House Passes Legislation Targeting Excise Tax Drawbacks for Tobacco Products

No sooner did the Court of Appeals for the Federal Circuit hand exporters a major victory in obtaining excise tax drawbacks than the Treasury department has turned to Congress in an effort to reverse that decision, at least with respect to tobacco products.

Recently, in National Association of Manufacturers v. United States, the Federal Circuit struck down Treasury regulations which attempted to limit recovery of excise taxes in drawback by prohibiting the exportation of untaxpaid goods as the basis for substitution drawback claims.

Wine producers had enjoyed some $60 million per year in drawback refunds on excise taxes in recent years, and exporters of tobacco products were preparing to claim such drawbacks for the first time. However, a provision tax increase legislation, passed by the House of Representatives to help fund the Biden Administration’s proposed $3.5 million budget would eliminate certain drawbacks for tobacco products, and to do so on a retroactive basis.

Section 138505 of the funding legislation amends the Internal Revenue Code, 26 U.S.C. § 5704, to define any remission of excise tax as a “drawback.” It would prohibit the exportation of untaxpaid products as the basis for substitution drawback in claims filed by with the Alcohol and Tobacco Tax and Trade Bureau (TTB). While the legislation does not mention Section 313 of the Tariff Act specifically, its enactment would lead Customs to deny drawback claims for tobacco products, asserting that those claims would represent an impermissible “double drawback” in violation of 19 U.S.C. § 1313(v).

To add insult to injury, the amendment would be effective retroactive to December 8, 2018, the date Treasury, under court order, implemented its Modernized Drawback Regulation. Once those regulations were issued, tobacco exporters filed claims for drawback in respect of goods imported as far back as 2013. The new law, if enacted, would effectively extinguish those drawback claims – a possible violation of the “Takings Clause” of the U.S. Constitution.

Interestingly, the proposed amendment goes after tobacco exporters, but not after wine exporters. This is probably in recognition of the fact that earlier attempts to legislatively terminate excise tax drawback for the wine industry met with strong opposition from the Congressional California delegation.

Drawback proponents are mobilizing before Congress to have the controversial measure killed. At this time, it is too soon to tell what the chances of success will be, but this is another indication of Treasury’s hostility to the drawback program.

FEDERAL CIRCUIT AFFIRMS CIT DECISION INVALIDATING LIMITATIONS ON EXCISE TAX DRAWBACKS

The United States Court of Appeals for the Federal Circuit, in National Association of Manufacturers v. Department of the Treasury, No. 2020-1734 (August 23, 2021), affirmed a decision of the United States Court of International Trade (CIT) which invalidated certain Treasury Department regulations which sought to limit drawback of Federal Excise Taxes (FET). The Federal Circuit found that Congress had spoken plainly to the issue at hand, favoring duty drawback over excise tax collections, and that Treasury’s regulations were inconsistent with Congressional intent.

Section 313 of the Tariff Act of 1930, as amended by the Trade Facilitation and Trade Enforcement Act of 2015, provides that excise tax drawbacks are to be paid in respect of eligible exports as though they had been imported. But the Treasury Department, in crafting its Modernized Drawback Regulations, 19 C.F.R. Part 190, sought to limit excise tax drawback in two ways: first, the regulations limited excise tax drawback to the amount of excise tax that had been paid on the exported good, a clear deviation from the statutory directive. Second, Treasury expanded the regulatory definition of “drawback claim”  to include any exemption or forgiveness of tax, rather than a claim for a refund of a duty or tax already paid.

The Court of International Trade struck down the regulations, holding that they did not pass Step 1 of the two-part test for evaluation of regulations set out in Chevron USA Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984).  Step 1 of the test asks whether Congress has spoken directly to the question at hand; if so, then the language of the statute governs.  If Congress has not spoken directly to the question, and has left “gaps” to be filled in by regulations, Step 2 of the test asks whether the agency’s regulatory interpretation is “reasonable”.

The Federal Circuit, per Judge Jimmie Reyna, held that:

To prevail, the Government must succeed in both its redefinition of “drawback,” particularly for the purposes of the “double drawback” prohibition of 19 U.S.C. § 1313(v), and in its interpretation of numerous subsections of 19 U.S.C. § 1313.

The Government fell short on both counts.

First, the Court struck down as unreasonable Treasury’s attempt to expand the regulatory definition of “drawback claim” for purpose of interpreting 19 U.S.C. §1313(v) prohibition against “double drawbacks”. Rejecting the government’s argument that excise taxes are “determined” on bonded goods upon removal from warehouse, and then “canceled” upon exportation, noting this was inconsistent with provisions of the Internal Revenue Code. The Court then sustained the traditional definition of “drawback” as being a claim for refund of a duty or tax actually paid:

The Rule’s broadened definition of “drawback” includes a drawback of excise tax that was never “paid or determined” on exported merchandise. See 26 U.S.C. §§ 5704(b), 5214(a), 5362(c). This defies logic. A tax that has never been paid or determined cannot be said to have been “drawn back,” and goods that have been exported without payment of tax cannot give rise to a “claim” for drawback, because there would be no refund to be paid out or cancellation of liability to be made.

The appellate court next rejected the Government’s arguments that its proposed limitations on excise tax drawback were consistent with legislative intent and sound policy considerations, noting that Congress directed that substitution drawback be paid under 19 U.S.C. §1313(j)(2) requiring substitution unused merchandise drawback to be paid when conditions are satisfied “notwithstanding any other provision of law”. The CAFC also noted that the Treasury regulations would effectively cancel the refund calculation provisions set out in the statute at 19 U.S.C. §1313(l), specifically that excise tax drawback was to be paid based on the tax “that would apply to the [substituted] exported article if the exported article were imported.”.

The Court rejected Treasury’s claim that the legislative history of the drawback statute supported its interpretation, stating that “Here, the legislative history of the drawback regime demonstrates that Congress chose to expand access to drawbacks at the expense of excise taxes”.

The decision protects an excise drawback scheme which the wine industry has enjoyed for years, and opens up new duty drawback opportunities in the tobacco and petroleum industries.

CUSTOMS PROPOSES NEW ORIGIN RULES FOR CANADA, MEXICO AND CERTAIN GOVERNMENT PROCUREMENT PURPOSES

United States Customs and Border Protection has issued a proposed regulation which proposes to retain the "NAFTA Marking Rules" in 19 C.F.R. Part 102, and to  make them applicable to all non-preferential origin determinations for goods imported from Canada or Mexico -- not just marking,  The proposal would use these "tariff shift" -based rules for purposes such as determining the rate of duty for goods for non-preferential purposes, and would preclude the use of the traditional "substantial transformation" test of a change in name, character or use. 

The proposed regulations are available at 2021-14265.pdf (govinfo.gov)

This would mean, for example, that in determining the origin of a good produced in Canada or Mexico with Chinese-origin parts, for purposes of determining the applicability of Section 301 tariffs, Customs would use the tariff-shift rules in 19 CFR Part 102, instead of assigning a good a country of origin for tariff purposes, which is different from the country of origin for marking purposes -- a phenomenon seen in several recent Customs rulings. 

 Customs claims that the tariff shift rules in Part 102 codify the "substantial transformation" rule, but Courts rejected that formulation years ago.  Indeed, since the new United States-Mexico-Canada Free Trade Agreement (USMCA) does not mention marking, or require a set of internationally-agreed marking rules, many have questions whether there is need to retain the NAFTA Marking Rules at all.

Perhaps more controversially, Customs is proposing to use the Part 102 rules to determine the  country of origin purposes, for government procurement reasons under the Trade Agreements Act (TAA), of goods imported from Canada and Mexico.  This proposal is likely to be more problematic. The TAA implementing statute, 19 USC 2518, specifically calls for the use of the "name, character and use" factors. This proposal could place Canadian and Mexican producers on a different footing from companies in other countries for TAA purposes. [Alternatively, CBP might just start applying the Part 102 tariff shift rules to goods from all countries in making procurement rulings and determinations].  We expect some industry resistance to this proposal. 

CBP will be soliciting public comment on the proposed regulatory changes for 60 days. We stand ready to furnish any information or assistance you might require concerning this proposal. If you have questions, please contact a Neville Peterson professional.

“FIRST SALE” APPRAISEMENT AND NON-MARKET ECONOMIES: KEEP CALM AND CALL A CUSTOMS LAWYER

The United States Court of International Trade this week turned a few heads (and probably stopped a few hearts) with a decision suggesting that the Nissho-Iwai “first sale” rule of transaction value appraisement should not apply to goods from China or other non-market economy countries (NMEs), or goods which contain materials from those countries. More broadly, the decision called into question whether “transaction value” was a viable basis for appraising any goods imported from China or other NMEs.

        In Meyer Corp. U.S. v. United States, Slip Op. 21-26 (March 1, 2021), the court considered the appraised value of cookware made in China, and cookware made in Thailand with Chinese inputs. The importer claimed that the goods should be appraised on the basis of “transaction value” using the “first sale” price from Chinese and Thai manufacturers to a related middleman, rather than the price at which the middleman resold the goods to the importer. Under the “first sale” rule of transaction value appraisement established in Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992), where there are two or more sales of goods “for exportation to the United States,” the goods may be appraised using transaction value on the basis of the first such sale which is made at “arm’s length”.  Typically, in determining whether a sale is at arms’ length, Customs looks at the behavior of private entities – the buyer and the seller.

  Neither the Courts nor Customs have ever suggested the “first sale” rule cannot be applied to NME goods, but the Meyer court did, adding a fourth factor to the test at the beginning of  the trial court’s 120-page opinion:

The Nissho Iwai “first sale” rule requires (1) bona fide sales that are (2) clearly destined for the United States, (3) transacted at arm’s length and (4) absent any sort of non-market influences.

The highlighted portion is new, set out by the trial judge. The “non-market influences” of which the court speaks are presumably those resulting from the non-market nature of the Chinese economy, such as dumping or subsidies (or possibly even forced labor). However, such “distortions” are surely not limited to non-market economy countries.

The Meyer decision has set off tremors throughout the trade community, since in recent years thousands of United States importers have established “first sale” pricing programs to cushion the impact of Section 301 retaliatory tariffs imposed on Chinese goods – or entered “first sale” programs operated by the major American retailers they sell to.  

  Although ruling for the government rested on various evidentiary findings, the CIT, at the conclusion of its opinion, doubled down on the notion that a fourth element applied to the Nissho-Iwai test, namely, the absence of non-market economy influences:

… more broadly, as a result of its consideration of the issues presented here, this court has doubts over the extent to which, if any, the “first sale” test of Nissho-Iwai was intended to be applied to transactions involving non-market economy participants or input. In that regard, the Court of Appeals for the Federal Circuit could provide clarification.

Perhaps more ominously, the Court also noted its doubts that an accurate ascertainment of the “true” value or “price paid or payable” for goods is possible unless distortive non-market economy factors are addressed. And since Customs’ decisions enjoy a presumption of correctness, the burden of addressing those factors rests on the importer.

Taking a Step Back

You’re an importer. You’re using the “first sale” rule for goods from China (or maybe Vietnam). How worried should you be?

Sit down. Relax and consider seeking legal advice. The Meyer decision is so unusual that Customs will need to think twice (at least) before “weaponizing” it to deny “first sale” treatment to Chinese goods.

In essence, the Court seems to have done the one thing the Ghostbusters were urged never to do: it “crossed the streams”. The Court imported into the Customs valuation law concepts that simply are not relevant to it. And as filmgoers know, crossing the streams often leads to a sticky mess.

United States Customs and trade laws are derived from various World Trade Organization (WTO) agreements which tell signatories how to address various areas of trade.

The WTO Customs Valuation Code, on which the United States’ Customs valuation statute is based, sets out rules for placing a value on goods for purposes of applying a country’s ordinary, statutory duty rates. These duties are imposed for the purpose of raising revenue, not for the purpose of correcting trade distortions. The Valuation Code, and Section 402 of the Tariff Act, are simply not concerned with trade distortions. They only care about pricing distortions caused by the relationship between a buyer and seller in a transaction value context. If a “price paid or payable” of $40 is found acceptable by the Customs authorities, that is the basis of Customs appraisement. It does not matter whether the seller, for example, received an energy subsidy which resulted in a lower price than might otherwise have been the case. That would not be a basis for a Customs authority to reject a related (or unrelated) party price.

It’s also important to note that, while income tax authorities generally have the power to adjust a related party price upward or downward, Customs authorities do not have this power. If they do not approve of a related party price, they can only reject it, and turn to another basis of Customs appraisement. And if “market distortions” were relevant to Customs value, importers would presumably be required to report them to Customs. As discussed below, none of the alternative bases of Customs appraisement are intended to, or capable of, dealing with “trade distortions”.

When trade distortions exist, the WTO Antidumping Code and WTO Subsidies Code come into play. Countries can resort to antidumping and countervailing duty laws to address them. These laws do not affect statutory tariff rates, but rather impose special, additional, non-statutory tariffs for the purpose of offsetting the injurious effect of any identified trade distortion. Furthermore, these remedies cannot be  invoked to address every possible trade distortion. They may only be used when distorting trade practices exist and are quantified, and those practices are found to have caused injury to an industry in the country of importation. These types of trade distortions are not addressed using the WTO Valuation Code, and that Code has no mechanisms for identifying, quantifying or dealing with any such distortions which might exist. Customs applies the valuation statute every day to thousands of entries of goods which might be affected by “trade distortions”; the valuation laws simply don’t care. And they don’t contain a method to address them, or adjust for them. And the imposition of a non-statutory antidumping or countervailing duty does not affect the dutiable value of goods.

Why the Customs Valuation Statute Can’t Address “Trade Distortions”

As noted above, except in very limited, and statutorily identified circumstances (e.g. an addition for an assist or a royalty) Customs authorities who find a related party “transaction value” unacceptable cannot adjust that value; they can only reject it, and look to another statutory basis of appraisement. But those other bases of appraisement can’t address trade distortions, either.

The first alternate basis of appraisement is the “transaction value of identical or similar merchandise” [19 U.S.C. §1401a(c)] in a sale to an unrelated purchaser. Assuming such sales exist (they rarely do), a widget produced in China and sold to an unrelated purchaser arguably would have enjoyed the same subsidy as a widget sold to a related purchaser. This basis of appraisement allows adjustments for differences in the merchandise and in levels of trade, but not for “trade distortions”.

Next in the hierarchy is “deductive value” [19 U.S.C. §1401a(d)], which is a “price minus” basis of appraisement. It begins with the price at which a good is generally sold to an unrelated purchaser in the United States, and then deducts certain non-dutiable costs, such as US selling expenses, international transportation costs and Customs duties. But if a “trade distortion” resulted in a price to the unrelated customer that is lower than it might otherwise have been, it might very well be reflected in the price to the unrelated customer. The allowable deductions won’t adjust for it.

The next alternate basis of appraisement is “computed value” [19 U.S.C. §1401a(e)], which is based on the foreign producer’s costs for materials, fabrication, plus an addition for general expenses and profit. The courts have stressed a preference for using the foreign producer’s actual costs. If a producer’s actual cost of, say, electricity, benefits from a subsidy, the computed value law provides no way to adjust for it.

In invoking “trade distortions”, the Meyer court imposes on the Customs valuation law a task that law was never intended to perform.  Also, if a “trade distortion” affects a “first sale” for exportation, who is to say it does not affect the “second sale” to the US importer as well? There is an entire body of trade law on the question of whether a subsidy or other trade distortion conferred on a manufacturer or seller “passes through” to subsequent purchaser. There is nothing about this in the Customs valuation law, and no way to deal with a “pass-through”. Rejecting a “first sale” appraisement under Nissho-Iwai doesn’t necessarily eliminate a distortion from any other basis of appraisement.

Indeed, the Meyer court’s reasoning would appear to make it impossible to use transaction value to appraise any Chinese or NME good – and any goods made in other countries (such as Thailand) with NME imports – on the basis of transaction value. Surely, that is not the Court’s intent.   

Stay Calm and Call Your Customs Lawyer

Ghostbusters warned us not to “cross the streams”. Another popular movie of that time warned us not to “bring a knife to a gunfight”. Another way of saying “the right tool for the job”.

The CIT, in the Meyer decision, seems to have ignored this hoary yet sage advice.  It seeks to put the valuation statute to work for a task that statute was never meant to do.

While Customs, for its part, might want to “weaponize” the decision, to deny the use of “first sale” or “transaction value” in NME transaction, but they should think twice (or thrice) before moving down that path.  Moving NME transactions to “deductive value” or any other basis of appraisement would multiply the agency’s workload substantially – and do not a thing to address the “distortions” which so concern the Meyer court.

It will be interesting to see if the Meyer rationale on the applicability of “first sale” or “transaction value” holds up on rehearing or appeal. There are many reasons to believe it will not.

Please feel free to contact any Neville Peterson professional if you have questions concerning this topic.

TRADE IN THE TIME OF CORONAVIRUS: UPDATE #10

At Neville Peterson LLP, we’ve been working through the COVID-19 pandemic, and like everyone else, we’re hoping the end is in sight as vaccines become available.  Herewith, the latest news affecting international trade.

THREE BIG YEAR-END DEADLINES LOOM FOR TRADE

The trade community is facing three significant year-end deadlines, as the Trump Administration begins to hand over control to the incoming Biden Administration.

 MOST REMAINING EXCLUSIONS FROM SECTION 301 TARIFFS granted by the United States Trade Representative will expire December 31, 2020. Thereafter, all articles of Chinese origin appearing on the retaliation lists activated by the USTR will become subject to supplemental Section 301 retaliatory tariffs. The Biden Administration has indicated that it does not plan to lift the Trump tariffs immediately after taking office. It will use the tariffs as leverage to try to negotiate trade concessions from China. Importers of targeted goods from China will need to continue to exercise diligence regarding tariff classification, Customs valuation and country of origin issues.

As noted below, exclusions for COVID-related goods have been extended through March 31, 2020.

THE GENERALIZED SYSTEM OF PREFERENCES WILL EXPIRE on December 31, 2020, as well. The GSP provides duty-free treatment from goods from many “Beneficiary Developing Countries” While there is bipartisan support for renewal of GSP, Congressional negotiators were not able to fit it into the year-end spending bill. The terms of the renewal are being debated. Senator Chuck Grassley (R-IA) had proposed extending GSP as it currently exists for six months. Sen. John Hawley (R-MO) is floating a proposal which would modify eligibility requirements and rules of origin, tying them to external United States trade conditions. GSP has expired in the past and been renewed by Congress from time to time in the past. That is likely to be its fate again. 

MISCELLANEOUS TARIFF SUSPENSIONS AND REDUCTIONS CONTAINED IN HTS CHAPTER 99 will also expire on December 31. These measures provide temporary three year suspensions and reductions of tariffs on a wide range of articles, primarily chemicals and pharmaceuticals. Congress failed to include miscellaneous tariff bill (MTB) legislation in its year-end omnibus spending package. Congress has been considering legislation to extend most of these temporary suspensions and exclusions, while introducing some new ones. However, some legislators are proposing to cut certain items, primarily finished goods as opposed to inputs, from the bill before it passes. A coalition of over 200 companies has written to Congressional leaders urging passage of the MTB act, noting that American importers will spend approximately $1.3 million per day in extra duties if the measure is not passed. MTB renewals, when tardy, have generally not been retroactive.

The American Competitiveness Manufacturing Act (AMCA), under which duty suspensions and temporary reduction measures were submitted to, and vetted by, the United States International Trade Commission, instead of being introduced as legislative bills by individual members of Congress, provided for two (2)  three-years review cycles, which have now been completed. It remains to be seen if Congress will renew the AMCA, which appears to have been very popular with both Congress and industry, or will revert to receiving individual duty suspension and reduction bills in the new Congress.

Congressional negotiators were able to insert some amendments to the US-Canada-Mexico Agreement (USMTA) Implementation Act. They restored the ability to make post-entry claims for refunds of merchandise processing fees and other taxes (the law previously had allowed 19 U.S.C. §1520(d) petitions only for duties under USMCA). They also changed provisions which had allowed goods produced in United States Foreign Trade Zones to qualify as USMCA “originating” goods upon being withdrawn for consumption. The NAFTA Implementation Act had contained a provision prohibiting production of originating goods in FTZs, a feature which the USMCA legislation lacked. The restriction has now been added to USMCA.

USTR EXTENDS, ADDS TO, SECTION 301 EXCLUSIONS FOR COVID GOODS

U.S. Trade Representative Robert Lighthizer has taken last-minute action to extend through March 31, 2021, Section 301 product exclusions for goods related to the COVID pandemic response. The lists, covering more than 100 product descriptions and statistical tariff items, cover a wide range of personal protective equipment (PPE), hand sanitizers, X-ray, CAT and PET-scan, MRI and other devices, scientific equipment, and medical and surgical equipment. The new provisions take effect January 1, 2021.

BIDEN ADMINISTRATION BEGINS SETTING TRADE AGENDA

President-Elect Biden has nominated Katherine Tai as United States Trade Representative.

Popular across both sides of the political aisle, Tai is currently Chief Trade Counsel for the House Ways and Means Committee. She played an important role in strengthening labor protections in the United States-Mexico-Canada Agreement and previously served as deputy counsel at USTR from 2007 through 2014. She is fluent in Mandarin, and has been a critic of China’s trade policies. However, instead of relying on unilateral tariffs to corner China, she favors a more “strategic” policy focusing on cooperation with international institutions.

Tai’s Nomination Suggests that Trade Policy will not be an immediate Biden Administration focus. Unlike most other Biden cabinet appointees, Tai has no personal connections to the President-elect and has not served as deputy in any Cabinet-level departments. This is taken as an indication that the incoming administration will initially focus on COVID relief and shoring up the economy, leaving trade for later. Biden has already indicated he will not immediately drop President Trump’s China tariffs but will use them as leverage for future negotiations with the Chinese. Whether the incoming USTR initiates another round of exclusion requests for Section 301 tariffs remains to be seen.

TRADE CHALLENGES WORK THEIR WAY THROUGH COURT

Challenges to President Trump’s Section 232 tariffs on imported steel and aluminum, as well as his Section 301 tariffs on Chinese goods, are making their way through the courts, and are likely to change parts of the trade landscape in the new year.

One lawsuit is already on the brink of paying results for its plaintiff. In Transpacific Steel LLC v. United States, the Court of International Trade ruled that President Trump’s efforts to double Section 232 duties on Turkish steel from 25 to 50% were untimely and unlawful. While the government has appealed, the Court of Appeals for the Federal Circuit recently denied a motion by the government to stay the CIT’s judgment pending appeal – indicating that Transpacific will be repaid its excess duties and that the appellate court does not see a likelihood that the government will prevail on the merits of its appeal.

Other Section 232 challenges are working their way to the courts. This includes Universal Steel Products v. United States, a broad-based challenge to the President’s actions in proclaiming Section 232 tariffs, and Maple Leaf Marketing, Inc. v. United States, which asserts that the President’s imposition of tariffs on steel from Canada was time-barred and invalid. [This suit, if successful, would also pave the way for challenges to Section 232 tariffs on steel from Mexico and the European Union]. Thyssenkrupp Inc. v. United States charges that Commerce’s issuance of company-specific, rather than product-specific exclusions from Section 232 tariffs violates the “Uniformity Clause” of the United States Constitution. In addition, a number of challenges are pending to the President’s efforts to proclaim Section 232 tariffs on “derivative” iron and steel products such as iron nails and aluminum wire.

Section 301 Challenges in the Court of International Trade continue to proliferate. More than 3500 companies have filed (and are continuing to file) suits in the United States Court of International Trade, asserting that the President’s Section 301 tariffs on List 3 and 4A Chinese products were not properly promulgated and are void. An avalanche of cases descended on the CIT in September after HMTX Corp., a Georgia-based importer of tile products, filed a challenge asserting that the president improperly imposed the List 3 and 4A tariffs without first obtaining a proper report from the Secretary of Commerce, and without following legally required procedures. The CIT is working out procedural details, including whether to appoint a three-judge panel to hear the HMTX case, whether to combine any other cases with it, and whether to stay most cases while a test case is litigated. Cases are expected to spring to action in the new year, with the government most likely filing a motion to dismiss them.

Back on the Section 232 side, the Commerce Department is proposing new regulations which would govern requests for tariff exclusions, which would create a category of “generalized exceptions” for certain products. Currently, Commerce grants exclusions from the steel tariffs on an individual company basis, typically limiting the amount of steel that can be imported without regard to the tariffs.

The Commerce Department has announced it will also implement an import licensing scheme for aluminum, starting January 25, 2021.

CUSTOMS TAKING ACTION TO COLLECT SECTION 301 TARIFFS

The Treasury Department is working on a regulatory proposal which would prohibit the use of the “low value shipment” exception contained in Section 321 of the Tariff Act from being used for Chinese goods subject to Section 301 tariffs. The Section 321 provision, which allows commercial shipments valued at $800 or less to be imported without entry or payment of duty, has proven extremely popular with importers, particularly in the e-commerce area. Companies have been able to import substantial amounts of Chinese goods under Section 321 without paying the Section 301 China tariffs, something that Treasury considers a loophole it intends to close. The proposal is currently on Treasury’s regulatory agenda, and a proposed rulemaking is expected in early 2021.

Customs has also posted its annual year end “blanket election for immediate delivery status” for goods imported in the second half of December. This election has the effect of giving entries made in the latter half of December 2020 a 2021 “entry date”, for duty rate purposes. Given the expiration of GSP and MTB at year’s end, many importers may want to opt out of this election.

For help regarding these or other trade topics in these challenging times, please contact a Neville Peterson LLP professional.

 Best wishes for a Happy Holiday Season from everyone at the firm.

SECTION 301 LITIGATION; WHERE ARE WE?

Some 3500 importers have filed suit in the United States Court of International Trade, seeking recovery of tariffs imposed under Lists 3 and 4A of the retaliation lists issued in the Section 301 investigation of China’s intellectual property rights practices.  Here’s a brief update on the current status of this litigation

Status of the HMTX “Lead” Case

Most observers expect that the Court will select the first-filed challenge, HMTX Inc. v. United States, Court No. 20-00177, as the “lead” case, and will suspend other cases while HMTX is litigated. More than two months after the HMTX case was filed, however, there has been surprisingly little action in the case.

Both HMTX and the government have filed proposed litigation plans, which call for the Court to “stay” action in other cases while the HMTX case is litigated. In addition, HMTX has proposed assigning the case to a three (3)-judge panel, based on the importance of the issues involved. The government does not oppose this proposal.

There has been some minor skirmishing from some plaintiffs, who believe that a case other than HMTX should be selected as the lead case, or that HMTX should be joined with other cases, which raise additional (usually Constitutional) challenges to the Section 301 tariffs. Others argue that HMTX should proceed ahead on its own, since Courts will not consider constitutional issues if cases can be decided on non-constitutional grounds.

Technically, the government’s time to file Answers to the Complaints in most of the Section 301 challenges has elapsed. While the Court would not hold the government in default, the urgency for establishment of a case management plan is increasing.

An informal Plaintiff’s Steering Committee has been established, and confers with some regularity. Neville Peterson LLP has a representative on that Committee.

To Protest or Not Protest?

One much-debated topic is whether importers seeking to recover Section 301 duties must file protests against the liquidation of their entries in order to preserve their rights to refunds of these duties.

Our firm has conducted extensive research on this issue. Our judgment is that while filing a protest is a viable procedural way to ultimately bring a specific refund claim before the Court of International Trade, it is not necessary, since filing a protest would be futile and the Court would almost certainly waive the exhaustion of that particular administrative remedy.

Section 514(a) of the Tariff Act of 1930, as amended [19 U.S.C. §1514(a)] allows importers to protest seven (7) categories of Customs decisions, typically (but not always after an entry of merchandise is “liquidated” by Customs. These categories are:

 (1) the appraised value of merchandise;

(2) the classification and rate and amount of duties chargeable;

(3) all charges or exactions of whatever character within the jurisdiction of the Secretary of the Treasury;

(4) the exclusion of merchandise from entry or delivery or a demand for redelivery to customs custody under any provision of the customs laws, except a determination appealable under section 1337 of this title;

(5) the liquidation or reliquidation of an entry, or reconciliation as to the issues contained therein, or any modification thereof, including the liquidation of an entry, pursuant to either section 1500 of this title or section 1504 of this title;

(6) the refusal to pay a claim for drawback; or

(7) the refusal to reliquidate an entry under subsection (d) of section 1520 of this title;

 A protest may be lodged against a determination “adverse to the importer, in any entry, liquidation, or reliquidation, and, decisions of the Customs Service, including the legality of all orders and findings entering into the same . . . “.

Some commentators have suggested that the assessment of Section 301 duties is not protestable, since the duties are imposed by order of the United States Trade Representative, rather than Customs, and because Customs’ role is “ministerial”.  We disagree. The only area where Congress has specifically eliminated or narrowed the ability to protest liquidations is with respect to antidumping and countervailing duties, and then only to the extent the protest would challenge a determination made by the Commerce Department.

While Congress sought to limit Customs protests from being used to make “collateral attacks” on decisions of other agencies, see Conoco Inc. v. Foreign Trade Zones Board, 18 F. 3d 1581 (Fed. Cir. 1994), it did not accomplish this goal. While Congress eliminated language from the Court of International Trade’s jurisdictional statute, 28 U.S.C. §1581(a), which gave court jurisdiction to challenge protest denials, “including the legality of all orders and findings entering into same”, it did not eliminate the parallel language from the protest statute, 19 U.S.C. §1514(a). Thus a protest may lie against liquidation of a Customs entry “including the legality of all orders and findings entering into same”, and the CIT has jurisdiction to consider all matters raised by protest.

That being said, filing a protest is possible, but not necessary, since filing a protest is futile – CBP has no power to hold USTR’s imposition of Section 301 tariffs unlawful and grant a protest challenging them. In this regard 28 U.S.C. §2637(d) provides “The court shall require exhaustion of administrative remedies where appropriate”, and the Court waives exhaustion of protest remedies where the remedy would be “futile” or “inappropriate”. In the case of Section 301 tariffs, as noted above, the protest remedy is “futile” since CBP has no power to declare USTR’s action unlawful and grant any protest.

A protest is a “slow boat” approach to bringing a Section 301 challenge in the CIT, A protest must be filed against the liquidation of every entry in which Section 301 duties are challenged, within 180 days, and once a protest is denied, CIT litigation must be brought within 180 days. All liquidated duties, taxes and fees must be paid prior to filing suit. Protests can usually reach entries made during the last 17 months, while the Court’s “residual” jurisdiction, under which the 3500+ Section 301 challenges have been filed, allows recovery of duties paid within two years prior to the filing of suit. [1]

Can Section 301 Refunds be Obtained in a Case Brought under the CIT’s “Residual Jurisdiction”?

Some observers have noted that the current CIT complaints seek declaratory relief, and relief under the Administrative Procedure Act, which requires a reviewing court to “hold unlawful and set aside” agency actions taken in violation of law and obligation. Money damages are not available in APA lawsuits.

However, Courts have held that, in APA cases, courts can order equitable restitution of funds taken from a plaintiff through unlawful means. This is viewed as a restoration of the plaintiff’s property, and not as an award of “damages”. See Bowen v. Massachusetts, 487 U.S. 879, 893-94 (1988); See also Anselmo v. King, 902 F. Supp. 273, 275 (D.D.C. 2005) ; National Ass'n of Counties v. Baker, 268 U.S. App. D.C. 373, 842 F.2d 369, 373 (D.C. Cir. 1988))”.

How do the Election Results Affect this Litigation?

Litigants who expect that the election of Joe Biden as President of the United States will lead to a quick removal of Section 301 tariffs on China are likely to be disappointed. It appears that tariffs will not be a “Day 1” issue for the incoming administration, which will be looking to focus on COVID-19 and the economy once it takes office. 

The Section 301 tariffs are popular with labor unions that supported the Biden candidacy, and are likely to be used by the incoming Administration as leverage in negotiations with China. Practical considerations make intervention in the pending Section 301 lawsuits unlikely. First, the cases are with the Judicial Branch, and Biden Administration’s initial focus will be on asserting control over the Executive Branch.  It may also take some time before the new Administration’s international trade team is in place.

 While we believe that the Biden Administration will approach trade with China from a different perspective, whether there will be a wholesale elimination of China-based duties is very uncertain.  We note the following: 

• One of the few areas in which there was some bipartisan political agreement is the belief that China acts in violation of international trade rules and must be called to account for its actions.  While there may be differences in how China is to be held liable, there is a consensus on the larger point that some form of trade redress is required.

•  The Biden Administration will likely approach the issue multilaterally – by engaging our other trading partners in a common pursuit of Chinese remedies - or by seeking a greater involvement from the WTO.  The Trump Administration charted its own China-trade course.  We expect the Biden Administration may move multilaterally but, in any event, will not likely withdraw the duties without demanding some changes in behavior in exchange.

We stand ready to discuss the litigation, and other international trade and Customs law issues, at your convenience.

[1] Our firm has prepared a more detailed analysis of the protestability issue, which we are happy to make available to clients on request.

September 21 Has Come and Gone – Can I Still File a Suit for Section 301 Duty Refunds?

This past week was like nothing before seen in the 40-year history of the United States Court of International Trade (CIT). From September 16 through September 21, 2020, more than 3,500 new lawsuits were filed in the CIT by importers seeking refunds of Section 301 tariffs imposed on Chinese goods appearing on the United States Trade Representative (USTR)’s Lists 3 and 4A of tariff sanctions.

As this post was completed, new suits were still being filed at a steady pace.

The cause of this filing frenzy was HMTX, Inc. v. United States, Court No. 20-00177, a suit filed on September 10 which asserts that List 3 and 4A tariffs are invalid because they did not relate to USTR’s original Section 301 investigation and finding. USTR had concluded that Chinese Intellectual Property Rights (IPR) practices unfairly burdened U.S. exports and recommended that retaliation being imposed against Chinese goods valued at $50 billion – which USTR did in Retaliation Lists 1 ($34 billion) and 2 ($16 billion).

The HMTX suit contends that Lists 3 and 4A were reactions to different Chinese trade policies, and that before imposing these tariffs, USTR was required to initiate a new Section 301 proceeding (or two). Lists 3 and 4A are not “modifications” of the initial determination and are therefore untimely. HMTX seeks a refund of List 3 and 4A tariffs paid. Apparently, thousands of other companies want a piece of that for themselves.

What is your company’s deadline to file a claim for relief?  USTR’s List 3 tariffs were published in the Federal Register on September 21, 2018.  Given the two-year statute of limitations for refund cases of this type, many reasoned that companies were required to file no later than September 20, 2020, which – since it fell on a Sunday – shifted the deadline to September 21, 2020.

But there may in fact be more time for importers to get in on the action.

Suppose your firm did not file suit in the CIT by September 21: are you out of luck? Almost certainly not. The HMTX case is filed under the Administrative Procedure Act (APA). It is well-established that a party acquires standing to sue under the APA when it suffers actual “injury in fact.” In the case of Section 301 tariffs, the first tariffs were not imposed until September 24, 2018. And, in APA cases, the first “injury in fact” an importer suffers occurs in the first date that Customs demands payment of Section 301 tariffs from that importer. Thus, if your company was not assessed with Section 301 tariffs until October 1, 2018, you arguably have until September 30, 2020 to file a suit in the CIT to redress that injury.

Moreover, each separate payment of duty constitutes a separate “injury in fact” which triggers a right to sue under the APA. Assume that you do not file a refund claim until October 15, 2020. You might be time-barred from recovering Section 301 duties paid before that date, but you would be able to preserve your right to refunds of duties paid thereafter.

So, despair not. Even if your company was unable to file a suit by September 21, you should be able to file for refunds anyway.

For more information on potential refund actions, contact any Neville Peterson LLP professional.

New CIT Lawsuit Challenges Section 301 Tariffs on List 3, List 4A Goods

A lawsuit recently filed in the United States Court of International Trade challenges the legality of Section 301 retaliatory tariffs imposed by the President on Chinese goods appearing on Lists 3 ($200 million trade action) and 4A ($300 million trade action) of the announced retaliatory measures. This lawsuit may provide a basis for interested importers to file their own claims to recover Section 301 assessments on List 3 and 4 A goods.

In HMTX Industries LLC v. United States, Court No. 20-00177, a Georgia-based importer of vinyl tiles asserts that the Section 301 tariffs on List 3 and 4 A goods are unlawful, as done in excess of delegated authority (ultra vires), and in an untimely fashion.

With regard to the ultra vires claim, the Complaint alleges that the USTR’s Section 301 report identified Chinese intellectual property rights (IPR) practices as harming United States exports, and found that the exports warranted retaliation against $50 billion Chinese goods. This $50 billion in retaliation was imposed in the List 1 ($34 billion) and List 2 ($16 billion) assessments.

However, List 3 assessments made against $200 billion in Chinese goods, were not related to China’s IPR practices. Rather, they were imposed in retaliation for China placing tariffs on United States-origin goods – a subject which was never covered in USTR’s Section 301 report. List 4 A tariffs on up to $300 billion worth of Chinese goods were imposed after the United States complaint that China was not purchasing sufficient quantities of United States goods.

In both instances, the Complaint alleges, the actions were ultra vires since USTR did not prepare a report regarding the Chinese practices which were being retaliated against. Moreover, the complaint alleges, these impositions are beyond the President’s power to “modify or rescind” properly-issued Section 301 measures in accordance with Section 307 of the Trade Act.

The Complaint also alleges that both the List 3 and List 4 A actions are untimely under the statute, since taken more than twelve months after issuance of USTR’s Section 301 report on intellectual property rights.

We have reviewed the Complaint and believe its contentions have merit. While no one can predict how a court will rule, a favorable decision in this case could pave the way for the plaintiff to receive refunds of List 3 and List 4 A tariffs imposed on its products.  

Protecting Your Company’s Right to Duty Recoveries

The safest way for an importer to protect its own right to recover Section 301 tariffs imposed on List 3 and 4 goods is to file its own action in the United States Court of International Trade, seeking such recoveries. The Court entertains these actions under its 28 U.S.C. § 1582 (i) “Residual” jurisdiction. These actions must be filed within two years after the importer’s cause of action accrues.

Some sources have reported that an action must be filed no later than September 20, 2020. Whether that is true or not is debatable, but our firm can file such claims by that deadline if we receive authorization to do so and a sufficient amount of facts to prepare a complaint.  For a case such as this we would need the following information to file a complant:

1.  Name of the importer/duty payer

2.  Its state of incorporation;

3  A general description of the merchandise (e.g. automotive parts; chemicals etc);

4. The HTSUS number under which the goods were imported, so that we can verify that they are within category 3 or 4A.  

An importer is generally aggrieved, for prudential standing purposes in a court, when it suffers “injury in fact” from a challenged action. This would be the date the importer is assessed with the challenged duties (either at the time goods are entered, or at liquidation of an entry). This suggests that importers may be able to file after September 20, 2020, to protect their rights to recoveries in whole or in part.

In our judgment, an importer could also raise a claim for refunds of Section 301 duties by filing a protest against the assessment of such duties in liquidation of an entry. If a court holds the Section 301 impositions unlawful, we would expect Customs to grant the protests and refund duties. [However, Customs will not grant refunds unless a Court strikes down the Section 301 measures; the agency has no authority to hold USTR’s actions unlawful].

As a general rule, importers should file their actions sooner rather than later.

For more information regarding this new opportunity to recover tariffs, please feel free to contact a Neville Peterson professional.

U.S. Court of International Trade Decision Could Call into Question the Validity of Section 301 Exclusion Request Denials by U.S. Trade Representative

A recent decision of the United States Court of International Trade could call into question the legitimacy of Commerce Department decisions denying exemptions from the Section 232 “national security” tariffs on imported steel and aluminum.

Before the U.S. Court of International Trade in JSW (Steel) USA, Inc. v. United States, Slip Op. 20-111, Court No. 19-00133 (August 5, 2020) was a challenge by a steel importer to the Department of Commerce’s denial of the company’s twelve (12) Section 232 exclusion requests. The Court applied the traditional administrative test of “arbitrary and capricious” to evaluate Commerce’s determinations to deny the exclusion request.

“Under the arbitrary and capricious standard, courts consider whether the agency ‘entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or [the decision] is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.’”, wrote Judge Claire Kelly.  Id. at 12. The Court said “[r]emand of all twelve exclusion requests is warranted because Commerce’s denials are devoid of explanation and frustrate judicial review.” Id. at 18. “The court cannot be certain what record evidence, if any, Commerce relied upon when both the BIS decision memoranda … [do] not explain what information the [agency] considered, how it was weighed, or why the evidence compelled denial.” Id.

Problems, similar to those identified by the Court in the denial of the 232 exclusion request, exist in the U.S. Trade Representative’s denial of Section 301 exclusion requests. The denials are supposed to consider the “Made in China 2025 Program” and whether the Section 301 tariffs cause “sever economic harm” to the importer or other domestic interests as grounds for granting an exclusion. However, USTR’s negative determination decisions do not explain how the agency arrived at the determination that a subject product is part of the Chinese government’s economic programs or that a requestor has not experienced severe economic harm because of the 301 tariffs.  Indeed, since USTR has never defined the concept of “severe economic harm”, there is no yardstick by which to measure its decisions.

The USTR’s Section 301 determinations dos “not explain what information the [agency] considered, how it was weighed, or why the evidence compelled denial.” A challenge filed in the CIT to such exclusion denials would no doubt result in a remand to USTR for reconsideration and explanation – much as the Court has required of the Commerce Department in the JSW Steel case.

If you have questions regarding denial of Section 232 of 301 exclusion requests, feel free to contact a Neville Peterson LLP professional to discuss your concerns.

Importers, Customs Scrambling with USMCA Implementation

Neville Peterson's John Donohue recently addressed some of the major issues facing trade and government following the July 1, 2020 implementation of the United States-Mexico-Canada Agreement. His comments were carried in The Beacon, the magazine of the Delaware River Maritime Exchange, and can be viewed here.

TRADE IN THE TIME OF CORONAVIRUS: UPDATE #9

At Neville Peterson LLP, we’re continuing to work in remote mode, as the COVID-19 crisis has eased in some areas of the country, but flared up in others.  Herewith, the latest news affecting international trade.

President Revokes Special Trade Status for Hong Kong

Following the Secretary of State’s certification under the Hong Kong Policy Act that Hong Kong is no longer autonomous from China, the President signed an order terminating China’s special trade status, effective July 14, 2020. Agencies have fifteen (15) days from that date to announce implementing actions. It is anticipated that goods manufactured in Hong Kong and imported into the United States will be required to be marked as “Made in China;” they will be subject to Section 301 retaliatory tariffs on Chinese-origin goods, where applicable. Although the volume of Hong Kong merchandise imported into the United States each year is not great, these changes will be significant for those dealing in such goods.

Other agencies are imposing restrictions on trade with Hong Kong as well. The Department of Commerce is effectively extending export controls to China on goods exported to Hong Kong. Initially, this will affect the availability of several export licensing exceptions, including TSR (technology and software under restriction), APR (additional permissive re-export), ENC (encryption), CIV (civilian end user; currently eliminated for China, Russia and Venezuela) and GBS (exports to Group B countries).

The State Department is also treating Hong Kong as part of China under the International Traffic in Arms Regulations (ITARs). Similar measures are being announced by other countries. Canada has extended much of its export control scheme on exports to China to include Hong Kong, and has announced that it will no longer allow extraditions to Hong Kong. The actions follow China’s adoption of a new Hong Kong security law, which many Hong Kong residents fear marks the end of the “one country, two systems” approach, agreed with Great Britain, when the former Crown Colony was handed over to China in 1984.

China has vowed to impose retaliation against the United States for its actions, although no specific measures have been announced.

CIT Limits President’s Power to Impose “National Security” Tariffs

The United States Court of International Trade has dealt a serious blow to the President’s imposition of sanctions against imported steel and aluminum pursuant to Section 232 of the Trade Expansion Act of 1962. In Transpacific Steel, Inc. v. United States, 20-98 (July 14th, 2020),  a three-judge panel of the Court held that the President’s power to “adjust imports” under Section 232, was constrained by the time limits set out in the statute. Once those time limits have expired, the Court held, the President’s authority to take action pursuant to a Section 232 report from the Secretary of Commerce has expired.

Transpacific Steel involved a challenge to the President’s decision to increase retaliatory tariffs against Turkish steel from 25 to 50% ad valorem. Transpacific had argued that the measure was not motivated by national security concerns and had deprived importers of due process rights. The Court held that the President’s action was invalid, because it was taken beyond the time specified in Section 232 from acting within specific time periods.

The decision also suggests that importers who have paid Section 232 duties on steel and aluminum imported from Canada, Mexico and the European Union could sue for recovery of those tariffs, since they were imposed after statutory deadlines had expired as well. It also indicates that the President’s attempts earlier this year to impose Section 232 tariffs on “derivative” steel and aluminum products, such as steel nails and aluminum wire, already being challenged in the courts, will be struck down.

The decision also casts doubts about the legality of the President’s threat to re-imposes Section 232 tariffs on imports of Canadian aluminum.

Customs Preparing New Regulation for Type 086 “Low Value Shipment” Entries

Customs has indicated that it is preparing regulations to implement new data collection processes for low value shipments ($800 or less) imported free of duty under Section 321 of the Tariff Act of 1930. Currently, Section 321 allows most low value shipments to be cleared on the carrier manifest without entry or payment of duty. However, the process is not available for shipments subject to requirements of “partner government agencies (PGA),” but those shipments can be imported duty-free using a type 086 entry.

CBP Trade Symposium Goes Virtual

Customs and Border Protection’s in-person Trade Symposium has been canceled as a result of the coronavirus pandemic. Instead, CBP plans to hold a “virtual trade event” in late August. CBP hopes to resume an in-person event in 2021.

New WRO Released for Disposable Gloves from Malaysia

CBP has issued a new “withhold release order” on disposable gloves from Malaysia effective July 15, 2020. The WRO applies to disposable gloves manufactured by Top Glove Sdn. Bhd. and TG Medical Sdn Bhd. Customs issues WROs in response to evidence that forced labor is used in a supply chain.

USMCA Correction Legislation Targeted for September

Legislators are hoping to pass technical corrections legislation for the United States-Mexico-Canada Agreement by September, according to various Capitol Hill sources. The legislation is intended to correct certain omissions in the USMCA Implementation Act, the most significant of which prevents companies from filing post-importation petitions for refunds of Customs user fees paid at the time of entry. As currently structured, USMCA only allows post-importation applications for refunds of duties.

US Threatens French Goods with Section 301 Tariffs

The United States Trade Representative has threatened to impose 25% retaliatory tariffs on imports of French make-up, soaps and handbags, if the countries cannot resolve their conflict over France’s new digital services tax. The United States contends that the tax, which would assess approximately $450 million per year from United States digital services companies violates international trading rules. France, the United States and other countries are engaged in WTO discussions to try and agree on a common framework for taxing digital services, but it is unclear if these negotiations will be successful.

As France has not yet imposed its tax, USTR has delayed implementation of the retaliatory tariffs until possibly as late as January 6th, 2021.

Customs Laws Reorganized?

The Office of Law Revision Counsel of the House of Representatives has indicated that it is planning to restructure the Customs laws in Title 19 of the United States Code. As it currently exists, Title19 features a number of gaps, representing sections of the law which have been repealed over the past half century.  The reorganization would not substantively change the law, but simply streamline the codification of the Tariff Act and various other trade-related acts currently contained in Title 19.

FTC Proposes New “Made in USA” Regulations

The Federal Trade Commission (FTC) on July 16, 2020 proposed new regulations to strengthen enforcement of the agency’s “Made in USA” (MUSA) labeling guidelines. The FTC has long prohibited the use of unconditional “Made in USA” statements unless goods are produced wholly or almost wholly in the United States, wholly or almost wholly of domestic materials. The new regulations, adopted under authority of 15 USC 45a, create a new Part to the FTC’s regulations [16 C.F.R. Part 323] which indicate that improper uses of the terms “Made”, “Manufactured”, “Built”, Produced”, “Created” or “Crafted”, with reference to the United States, will be considered an unfair practice under the Federal Trade Commission Act. The regulations extend to mail order (and presumably internet) advertising. The FTC is accepting comments through September 14, 2020.

CBP Hopeful About Rescheduling Brokers License Exam for October

After the COVIS-19 pandemic forced cancelation of the April 2020 Customs Broker’s exam, Customs and Border Protection has indicated that it hopes to accommodate test-takers in October 2020. The agency is monitoring local conditions related to COVID, with a view toward adopting additional examination sites, or using paper exams instead of electronic ones. However, plans for administering the exam will depend on local conditions at the ports where the exam is go be administered,  CBP officials have noted.

FDA Issues Emergency Use Authorization for “Sample Pooling” in COVID Testing

The Food and Drug Administration has issued an Emergency Use Authorization (EUA) to allow Quest Diagnostics to use “sample pooling” in COVID-19 testing. Sample pooling is a practice where samples from four swabs are tested together. If the pooled sample tests negative, all 4 patients are considered negative. If a positive result comes back, the samples are then tested individually. Sample pooling is expected to expedite testing in areas where there is a low prevalence of COVID-19.

For help regarding these or other trade topics in these challenging times, please contact a Neville Peterson LLP professional.

A Brief Word on George Floyd’s Killing and Recent Demonstrations

As international trade attorneys, we devote considerable professional effort to ensuring the success of transactions and interactions between people of different colors, nationalities and creeds around the world. We have watched civil unrest unfold, literally steps from our offices, following the killings of George Floyd and others, and we add our voices to those who speak out against systemic and pervasive inequality in our society. Neville Peterson stands firmly against all forms of hate, bigotry, and prejudice. We hold the core principles of diversity, equity, and inclusion, and believe all people should be treated with dignity and respect. We are committed to combating racism and advocating for justice and peace for people of color.

As lawyers, we are privileged to practice before the nation’s courts, historically the peaceful fora for resolving grievances and for ensuring that everyone receives equal justice under law. Law and the judiciary struggle with issues of equality every day. The first step in addressing these issues is education. For that reason, Neville Peterson would like to make available, at the link below, a collection of legal scholarship on these important topics compiled by the Center on Law, Equality and Race at the University of California-Irvine School of Law, made available by our Summer Associate, Shey Coughlan, UCI Law ’21, who serves as her school’s Racial Justice Fellow. We hope that these materials will provoke more critical thinking on these important issues.    

C.L.E.A.R resources

TRADE IN THE TIME OF CORONAVIRUS UPDATE #8

At Neville Peterson LLP, we’re continuing to work in remote mode, as the COVID-19 crisis appears, at last, to be winding down a bit.  Herewith, the latest news affecting international trade.

China Relations Keep Going Downhill:

            The President’s Phase I trade deal with China hangs in the balance, as trade relations between the two superpowers continue to go downhill. Following an announcement from Secretary of State Pompeo that Hong Kong was no longer considered autonomous from China, the Chinese Trade Minister apparently told two large state-owned agriculture companies, Cofco and Sinograin, to stop buying American goods. Under the Phase I deal, China has made a commitment to buy certain quantities of United States-origin goods during 2020-21. The President has repeatedly threatened to impose additional sanctions on China if that country does not meet its purchase commitments. Whether the COVID-19 crisis would block those commitments from being met has been a subject of considerable speculation.

            US Trade Representative Robert Lighthizer struck a more conciliatory tone in a virtual event with the Economic Club of New York, indicating that the COVID-19 pandemic made it hard for China to get its economy in running order before March 1, and that he believed China was making a serious effort to meet its commitments under the pact.

Hong Kong: About That State Department Finding:

            The Hong Kong Policy Act of 1992 provides various ways in which United States treats Hong Kong as a separate sovereign, notwithstanding Britain’s ceding the city-state to China some 28 years ago. The Act provides that the United States and Hong Kong may enter into bilateral agreements dealing with various topics such as investment, transportation, extradition, trade and banking, either completely independently or with provision of notice to Beijing. The Act requires the Secretary of State to certify that Hong Kong continues to be an autonomous entity, a finding the Secretary made every year until this one.

The Secretary’s finding has no immediate consequences, but leads to extended policy reviews to determine whether the United States should remove privileged treatment from Hong Kong in various areas. The Secretary can issue waivers even after making a finding of “no autonomy”.  The U.S. Chamber of Commerce and other groups have urged the Administration to go slow on any such measures. However, actions the United States might take would include treating Hong Kong as part of China for purposes of export control laws, which would slow the flow of technology to Hong Kong, and by extension, China. In the import area, China enjoys the same Normal Trade Relations (NTR) status as Hong Kong, but Hong Kong products could be subject to Section 301 tariffs which the President has imposed on Chinese goods, as well as antidumping and countervailing duties imposed on Chinese products. It is believed that approximately 50% of Hong Kong’s $16.1 billion exports to the United States could be affected by Section 301 tariffs. United States exports to Hong Kong totaled $50.8 million in 2018.

More Section 301 Action:

            The United States Trade Representative has announced a series of new Section 301 unfair trade investigations against various foreign countries which have adopted, or are in the process of adopting, digital services taxes. Should an investigation determine these digital taxes to be in violation of international trade rules, the United States could impose retaliatory measures, including the imposition of tariffs on goods from offending countries.

            In addition, the Department of Commerce announced a new Section 232 investigation to determine whether of imports of vanadium constitute a threat to national security.

EU Pursues Medical Supplies Trade Deal:

            Just days after lifting its pandemic-driven restrictions on the exports of medical equipment and supplies, the European Union is proposing negotiations aimed at a global agreement to eliminate tariffs and trade restrictions on medical supplies and pharmaceuticals.

USMCA Implementation Draws Near: 

            According to certain Customs officials, CBP is planning initially to have a lax approach to enforcement of certifications of origin, once the U.S.-Mexico-Canada agreement enters into force on July 1, 2020. According to Maya Kumar, CBP’s director of textiles and trade agreements, “the first six months of this trade agreement we can pretty much say there will be little to no enforcement.” The comments were given at a recent agency webinar. CBP stressed that it wishes to avoid putting “trade under stress”. Customs also noted that should an importer be issued a CBP Form 28 Request for Information on USMCA matters during the initial months of the deal, the agency will allow extra time for importers to get the documents they need from a supplier.

            The Administration is also pursuing a legislative fix to one of the provisions in the USMCA implementation act which indicates that post-entry USMCA claims can be filed to recover duties, but not to recover merchandise processing fees. CBP’s Interim Instructions on USMCA implementation contained the restriction, which resulted from an oversight in the USMCA Implementation Act which Congress passed earlier this year.

            The United States Trade Representative also published the new Uniform USMCA Regulations, which govern the making of claims for preferential treatment, rules of origin, textile trade and Customs administration.

CBP Issues Proposed Customs Broker Regulatory Overhaul

            Customs and Border Protection has issued proposed new regulations “modernizing” the regulation and supervision of licensed Customhouse brokers. The new regulations eliminate Customs “districts” into which brokers were categorized, as well as eliminating “district permits” for brokers. All brokers will operate under a national permit, and be permitted to locate their offices anywhere in the Customs territory of the United States. CBP will eliminate the requirement that firms employ at least one licensed broker in each Customs district, and require only that enough brokers be employed to allow the exercise of “responsible supervision and control” over the Customs business they do. A new definition of “responsible supervision and control” has also been formulated.

            Broker regulation will be transferred from port offices to CBP’s Centers of Excellence and Expertise (CEE), and fees for individual and organization broker’s licenses will be increased.

            Two requirements are likely to be controversial. First, CBP will no longer allow brokers to accept powers of attorney from freight forwarders, and will require brokers instead to obtain powers of attorney directly from importers themselves. Second, the proposed regulations would require brokers to notify Customs in writing whenever they drop a client who they believe is attempting to defraud, or perpetrate a crime, against the government. This is part of an effort to turn brokers into a “force multiplier” for Customs enforcement. 

            Customs is accepting comments on the proposed regulations.

            For help regarding these or other trade topics in these challenging times, please contact a Neville Peterson LLP professional.

NEW CIT DECISION GREENLIGHTS UP TO $383 MILLION IN REFUNDS

A Friday evening decision of the United States Court of International Trade (CIT) paves the way for quick refunds of up to $383 million to substitution drawback claimants. In National Association of Manufacturers v. Department of the Treasury, Slip Op. 20-67 (May 15, 2020), Senior Judge Jane A. Restani of the CIT ordered United States Customs and Border Protection to begin immediately processing and paying drawback claimants’ applications for “accelerated  payment” of substitution drawback claims involving Federal excise taxes.

The Court indicated it will enter an Order suspending final liquidation of affected drawback claims while the government pursues an appeal of a recent decision which struck down CBP’s excise tax drawback regulations.

Earlier in the case, the CIT, in Slip Opinion 20-9, had struck down Treasury drawback regulations which sought effectively to eliminate substitution drawback of excise taxes in cases where the substituted exported merchandise had not itself been assessed with taxes. Treasury’s regulations expanded the definition of “drawback” to include tax exemptions and remissions, and asserted that exporting non-tax-paid merchandise and claiming drawback constituted a prohibited “double drawback”. But the CIT held the regulations invalid, noting that the drawback statute, as amended by the Trade Facilitation and Trade Enforcement Act of 2015), required that drawback be paid in an amount equal to the tax which would have been imposed had the exported merchandise been imported. If Treasury was displeased with this result, the Court said, it needed to look to Congress (which had previously declined to adopt such a rule) rather than the courts.

The Court’s final Judgment, issued in February, 2020, ordered CBP to begin processing drawback claims, including claims for accelerated payment of drawback, which CBP had declined to process since the TFTEA amendments entered into force in February 2018.

Seeking a stay of enforcement of the judgment while it pursued an appeal, Treasury asked the court to suspend all processing of excise tax drawback claims pending the exhaustion of appeals. The court refused. Displeased that the government had apparently taken no action to implement the February 2020 judgment, the CIT noted that Treasury had little chance of success on the merits of the appeal, and did not face irreparable harm, since accelerated payments of drawback were fully bonded. On the other hand, a stay pending appeal would injure drawback claimants, by limiting their access to working capital and because drawback, when paid, is paid without interest. Finally, the Court indicated that the public interest favored paying claimants monies they had earned.

While ordering Treasury and CBP to begin processing paying claims, the court indicated that it would issue an order staying final liquidation of affected drawback claims while appeals were exhausted. Drawback claimants indicated they were amenable to such action.

Customs reacted quickly to the Court’s decision, indicating that necessary programming to ACE could be accomplished in  10 days (down from an earlier estimate of 3 months provided to the Court) and issued a Cargo Systems Messaging Service (CSMS) bulletin announcing that accelerated payments for  FET drawback claims would be processed immediately.

TRADE IN THE TIME OF CORONAVIRUS: UPDATE #7

At Neville Peterson LLP, we’re continuing to work in remote mode, assisting our clients and trying to keep international trade rolling along.  Herewith, the latest news affecting international trade.

Food and Drug Administration

The FDA revoked Emergency Use Authorization (EUA) approvals for more than 60 Chinese makers of protective masks which are similar to the N95 respirator device. FDA explained that the withdrawals to quality issues found by federal regulators with the imported products which were determined not to have a particulate filtration efficiency of 95%. As a result, the updated list of authorized respirator producers from China now only lists 14 qualified manufacturers.

The FDA also updated its Emergency Use Authorization to provide that only manufacturers, and not importers, can request to be added to “Appendix A” which lists filtered faceplate respirator (FFR) manufacturers eligible for importation, “Importers will no longer be allowed to submit a request to add an FFR to Appendix A” the agency said.

Potential importers and traders should also be aware of the high levels of fraud being attempted in connection with PPE purchases. Our firm recently performed due diligence on a company’s proposed purchase of some 25 million N95 respirators and quickly determined that the offer was fraudulent. There were a number of indicators that “raised red flags” during the due diligence process. The offer to produce and deliver 25 million 3M respirators was clearly bogus in light of the fact that 3M only produced 20 million N95 respirators in the last year. We stand ready to assist clients in evaluating potential PPE purchases.

United States International Trade Commission

A report by the United States International Trade Commission (ITC) identified 112 line items in the Harmonized Tariff Schedule describing goods which are needed to fight COVID-19. While the majority of these 112 tariff lines are not subject to regular or Section 301 duties, there are approximately 55 HTS ten-digit statistical numbers which are subject to Section 301 tariffs which have not yet been the subject to exclusions issued by the United States Trade Representative. Goods which have not received exclusions include diagnostic testing instruments, protective gear and medical oxygen. Both House Ways and Means Committee Chairman Richard Neil (D-MA) and Senate Finance Committee Chairman Chuck Grassley (R-IA) have joined in a request that tariffs for all of these products, which range from 2.5% to 16% plus Section 301 duties in some cases, be the subject of tariff suspensions for at least a ninety day period. As of this writing, USTR had not responded or taken any action in response to the ITC report or Congressional pleas. Which makes one wonder why Congress has not simply legislated the tariff suspensions, which it has the power to do. 

Confusion from the White House:

In a recent television interview, the President raised the possibility that he might hike tariffs further on Chinese goods as a punishment for China’s role in the COVID-19 outbreak. The President indicated that “we are not going to get rid of tariffs.” Pressed by importers as to whether the Administration might consider waiving Section 301 tariffs on Chinese goods to enable United States firms struck by COVID-19 to be more competitive, the President demurred, asserting that the government has “taken those tariffs and given a lot of them to the farmers and farmers that would have really been forced out of business by China when they were targeted.”

Separately, U.S. and Chinese trade negotiators publicly reaffirmed their adherence to President Trump’s “Phase One” trade agreement with China, under which China is to purchase $200 billion of American goods over the next 2 years. Many observers have questioned whether interruptions in global supply chains caused by the COVID-19 crisis will make it impossible for China to fulfill its purchase commitments.

Customs and Border Protection

Noting that importers have goods arriving in May or June cannot benefit from the ninety-day-tariff deferral the Administration offered for MFN duties, a number of Republican senators have expressed interest in extending the duty deferral program through statute. Senator Roy Blunt (R-MO). a member of the GOP leadership, indicated that he was open to the idea that a further tariff extension could be part of the next COVID-19 relief package senators Mike Rounds (R-SD) and Richard Blumenthal (D-CT) were both open to further tariff relief, although the notion was opposed by Senator Rand Paul (R-KY), who expressed opposition to the idea (but apparently did not realize that the proposal was for duty-payment suspension, and not forgiveness)

“Low value” commercial shipments valued at $800 or less are flooding Customs’ systems, as homebound consumers turn to online sales to provide needed goods. To address processing problems, a new Cargo Systems Messaging Service bulletin, #42629672, which provides additional  instructions for importing low-value packages, whether on carrier manifests or through Type 86 Customs entries. CBP has director carriers to limit master bills of lading to  a maximum of 10,000 related House (NVOCC) bills, and has directed that all Master and House B/Ls be filed in the Automated Manifest System before an entry is made. Truck shipments are limited to 100,000 waybills per filing, but a single truck crossing can count as multiple truck trips. Other carriers are being urged not to transmit more than 20-30,000 bills per hour.

Commerce Department New Section 232 Investigations Commenced

The Commerce Department has commenced two new investigation regarding whether imports of products pose a threat to national security and require “import adjustment” under Section 232 of the Trade Expansion Act of 1962. The new inquiries involve Mobile Cranes and Laminated Cores for Power Transformers. In both cases, domestic manufacturers contend that they are being driven out of business by unfair competition and cheap imports. The President also signed an executive order authorizing the Department of Energy to cease purchasing imports of certain power plant equipment, particularly from China and Russia.

United States Trade Representative

The US Trade Representative released two more sets of Exclusions from Section 301 tariffs on Chinese goods, a large set of exclusions from Tranche 3 tariffs (currently set at 25% ad valorem) and this morning a smaller set of exclusions from Tranche 4 tariffs (currently at 7.5% ad valorem, reduced from 15%). The Tranche 4 exclusion contains some medically related goods, such as dental floss, hospital ID wristbands, pill crushers, and Bluetooth tracking devices,

For help regarding these or other trade topics in these challenging times, please contact a Neville Peterson LLP professional.

TRADE IN THE TIME OF CORONAVIRUS: UPDATE #6

At Neville Peterson LLP, we’re fully functional in remote working mode, ready to assist our clients, and openly fretting about the fate of so many unwatered plants in offices across the nation. But trade rolls on, with fits and starts, in these challenging times, and we’re striving to keep the trade community advised of news that affects them.

USMCA To Become Effective July 1, 2020: The United States Trade Representative has announced that the United States-Canada-Mexico Agreement (USMCA) will enter into force on July 1, 2020. Customs and Border Protection has issued a set of “Interim Instructions” which, it indicates, will govern the making of claims for USMCA preferential tariff treatment until final regulations can be adopted. USMCA gives the signatory countries up to one year after entry into force to adopt final regulations. It is unclear whether CBP intends to use its “Interim Instructions” during that period, which would appear to be a violation of Administrative Procedure Act (APA) requirements.

CBP’s “Interim Instructions” contain a number of surprises. For example, it indicates that Customs will continue to use the “NAFTA Marking Rules” codified at 19 C.F.R.§  102.20-21 to determine the origin, for marking purposes, of goods imported into the United States from Canada and Mexico. USMCA does not contain marking rules, and it was assumed that Canada and Mexico would have the origin of their goods determined by the traditional  rule of  “substantial  transformation”. CBP appears to have other ideas.

In addition, CBP’s “Interim Instructions” contain the data requirements for issuing USMCA certifications of origin, which can be in any form, including a statement on invoices or shipping papers. The number of data elements required for proper certification appear to preclude putting the information on a typical invoice form containing other data. The rules also contain documentation retention requirements for parties issuing USMCA rules of origin.

CBP’s Interim Instructions indicate that the HTS will be amended to contain a Special Program Indicator “S” for USMCA, but that the indicator will appear only in tariff items which carry a rate of duty. In addition, the agency indicates that USMCA will allow claims for waiver of Merchandise Processing Fees, but only if this treatment is claimed at the time of entry. MPF exemptions cannot be claimed in a post-entry request, according to the agency.

There are serious concerns about whether industry, which needs to restart many operations following the COVID-19 pandemic, will be able to adjust to new USMCA operations by July 1, 2020. Numerous groups, including Customs’ Commercial Operations Advisory Committee (COAC), have urged that implementation be delayed.

USTR has also published a rule soliciting applications from North American auto makers for leave to use the alternate timeline for coming into compliance with USMCA’s complex new automotive rules of origin.

USTR also released another round of exclusions of products from Section 301 tariffs on Chinese goods, but as of this writing, has not issued any new exemptions in response to its recent request for comments on possible COVID-19 related exclusions.

United States Customs and Border Protection has posted on its website a Frequently Asked Questions (FAQ) document regarding the recently announced ninety-day postponement of duty payments for goods entered during the months of March and April. There are calls from importers and trade groups to extend the ninety-day payment suspension, and to take other actions to provide relief to business during this time.

The United States International Trade Commission has recently delivered to Congress  a Section 332 Investigation Report (Investigation 332-576) regarding COVID-19 Related Goods – U.S. Imports and Tariffs. The study is intended to provide Congress and the Administration with additional information regarding trade flows for goods deemed essential to the COVID-19 response. The ITC will continue to provide data on its website regarding COVID-19 related goods at least through June 20, 2020.

The Department of Justice, Antitrust Division has taken the unusual step of wading into a newly initiated set of antidumping and countervailing duty investigations regarding Mattresses from Cambodia, China, Indonesia, Malaysia, Serbia, Thailand, Turkey and Vietnam. In a brief filed with the United States International Trade Commission, the Antitrust Division argues that new antidumping and countervailing duties could increase the price of mattresses, making it harder for hospitals to increase the number of beds they have available for patients with COVID-19. Noting that domestic producers were seeking antidumping rates between 48 and 1000 percent, DOJ asserted that “indiscriminately imposing equivalent antidumping or countervailing duties could significantly increase mattress prices for consumers in the United States and, more importantly, could potentially affect the supply of mattresses needed in hospitals and other healthcare facilities.” The International Sleep Products Association (ISPA) which filed the trade petitions, filed a response brief noting that states have shuttered most retail mattress stores nationwide and idled most mattress manufacturers, asserting that demand for mattresses has actually dropped and domestic producers, when they restart capacity, can supply mattresses to meet COVID-19 needs. The ITC’s preliminary determination is due May 15, 2020.

The Commercial Operations Advisory Committee, which advices Customs and Border Protection, held a virtual meeting with senior CBP officials last week, and presented a White Paper on the agency’s response to COVID-19. The COAC urged that Customs should relax its collection of duties, fees and taxes to the greatest extent possible, to ensure the economic health and safety of the trade and logistics industry. It urged CBP and partner government agencies to align with the IRS to provide an industry-wide ninety (90) day delay or deferral on all duties, taxes and fees, to waive or compromise past due payments of duties, taxes, fees and liquidated damages, in order to allow stricken companies to remain financially solvent.

COAC also suggested that CBP should not charge interest on supplemental duty bills for at least six (6) months, and should suspend demands to terminate and replace bonds based on insufficiency calculations. The Committee also recommended that CBP’s National Finance Center continue to process and accelerate refunds associated with trade remedy tariffs, drawback entries, protests, and post-summary corrections.

Another priority for the COAC is to  have Customs and PGAs develop a unified COVID-19 communication strategy, and to ensure that requests for information, notices of action and other post-entry (including audit) communications should be provided not only by ACE and regular mail but also email to points of contact listed in the ACE portal, as well as to brokers and sureties, to ensure that they are received. The agencies should also send enforcement actions and decisions via email, grant extensions to respond to inquiries and claims, and extend the period for importers to submit additional information in support of a protest. The COAC also suggests that CBP should limit its inspection activities and exercise discretion to situations where non-compliance does not pose a threat to consumer health, safety or welfare.

For help regarding these or other trade topics in these challenging times, please contact a Neville Peterson LLP professional.

COVID 19 and America’s Newest Oldest Crime – Hoarding

Shortly after the President signed Presidential Proclamation 9994 invoking the Defense Production Act to fight the Coronavirus Pandemic, the Attorney General, acting under the same body of law, issued his own memorandum addressing the legal aspects of the consequences of the Proclamation. The Memorandum, dated March 24, 2020 and sent to all U.S. Attorneys, promised to “pursue bad actors who amass critical supplies either far beyond what they could use or for purposes of profiteering. Scarce medical supplies” the Memorandum said, “need to be going to hospitals for immediate use in care, not to warehouses for later profit.”  

The Memorandum gave few specifics on what acts would, and would not, be criminally pursued, but those which were given were helpful.  The memo states that the U.S. will pursue “those who acquire vital medical supplies in excess of what they would reasonably use or for the purpose of charging exorbitant prices to the healthcare workers and hospitals who need them.”  It said it would not pursue “[r]egular Americans who are stocking up on the necessities of daily life or businesses who are acquiring material reasonably needed for their own use.  Nor will we take action against manufacturers or suppliers who are working with the government and healthcare providers in an effort to combat this crisis.”  In effect, those who “stockpile” will not be pursued.  Those who “hoard” will.  So, last week, when Melinda Gates told a BBC interviewer that she and her husband began, as far back as 2015, acquiring foods and other necessities in anticipation of a pandemic, she was admitting to “stockpiling,” not hoarding. (Interview of Melinda Gates with Emma Barnett, April 16, 2020, (bbc.co.uk/sounds/play/089n5rj)).  She broke no law.  The distinction seems a bit ephemeral but is important since, in the end, the remedies for a violation of the Defense Production Act call for fines and a period of imprisonment not to exceed one year per violation. (50 USC §4513).   

What is actionable under the Defense Production Act?

The Attorney General’s Memorandum, brief though it is, generally summarizes the prohibitions under the Defense Production Act.  Unlike the 1917 National Defense Act, which, at the time, prohibited “hoarding”, but not price gouging, the Defense Production Act, effectively combines the two “either/or” forms of conduct into a single prohibition.  The Act states: “No person shall accumulate (1) in excess of the reasonable demands of business, personal or home consumption or (2) for the purposes of resale at prices in excess of prevailing market prices” those materials designated by the President [or his delegee under the statute] as scarce or which would be threatened by such accumulation.” (50 USC §4512)   So the first point of emphasis is that not all articles can be the subject of a federal criminal charge of price gouging under the DPA, only those designated as “threatened by accumulation.”  On March 30, 2020, acting pursuant to authority delegated to him by Pres. Proc. 9994, the Secretary of Health and Human Services identified 15 classes of goods that were that were designated as “scarce” and were covered by the Act.[1]    

The Attorney General’s language explaining who would and would not be subject to prosecution is helpful, but of greater consequence is the safe harbor language related to business conduct.   “Nor will we take action against the manufacturers or suppliers who are working with the government and with healthcare providers in an effort to combat this crisis.” The sentence contains within it certain built in defenses against charges of profiteering.  Government agencies are sophisticated buyers, the memo implies, so prices to them, negotiated by sellers in good faith, should be presumptively “prevailing”, or at a minimum defensible.  Arguably a price paid by the government creates a prevailing price.  Similarly, sales directly to sophisticated healthcare providers should fall within the same defense. But the language in the memorandum discussing merchandise going to “warehouses for later profit” is unclear, but it implies some distinctions that can be important.  If a distributor has already consummated a sale to a hospital, but the buyer has requested a delay in delivery, the seller is probably relatively safe, provided that the price itself meets the “prevailing market price” test.  This is not a holding for “later profit.” It is a holding for “later delivery.” The memo is clearly directing itself to those who both buy and hold for the purpose of increasing the price as scarcities grow, not simply those who hold because a customer cannot be found, even if the “prevailing market price” later changes.  So ultimately the “prevailing market price” standard and the price point above which such a price will be actionable, will present the most difficult question for distributors and their attorneys.  There is no easy answer.  State price gouging laws fall into two, predictable, categories. In states like New Jersey and California, a fixed percentage increase above a provable market price is per se a “gouging” price. In both states the price uplift cap is 10%. But other states, as well as the Defense Production Act, use the variable standard of a price “above” the “prevailing market” price, which both puts on the prosecutor the burden of establishing the “prevailing market price” and creates the subset question of “how far above prevailing market must one go to risk a violation”? This is clearly the greatest question that the seller/distributor faces. 

The one especially helpful factor of the Attorney General’s Memorandum is that the Memorandum establishes a task force, requiring each U.S. Attorney’s Office to appoint one Assistant as a member of the task force, giving uncertain distributors some point of inquiry to where they should look for more specific guidance.  A distributor or his attorney who in good faith seeks some guidance from the federal government, may be able to get some direction from his local U.S. Attorney’s Office by simply calling and soliciting the guidance from the Task Force that the memo implies will be available.    To the extent that an inquirer gets comfort from a Task Force member, never would a memo to the file be more valuable.

If you would like assistance with these issues, please contact a Neville Peterson professional.

[1] The 15 articles designated a “scarce” were: M95bFiltring Facepiece respirators (FFR); other FFRs; air purifying respirators; powered purifying respirators; portable ventilators; drug products with the active ingredient chloroquine; sterilization services for certain medical devices; disinfecting devices intended to kill pathogens; medical gowns and apparel; personal protective equipment; PPE facemasks; PPE surgical masks; PPE face shields; PPE gloves; ventilators and devices modified to act as ventilators.   85 Fed. Reg. 17592-593, March 30, 2020.

TRADE IN THE TIME OF CORONAVIRUS: UPDATE #5

       At Neville Peterson LLP, we’ve transitioned to a remote working environment, and remain fully operational during the Coronavirus National Emergency. We get together by Skype biweekly, and we’re getting to see who dyes their hair and who does not. Remarkably, not much dyeing, but a whole lot of honestly earned gray. As one NPLLP professional advised a child, “Each gray hair means you’ve had a profound thought”. And the child advised the NPLLP professional, “Well, by that measure, you’re about out of ideas!”

Child discipline measures are of course confidential, but your naturally-hued NPLLP professionals remain ready to deal with client inquiries. Now, here’s what’s going on:

Customs Allows Temporary, Grudging, Limited, Duty Payment Deferrals

            President Trump on April  19th signed an Executive Order authorizing the Treasury Department to issue a temporary regulation which provides importers with a temporary, limited – and somewhat grudging -- extension of time to pay certain Customs duties.

            The regulation provides importers with a 90-day postponement in paying certain Customs duties if the importer can show that it has experienced “significant financial hardship” as a result of COVID-19. “Significant Financial Hardship” is defined to exit where the operations of the importer have been fully or partly suspended by operation of a governmental order, and the importer’s gross receipts for the period March 13-31, 2020 are less than 60 percent of gross receipts for the corresponding period of 2019.  Importers can self-certify their entitlement to the extension, but must retain records to document the claim to CBP.

            However, the extension does not apply to any entries which include goods:

• Subject to an antidumping or countervailing duty order;

• Subject to safeguard tariffs imposed under Section 201 of the Trade Act of 1974;

• Subject to retaliatory tariffs imposed under Section 301 of the Trade Act of 1974; or

• Subject to Section 232 retaliatory tariffs under the Trade Expansion Act  of 1962.

The extension is thus limited in scope and duration.  CBP has indicated that delinquency interest will not apply for the 90-day period for which payments are suspended.

            Cargo Systems Messaging Service notice #4243171 contains additional information regarding the deferrals.

FEMA Announces Exceptions to Export Detention Order

            As previously reported the Federal  Emergency Management Agency has ordered Customs and Border Protection to detain proposed exports of medical supplies deemed necessary to address the COVID-19 pandemic. CBP has been directed to temporarily detain exports pending a determination  of whether the export will be allowed, redirected to domestic needs, or subjected to a “rated order” allowing partial exports.

            FEMA has now issued new guidance providing additional exceptions to the export detention orders. Exempt shipments have been expanded to exclude

• Shipments to U.S. Commonwealths and Territories, Including Guam, American Samoa, Puerto Rico, U.S. Virgin Islands, and the Commonwealth of the Northern Mariana Islands (Including Minor Outlying Islands). 

• Exports of Covered Materials by Non-profit or Non-governmental Organizations that are Solely for Donation to Foreign Charities or Governments for Free Distribution (Not Sale) at their Destination(s).

• ·Intracompany Transfers of Covered Materials by U.S. Companies from Domestic Facilities to Company-owned or Affiliated Foreign Facilities. 

• Shipments of Covered Materials that are Exported Solely for Assembly in Medical Kits and Diagnostic Testing Kits Destined for U.S. Sale and Delivery. 

• Sealed, Sterile Medical Kits and Diagnostic Testing Kits Where Only a Portion of the Kit is Made Up of One or More Covered Materials That Cannot be Easily Removed Without Damaging the Kits.

• Declared Diplomatic Shipments from Foreign Embassies and Consulates to their Home Countries.  These May be Shipped via Intermediaries (Logistics Providers) but are Shipped from and Consigned to Foreign Governments. 

• Shipments to Overseas U.S. Military Addresses, Foreign Service Posts (e.g., Diplomatic Post Offices), and Embassies. 

• In-Transit Merchandise:  Shipments in Transit through the United States with a Foreign Shipper and Consignee, Including Shipments Temporarily Entered into a Warehouse or Temporarily Admitted to a Foreign Trade Zone. Shipments for Which the Final Destination is Canada or Mexico.

• Shipments by or on behalf of the US Government, including its military.

FDA, Customs Work to Streamline Imports of COVID-19 Supplies

            The Food and Drug Administration and United States Customs and Border Protection are working to expedite the importation of protective equipment and other medical supplies needed to provide relief during the Coronavirus pandemic. The FDA has set up a special import assistance page on its website, with contact information for persons seeking to expedite FDA clearance of incoming medical supplies. Email inquiries can be addressed to covid19FDAImportingInquiries@fda.hhs.gov.

In addition, Customs has migrated its email box for the COVID-19 Cargo Resolution team to a new web-based portal, according to CSMS 42364745. The new portal can be found at http://imports.cbp.gov.

        The Food and Drug Administration has also issued an Emergency Use Authorization covering imported face shields. The EUA sets out conditions for allowing the importation of face shields which have not previously been registered with or approved by the agency on an FDA form 510(k).

            FDA and some states are also reporting shortages of fluids needed to conduct dialysis procedures. COVID-19 patients are suffering an abnormally high rate of kidney failure, necessitating that they be placed on dialysis. This is creating regional shortages of the fluids required for the procedure.

European Union

As countries struggle to find needed medical supplies and some (including the United States) lock exports of such supplies, EU Trade Commissioner Phil Hogan is calling on governments to suspend tariffs on essential medical supplies, and has proposed the initiation of negotiations aimed at seeking a permanent worldwide elimination of tariffs on medical products similar to the Information Technology Agreement (ITA) which eliminated tariffs on computer and many telecommunications products.

Department of Justice

The Justice Department is issuing guidance in a number of cases and is changing procedures as a result of the Coronavirus pandemic.

DOJ has assigned Assistant United States Attorneys in all U.S. Attorneys’ offices to provide counseling on possible price gauging in the sale of necessary medical equipment.

In addition, the Justice Department has provided updated guidance to its March 31, 2020 order regarding Temporary Suspension of Affirmative Civil Debt Collection and Enforcement Activities During the COVID-19 Pandemic. DOJ has temporarily stopped affirmative civil debt collection and enforcement activity. It has clarified that the Justice Department may still file liens against debtors’ property and that United States attorneys may collect settlement payments pursuant to a voluntary settlement agreement. Limitations on taking action to enforce debts and civil penalties are currently scheduled to continue through May 31, 2020.

USTR/USMCA

The United States Trade Representative and other government agencies continue to work toward a proposed July 1, 2020 implementation of the United States-Canada-Mexico Agreement (USMCA),  the proposed replacement for the North America Free Trade Agreement. CBP has indicated that preliminary implementation structures may be posted on its website imminently. As of this writing, they had not been posted.  

A bipartisan group of Congressmen recently wrote to USTR requesting that implementation of the automotive rules of origin for USMCA be delayed, since most automakers are currently shut, and they require more time to work with their first and second-tier suppliers on implementation. USTR was initially opposed to any delay, but reportedly is willing to reconsider.

          Although USTR sought public comments regarding additional Section 301 exclusions for devices essential to the COVID-19 response, it has not yet issued any new exclusions.

Short Takes

We’ve noted some billing discrepancies from Customs for Section 301 tariffs for entries made during late May and early June 2019. This was the period when Section 301 tariffs Tranche 3 products were increased from 10 percent to 25 percent ad valorem, and the effective date was something of a moving target. Importers should review their bills accordingly.

USTR has announced its intention, once again, to revoke the exclusion from Section 201 measures on solar panels given to Bifacial Solar Panels. However, a Court of International Trade injunction currently blocks implementation of any such change.

          For help regarding these or other trade topics in these challenging times, please contact a (naturally-hued, well-groomed) Neville Peterson LLP professional.

TRADE IN THE TIME OF CORONAVIRUS: UPDATE #4

At Neville Peterson LLP, we’ve transitioned to a remote working environment, and remain fully operational during the Coronavirus National Emergency. We’re abiding Samuel L. Jackson’s advice to stay at home and hope you are doing the same and staying safe.  Now, our latest update on the state of trade during these trying times.

FEMA: The Federal Emergency Management Agency (FEMA) has issued temporary regulations implementing an “allocation order” under the Defense Production Act. The order prohibits the exportation of certain medical articles, without the approval of FEMA.

The affected articles are:

•   N95 Filtering Face Piece Respirators

•  Other Filtering Face Piece Respirators such as N99, N100, R95, R99, R100, P95, P99, P100, including single use half masks and respiratory protection devices operating at N95 filtration efficiency;

• Elastomeric air-purifying respirators and appropriate filters and cartridges;

• Personal Protective Equipment (PPE) such as surgical masks or gowns;

• PPE such as surgical gloves or protective gloves. 

The interim regulation indicates that Customs and Border Protection will temporarily detain all shipments of this merchandise until FEMA determines whether they should be returned for domestic use, whether a “rated order” should be issued, or whether part of all of the shipments should be permitted to be exported. FEMA will determine whether to purchase the materials or otherwise allocate them to domestic use.

FEMA’s regulation indicates that it will not purchase covered material shipments made by or on behalf United States manufacturers who have continuous export agreements in place with customer in other countries since January 1, 2020. However, this applies so long as 80 percent of each manufacturer’s domestic production of covered materials on a per item basis was distributed in the United States in the past twelve (12) months. This feature is apparently part of the resolution of the Administration’s dispute with 3M Corporation.

FEMA has the authority to issue requests for information regarding particular export shipments and to seek injunctions against any attempted violation or evasion of these new restrictions. FEMA has also indicated that criminal fines or penalties may be available under 50 U.S.C. §4513 for violation of these regulations, and/or under 18 U.S.C. § 554 for any knowing and fraudulent exportations made in violation of these rules.

The new temporary regulation is effective immediately. FEMA has indicated that the rule is not subject to notice and comment under the Administrative Procedure Act. FEMA has further indicated that more detailed regulations will be promulgated and issued in the near future.

World Customs Organization/World Health Organization:  The World Health Organization (WHO), with the assistance of the World Customs Organization (WCO), has issued a 2nd Edition of the Harmonized System Classification Reference for COVID-19 Medical Supplies. The indicative list, which has no legal effect, lists and provides tariff classification information for medical supplies deemed essential to the fight against COVID-19. Covered goods include diagnostic kits, protective garments and the like, disinfectants and sterilization product, oxygen therapy equipment and pulse oximeters, other medical devices and equipment, other medical consumables and vehicles. The reference is designed to assist customs authorities in identifying shipments of potentially critical goods.

Customs and Border Protection (CBP):  As a result of the Center for Disease Control’s March 14, 2020 “No sail” order, which was extended on April 8, 2020, cruise ship operators have  been required to cease operations and for the most part remain at dock or anchorage at United States ports. Ships’ crews’ which may number 1000 persons on average, are effectively quarantined  aboard these vessels. This has raised the question of whether these vessels may continue to receive deliveries of duty-and tax-free bonded supplies, under Sections 309 and 317 of the Tariff Act of 1930.

In a March 30, 2020 ruling issued to Carnival Cruise lines – in relation to an unrelated question first raised in 2014 – Customs indicated, in  a footnote to Customs Headquarters Ruling H260759, that “Prior to the resumption of their cruise itineraries, these vessels are not considered “actually engaged in foreign trade” within the meaning of 19 U.S.C. § 1309”. This determination effectively cuts off the cruise ships from bonded supplies for the crewmembers who are effectively quarantined aboard. The position is being challenged administratively, but has caused additional turmoil for the cruise ship industry.

If you have any questions regarding these issues, please contact any Neville Peterson LLP professional.

TRADE IN THE TIME OF CORONAVIRUS: UPDATE #3

At Neville Peterson LLP, we’ve transitioned to a remote working environment, and remain fully operational during the Coronavirus National Emergency. Perhaps a bit less well-groomed than we started, but operational nonetheless Now, more than ever, it is essential for businesses and their service providers to remain in contact and available to provide assistance. This is our latest update on the state of trade during these trying times.

No Tariff Deferral Forthcoming:  While trade groups and importers have implored the Administration to provide some sort of tariff relief during the National Emergency, such as a deferral of payment for Customs duties, the idea was recently rejected. National Economic Adviser Larry Kudlow shot the idea down in a recent interview with Bloomberg News, saying that while a plan to defer payment of Most Favored Nation (MFN) tariffs had been considered, it was rejected as being “too complicated” and because it “might send the wrong signals”.

United States Trade Representative:  Prospects for June 1, 2020 enactment of the United States-Mexico-Canada Free Trade Agreement (USMCA), the recently-agreed replacement for NAFTA, failed after the United States and Mexico failed to meet an April 1, 2020 deadline to certify that they were ready for implementation. 

Canada issued a letter proclaiming its readiness on March 31, and Mexico followed with a letter on April 4th. If the US certifies its readiness during April, a July 1, 2020 USMCA implementation is still possible.

USTR also quietly reversed two Section 301 exclusion denials it had issued to GOJO Industries, the maker of Purell Hand sanitizer. On April 3, 2020, the USTR granted GOJO exclusions for certain e-collars and pumping stations, after the press had reported the earlier denials.

Food and Drug Administration (FDA):  The FDA has broadened its Emergency Use Authorization (EUA) to allow the importation Chinese-made KN-95 respirators, provided they are “authentic”. Our firm has prepared a guide and supporting materials for persons looking to import masks and respirators to combat the spread of the Coronavirus.

Customs and Border Protection (CBP) – CBP has announced the formation of a “COVID19 Cargo Resolution Team” within the Pharmaceuticals, Health and Chemical Center of Excellence and Expertise. The CCRT “triage incoming inquiries, coordinate with affected ports, and respond directly as appropriate”, in an effort to expedite the importation of legitimate medical devices and personally protective equipment (PPE). The CCRT can be contacted at COVID19_RELIEF_IMPORTS@cbp.dhs.gov.

CBP is still operating a toll-free number to reach the Centers of Excellence  and Expertise (CEE) on these matters – 1-866-295-7624.

Customs has also closed its Anchorage Port Office for at least 14 days, after an employee in the office tested positive for COVID-19.  During the closure, packages, physical correspondence, petitions and samples should be directed to the CBP cargo office at Anchorage’s Ted Stevens International Airport.

Customs is making adjustments in other cities as well. The San Francisco port has reduced operating hours and staffing for its Entry Branch, and has indicated that import specialists will  be working from  home, with a few staffing the office two days a week. Customs’ Miami office has indicated that all submissions to the Fines, Penalties and Forfeitures office should be submitted by email at miamifpf@cbp.dhs.gov, and payments should be made through Pay.Gov.

Meanwhile, CBP Headquarters has urged port offices to exercise “maximum discretion” in trying to ensure trade flows and in dealing with problems arising from  the coronavirus pandemic This includes increased demand for Customs bonded warehouses and other facilities to store inbound cargoes while importers’ businesses are closed. Another problem arises with cargo resting at the ports as the lay order period expires, and the goods are threatened with being sent to General Order storage.

Our firm has already filed several applications to allow “constructive bonded warehousing”.

U.S. International Trade Commission: The ITC has closed its building to the public through at least April 24, 2020. The Office of the Secretary is accepting electronic submissions only. The Commission has noted that the Office is the Secretary is not monitoring general phone lines. Persons with inquiries should e-mail the Office of the Secretary and a staff member will respond.

United States Court of International Trade (CIT):  The CIT has closed its courthouse at One Federal Plaza in Manhattan altogether, Clerk Mario Toscano announced, and will conduct business electronically only. Hearings will be done by teleconference or electronic link. Our firm  participated last week in an antidumping appeal conducted by teleconference, with 20 participants from across the country, and it was efficiently handled. Trials, where needed, will pose a thornier problem, and are likely to be deferred or postponed.

The Scramble for Supplies:  As the coronavirus pandemic spreads, various anxious countries have imposed export bans or restrictions on critical medical supplies, such as masks, respirators, ventilators, and personal protective equipment (PPE). President Trump, in invoking the Defense Production Act to direct Minnesota’s 3M corporation to produce masks, requested the company to cease exports of masks to Canada and Latin America. The company objected, saying it would not abandon those markets, where its products form a significant part of supplies. Canadian Prime Minister Justin Trudeau, along with several Provincial Premiers, objected, noting that trade in these products is a “two way street”.  India banned exports of the antimalarial drug hydroxychloroquine, which President Trump has touted as a treatment for COVID-19, although his medical and scientific advisers have noted there is no clinical proof of the drug’s effectiveness.

United States trade advisers have also decried the country’s dependence on China to supply some of these essential items, noting that the US imported some $12.8 billion worth of drugs, medical supplies, active pharmaceutical ingredients and essential food products from China in 2018.

In an effort to reduce red tape for medical suppliers, the Department of Justice, Antitrust Division recently issued a determination that joint sourcing, logistics and shipping operations being carried out by five (5) major medical suppliers – McKesson, Owens & Minor, Cardinal Health, Medline Industries and Henry Schein – did not violate antitrust rules.

If you have any questions regarding these issues, please contact any Neville Peterson LLP professional.