Administration Regulations (“EAR”). Most recently, BIS published a Federal Register notice to implement the following enhancements. Although BIS published this Federal Register notice on August 20, 2020, the following rule changes took effect retroactively as of August 17, 2020:

Addition of Thirty-Eight New Huawei Affiliates to the Entity List. In its announcement, BIS added thirty-eight (38) additional Huawei affiliates to the Entity List. This action now brings the total number of Entity List-designated Huawei affiliates to one hundred and fifty-two (152). The EAR generally prohibits anyone, anywhere in the world from supplying products, software or technology that is “subject to the EAR” to these Huawei affiliates without a BIS license.

Expiration of Huawei Temporary General License. BIS had previously issued (and then, on multiple occasions, extended) a Temporary General License which permitted certain transactions with Huawei Entity List affiliates in order to support existing networks, equipment and handsets that were in existence prior to Huawei’s initial Entity List designation on May 16, 2019. In its Federal Register notice, BIS announced that it would be allowing the Temporary General License to expire. As a result, pursuant to the expiration date set in its most recent renewal notice, the Huawei Temporary General License expired effective August 13, 2020.

Anyone who previously utilized the Temporary General License was required to obtain certain compliance certifications in connection with transactions conducted pursuant to the Temporary General License and the EAR will require those persons to retain those certifications in accordance with the EAR’s recordkeeping requirements.

Permanent Authorization for Cybersecurity Research and Vulnerability Disclosures to Huawei Entity List Companies. The Temporary General License also contained a provision which authorized the disclosure of certain information to Huawei Entity List companies in order to assist with maintaining the integrity and reliability of existing data networks. After allowing the remainder of the Temporary General License to expire, BIS permanently codified this narrow exception into the EAR in order to promote cybersecurity.

Expansion of the Huawei Foreign-Produced Direct Product Rule. In May 2020, BIS amended the EAR’s foreign-produced direct product (FPDP) rules to designate the following items as “subject to the EAR”: (i) foreign-produced items produced or developed by a Huawei Entity List affiliate through the use of technology or software controlled under certain Export Control Classification Numbers (ECCNs), and (ii) foreign-produced items that are produced using equipment which is the direct product of U.S. origin software or technology controlled under certain ECCNs and also produced according to software or technology specifications produced or developed by a Huawei Entity List affiliate. BIS has now significantly expanded this rule.

As amended, the new Huawei FPDP rule now completely disregards whether foreign-produced items produced by a 3rd party are produced according to Huawei specifications and instead extends the Huawei FPDP rule’s coverage to all foreign-produced items resulting from the specified software, technology or production equipment which are intended for incorporation into or for use in the “production” or “development” of any “part”, “component”, or “equipment” to be produced, purchased or ordered by a Huawei Entity List company or otherwise included in any transaction featuring a Huawei Entity List company as a “purchaser”, “intermediate consignee”, “ultimate consignee” or “end-user” (terms in quotation marks in the previous sentence are defined terms under the EAR).

As a result of these amendments, a much broader range of foreign-produced items are now “subject to the EAR” and therefore prohibited for export, reexport or in-country transfer to any Huawei Entity List company without an appropriate BIS license.  Although BIS will normally review such license applications on a “presumption of denial” standard, these amendments did create an exception which states that BIS will evaluate license applications involving Huawei Entity List companies on a “case-by-case” basis when they involve foreign-produced telecommunications systems, equipment and devices below the 5G level.

The amendment did feature a savings clause, which allowed the continuance of certain qualifying transactions which were initiated prior to August 17, 2020.

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Grant Leach is an Omaha-based partner with the law firm Husch Blackwell LLP focusing on international trade, export controls, trade sanctions and anti-corruption compliance.

Cortney O’Toole Morgan is a Washington D.C.-based partner with the law firm Husch Blackwell LLP. She leads the firm’s International Trade & Supply Chain group.

Camron Greer is an Assistant Trade Analyst in Husch Blackwell LLP’s Washington D.C. office.

u.n. sanctions

U.S. Seeks Snapback of U.N. Sanctions on Iran Despite Departure from Nuclear Deal

The United States is formally demanding that the United Nations (U.N.) reimpose sanctions on Iran for its failure to meet commitments to limit its nuclear program set forth under the Joint Comprehensive Plan of Action (JCPOA). U.N. sanctions on Iran were lifted in 2015 as part of the terms of the JCPOA, which included the United States, European Union, France, Germany, the United Kingdom, Russia, and China as signatories. The U.S. formally withdrew from the JCPOA in 2018 and reinstated sanctions on Iran.

According to President Trump, the U.S. intends to restore “virtually all of the previously suspended U.N. sanctions on Iran. It’s a snapback.” Secretary of State Mike Pompeo is scheduled to go before the United Nations this week to officially notify the Security Council that the U.S. intends to restore U.N. sanctions on Iran. According to the Department of State’s press release, a range of U.N. sanctions will be restored within thirty (30) days, including the requirement to end all nuclear enrichment activities and the extension of the arms embargo on Iran, which is currently set to lapse in October.

The decision to request a snapback of U.N. sanctions on Iran follows the failure of an effort to extend a five-year U.N. arms embargo on Iran. The legality of the requested snapback by the U.S. has been questioned by other members of the JCPOA and the U.N. Security Council because the U.S. is no longer a party to the agreement. The Administration, however, maintains that as a permanent member of the Security Council, it has the authority under U.N. Security Council Resolution 2231 to push for a snapback of sanctions.

As a “participant state” in the JCPOA under the resolution, the U.S. claims it can assert “significant non-performance of commitments” by Iran to force a snapback within 30 days. It is not clear how the U.S. without support from Europe would enforce the U.N. sanctions. Without support from the rest of the Security Council, the U.S. will need to enforce sanctions unilaterally.

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Cortney O’Toole Morgan is a Washington D.C.-based partner with the law firm Husch Blackwell LLP. She leads the firm’s International Trade & Supply Chain group.

Camron Greer is an Assistant Trade Analyst in Husch Blackwell LLP’s Washington D.C. office.