On March 26, 2021, the Office of the U.S. Trade Representative (USTR) issued several Federal Register notices concerning the ongoing Section 301 investigations of Digital Service Taxes (DSTs) adopted or under consideration by 10 U.S. trading partners. For six countries, the investigations will continue and the USTR is seeking public comment on possible trade actions. For four other jurisdictions, the USTR has decided to terminate the investigations at this time without action. These investigations under Section 301 of the 1974 Trade Act were initiated on June 2, 2020, out of concern that many U.S. trading partners are adopting tax schemes designed to unfairly target U.S. companies. See Updates of June 4, 2020, January 7, 2021 and January 14, 2021 for further details.

In the ongoing investigations involving Austria, India, Italy, Spain, Turkey and the United Kingdom, the USTR issued separate Federal Register notices seeking comment on possible trade actions to preserve procedural options before the conclusion of the statutory one-year time period for completing the investigations. The notices indicate that the USTR is considering tariffs of up to 25 percent on “on an aggregate level of trade that would collect duties on goods” from each country “in the range of the amount of the DST” that country is expected to collect from U.S. companies. In each notice, the USTR requests the following information from interested parties:

  1. The level of the burden or restriction on U.S. commerce resulting from the specific country’s DST, including the amount of DST payments owed by U.S. companies, the annual growth rate of such payments, and other effects, such as compliance costs.
  2. The appropriate aggregate level of trade to be covered by additional duties.
  3. The level of the increase, if any, in the rate of duty.
  4. The specific products to be subject to increased duties, including whether the tariff subheadings listed in the attached Annex to each Federal Register notice should be retained or removed, or whether tariff subheadings not currently on the list should be added.

Any written comments must be submitted no later than April 30, 2021. If seeking to appear and testify at the multi-jurisdictional hearing on May 3, 2021, a party must submit a written request with a summary of the expected testimony no later than April 21, 2021. Any post-hearing rebuttal comments must be submitted by May 10, 2021. There will also be a series of country-specific DST hearings after the May 3 multi-jurisdictional hearing; dates for these hearings and any deadlines for post-hearing rebuttal comments vary and are set forth in each Federal Register notice. Documents must be submitted via the electronic portal at https://comments.ustr.gov/s and should be placed under the appropriate docket number for each country.

In the final Federal Register notice, the USTR announced that it was terminating the Section 301 investigations involving Brazil, the Czech Republic, the European Union (EU) and Indonesia because “these jurisdictions either have not adopted or not implemented a DST during the period of investigation.” In the notice, the USTR stated that it would continue to monitor the status of any proposed or adopted DSTs that the EU and three countries may consider. If any of these jurisdictions proceeds to adopt or implement DSTs, the USTR noted that it may initiate new investigations.

In a brief statement, Ambassador Katherine Tai stated, “The United States is committed to working with its trading partners to resolve its concerns with digital services taxes, and to addressing broader issues of international taxation ….  [and] remains committed to reaching an international consensus through the OECD process on international tax issues.”

On March 22, 2021, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned two Chinese government officials for “serious human rights abuses” against ethnic minorities in the Xinjiang Uyghur Autonomous Region of China. In a brief press statement, the Director of OFAC stated, “Chinese authorities will continue to face consequences as long as atrocities occur in Xinjiang …. Treasury is committed to promoting accountability for the Chinese government’s human rights abuses, including arbitrary detention and torture, against Uyghurs and other ethnic minorities.” This action was taken by the United States in conjunction with the European Union, United Kingdom and Canada, which imposed sanctions on these individuals and others.

The two officials sanctioned are: (i) Wang Junzheng, the Secretary of the Party Committee of the Xinjiang Production and Construction Corps (XPCC), and (ii) Chen Mingguo, Director of the Xinjiang Public Security Bureau (XPSB). OFAC has previously sanctioned other Chinese officials over concerns in the Xinjiang region over human rights abuses (see Update of August 3, 2020). The Department of Commerce has also placed a number of Chinese companies on the Entity List (see Federal Register notices of July 22, 2020 and June 5, 2020) in an effort to combat China’s campaign of repression, mass arbitrary detention, forced labor and high-technology surveillance against Uyghurs, Kazakhs and other members of Muslim minority groups in the Xinjiang region.

As a result of this action, these officials have been placed on OFAC’s Specially Designated Nationals (SDN) List and all property and interests in property of the individuals, and of any entities that are owned 50% or more by them, that are in the United States or in the possession or control of U.S. persons must be blocked and reported to OFAC. Unless authorized by a general or specific license issued by OFAC, or otherwise exempt, all transactions by U.S. persons or within (or transiting) the United States that involve any property or interests in property of these designated persons is generally prohibited.

U.S. exporters and importers should remain mindful of the July 1, 2020 multi-agency advisory that warns U.S. businesses of potential supply chain risks involving the Xinjiang region (see Update of July 2020). U.S. businesses, individuals, academic institutions, service providers, investors and others operating in this region could face significant reputational, economic and legal risk if sufficient due diligence of supply chain activity in China is not conducted.

Note: This previously published client update has been revised to provide links to the official notices published by the Departments of Commerce and State on March 18, 2021.

On March 2, 2021, the Departments of Commerce, State and the Treasury imposed sanctions and export restrictions on numerous Russian officials and government entities in response to the Russian Federation’s alleged poisoning and subsequent imprisonment of opposition figure Aleksey Navalny. These actions follow similar sanctions imposed by the European Union and the United Kingdom. Dozens of Russian affiliates, officials and entities have been sanctioned and designated on the SDN List, Entity List and CAATSA’s 231 List. U.S. and foreign persons face significant risk from engaging in certain transactions or dealings with the newly sanctioned entities and persons.

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The Commercial Customs Operations Advisory Committee (COAC) of U.S. Customs and Border Protection (CBP) has indicated that CBP intends to add forced labor to its list of priority trade issues. The COAC issued draft recommendations on how to “ensure a more holistic U.S. government-wide approach to addressing forced labor.” The COAC Forced Labor Working Group (FLWG) recommendations urge CBP to collaborate with other agencies and the private sector to develop objective metrics for success in combating forced labor.

The current Priority Trade Issues identified are: (1) agriculture and quota; (2) antidumping and countervailing duties; (3) free trade agreements; (4) import safety; (5) intellectual property rights; (6) revenue; and (7) textiles and wearing apparel. Based on the report, CBP briefed the FLWG on its intent to add forced labor as a Priority Trade Issue in the near future.

The report made four specific recommendations that CBP should consider if it does add forced labor as a Priority Trade Issue, namely, that CBP should:

  1. Take a collaborative, multi-agency approach with various agencies including the Departments of Labor and Homeland Security, Immigration and Customs Enforcement and the Office of the U.S. Trade Representative and develop a synchronized strategy across the government on forced labor;
  2. Expand communication and cooperation with trade sectors and industries to identify best practices, as highlighted in the Industry Collaboration White Paper;
  3. Develop an objective methodology to measure the success of CBP’s forced labor informed compliance, facilitation, enforcement and risk mitigation that is not based on enforcement output (e.g. number of WROs and detentions issued); and
  4. Apply the same principles, tools, guidance and outreach to forced labor as is the case with the other Priority Trade Issues.

As we have noted in previous posts on recent government enforcement efforts related to forced labor in the Xinjiang region, like CBP’s Withhold Release Order (WRO) and Treasury’s Office of Foreign Assets Control’s sanctions, we expect forced labor enforcement to continue to expand as a priority across the trade agencies.

On March 16, 2021, the State Department identified 24 additional persons it determined are contributing to “the failure of the People’s Republic of China (PRC) to meet its obligations under the Sino – British Joint Declaration … or Hong Kong’s Basic Law” and, as a result, the Department of the Treasury has sanctioned these persons. These actions were taken pursuant to the Hong Kong Autonomy Act (HKAA), which authorizes and imposes sanctions on foreign persons, entities and financial institutions contributing to China’s actions to remove autonomy from Hong Kong. See Update of July 16, 2020. The HKAA requires the State Department to submit a report to Congress identifying such persons, the first of which was issued on October 14, 2020, and identified 10 Chinese and Hong Kong government officials. See Update of October 15, 2020.

The March 16 notice is an update to the October 14 report, and identifies each foreign person and provides an explanation for why each individual was identified and a description of the activity that resulted in their being sanctioned. In most instances, the identified government officials are members of China’s Standing Committee of the National People’s Congress, which adopted the National Security Law that undermined freedoms of assembly, speech, press and reduced the autonomy granted to Hong Kong.

Concurrently, the Treasury Department’s Office of Foreign Assets Control (OFAC) imposed sanctions on these same individuals and placed them on the Specially Designated National (SDN) List. OFAC has noted that the HKAA requires blocking sanctions on persons identified by the State Department and that the Treasury secretary must thereafter identify – and potentially sanction – any foreign financial institution that knowingly conducts significant transactions with such identified foreign persons.

On March 12, 2021, the U.S. District Court for the District of Columbia issued a preliminary injunction which prohibits the Department of Defense (DOD)  from enforcing its January 2021 designation of Xiaomi Corporation (Xiaomi) of China as a Communist Chinese Military Company (CCMC) pursuant to Executive Order (EO) 13959 and Section 1237 of the National Defense Authorization Act for Fiscal Year 1999 (NDAA).  Under EO 13959, U.S. persons are prohibited from conducting any transaction in publicly traded securities, or securities that are derivative of, or are designed to provide investment exposure to such securities of any CCMC, subject to wind-down timelines.  For additional background on this U.S. prohibition on investment in CCMCs, see Updates of November 24, 2020, and January 15, 2021.

On January 14, 2021, DOD listed Xiaomi (a smartphone manufacturer) and other Chinese firms as CCMCs.  Shortly after, Xiaomi filed a lawsuit challenging the listing and claiming that DOD provided no explanation for the designation.  The complaint alleges that DOD violated the Administration Procedures Act (APA) on several points:  (i) that the explanation for the designation is “inadequate”; (ii) that Xiaomi fails to meet the Section 1237 statutory criteria for the CCMC classification; (iii) that the designation decision lacks the required “substantial evidence” necessary under the APA for an agency to arrive at a factual conclusion.  In issuing its Memorandum Opinion, the Court agreed on all three points.  During briefing on the matter, DOD produced only a two-page document to the Court in support of the designation; a memorandum which the Court found “begins on a shaky ground”  with errors that “do not inspire confidence in the fastidiousness of the agency’s decision-making process.”  Ultimately, the Court found that any “required rational connection—or any connection—is lacking” in connecting Xiaomi’s designation to the statutory requirements of Section 1237 of the NDAA.  Thus, the Court issued an order preliminarily enjoining the implementation and enforcement of the E.O. 13959 prohibitions against Xiaomi.  The case is Xiaomi Corporation v. Department of Defense (Case No. 1:21-cv-00280-RC).

With this ruling, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) has issued related FAQs and stated that as a result of the Court’s opinion, the prohibitions in E.O. 13959 “do not apply with respect to Xiaomi pending further order of the Court.”

On March, 11, 2021, the U.S. government, the defendant in the ongoing U.S. Court of International Trade (CIT) China tariff refund litigation filed its master answer and anticipated affirmative defenses in response to the thousands of complaints challenging the legality of the additional duties implemented on certain imports from China pursuant to Section 301 of the Trade Act of 1974.

As directed by the CIT, the U.S. government make clear that this master answer does “not attempt to provide a cross-reference to particular paragraphs or counts of the various complaints” and provides only “generic” responses to “allegations typically included in claims” covered in the Section 301 master case (Court No. 21-cv-00052-3JP). The U.S. government has also reserved the right “to provide additional responses to allegations and claims that are not addressed in this master answer.” The master answer also states that pursuant to the CIT’s instruction, these responses do not constitute an admission that any plaintiff has stated a claim for relief.

In broadly categorizing and addressing the allegations set forth in the Section 301 complaints, the U.S. government generally proffers a response that admits to an allegation to the extent supported by the cited statute, regulation, notice, document and the administrative record, “which are the best evidence of their contents,” but otherwise denies an allegation. In doing so, the master answer states that the tariffs implemented under List 1 ($34 billion trade action) and List 2 ($16 billion trade action) are not at issue in this litigation. Thus, the responses to the factual allegations focus on List 3 ($200 billion trade action) and List 4 ($300 billion trade action).

The master answer addresses four claims that exist in most of the Section 301 cases:

  • The List 3 and List 4A Trade Actions Violated the Trade Act;
  • Defendants Violated the Administrative Procedure Act (APA) in Promulgating List 3 and List 4A;
  • The List 3 and List 4A Trade Actions Violated the U.S. Constitution; and
  • The Promulgation of List 3 and List 4A Violated the General Agreement on Tariffs and Trade.

The U.S. government’s broad response to specific factual claims set forth in the Section 301 complaints is generally that the allegations “are plaintiffs’ characterization of their case and consist of legal argument and conclusions of law to which no response is required.” To the extent a response is required, an answer may admit to the extent supported by a cited statute or the administrative record “which are the best evidence of their contents,” but otherwise denies the stated claims.

Most importantly for this filing, the U.S. government has set forth its anticipated defenses, which consist of:

  1. The U.S. Trade Representative (USTR) was acting at the direction of the president in promulgating List 3 and List 4, and the president is not subject to the Administrative Procedures Act (APA).
  2. Review of the president’s discretionary decisions, and the USTR’s implementation of those decisions, “present a non-justiciable, political question.”
  3. Even if the challenged actions could be considered actions of the USTR, substantial deference is afforded, and the CIT should not intervene because there was (i) no clear misconstruction of a governing statute, (ii) no significant procedural violation, or (iii) no action taken outside of delegated authority.
  4. The USTR possessed the authority under Section 307 of the Trade Act to promulgate List 3 and List 4, because the burden on U.S. commerce continued to increase and previous actions were no longer appropriate or effective in eliminating the unfair trade practices.
  5. Alternatively, if the challenged actions constitute agency action by the USTR, they are exempt from the APA’s informal rulemaking requirements because they qualify for the “foreign affairs function” exception.
  6. Even if the APA’s informal rulemaking requirements apply, the USTR’s actions complied with statutory requirements, and were not arbitrary and capricious, contrary to law, or in excess of statutory authority.

The U.S. government further reserved the right to raise additional defenses “after the test cases have been chosen, including, but not limited to, all defenses related to jurisdiction and/or timeliness.”

For additional information on the CIT’s procedural orders, see our update of February 18, 2021.

Thompson Hine attorneys and trade professionals will continue to monitor and report on significant developments in this litigation.

The Department of Commerce’s Bureau of Industry and Security (BIS) has issued a notice seeking public comment on the risks in the semiconductor manufacturing and advanced packaging supply chains. This request is a direct result of President Joseph Biden’s recent Executive Order 14017 and the need for resilient, diverse, and secure supply chains for critical and essential goods. Under the Executive Order, the president has directed numerous departments and agencies to submit reports within 100 days on certain findings and policy recommendations. See Update of February 28, 2021 for additional details. Accordingly, the Secretary of Commerce must submit such a report identifying the risks in the semiconductor manufacturing and advanced packaging supply chains and propose policy recommendations to address these risks.

BIS is seeking comments and information from the public to assist in preparing the report. In particular, comments on the following elements are encouraged:

  1. Critical and essential goods and materials underlying the semiconductor manufacturing and advanced packaging supply chain;
  2. Manufacturing and other capabilities necessary to produce semiconductors, including electronic design automation software and advanced integrated circuit packaging techniques and capabilities;
  3. The availability of the key skill sets and personnel necessary to sustain a competitive U.S. semiconductor ecosystem;
  4. Risks or contingencies that may disrupt the semiconductor supply chain (including defense, intelligence, cyber, homeland security, health, climate, environmental, natural, market, economic, geopolitical, human-rights or forced labor risks);
  5. The resilience and capacity of the semiconductor supply chain to support national and economic security and emergency preparedness;
  6. Potential impact of the failure to sustain or develop elements of the semiconductor supply chain in the United States on other key downstream capabilities, as well as the potential impact of purchases of semi-conductor finished products by downstream customers;
  7. Policy recommendations or suggested executive, legislative, regulatory changes, or actions to ensure a resilient supply chain for semiconductors (e.g., reshoring, nearshoring, or developing domestic suppliers, cooperation with allies to identify or develop alternative supply chains, building redundancy into supply chains, ways to address risks due to vulnerabilities in digital products or climate change);
  8. Any additional comments relevant to the assessment of the semiconductor manufacturing and advanced packing supply chains required by the Executive Order.

For full details on each element, please refer directly to the notice.

Comments will be accepted until April 5, 2021. All written comments must be submitted on BIS Docket No. BIS-2021-0011, addressed to “Semiconductor Manufacturing Supply Chain” and filed through the Federal eRulemaking Portal at http://www.regulations.gov. The notice provides further details on filing any comments and the handling of any business confidential information. Thompson Hine attorneys and professionals have extensive experience in filing regulatory comments.

On March 10, 2021, the U.S. Court of International Trade (CIT) issued an opinion dismissing all claims by Thyssenkrupp Materials NA Inc. (Thyssenkrupp) challenging the constitutionality of the federal government’s administration of Section 232 aluminum and steel duties under the Trade Expansion Act of 1962. The CIT addressed whether the modified process created by the Department of Commerce (Commerce) for requesting exclusions from the Section 232 tariffs imposed on aluminum violated the Uniformity Clause of the U.S. Constitution that generally requires uniform taxation across all states and across the same products.

In April 2020, Thyssenkrupp and several of its subsidiaries challenged the Section 232 duties, arguing that they had imported and paid Section 232 duties on aluminum and steel products corresponding to tariff classifications contained in exclusions Commerce granted to other U.S. parties. They claimed that Commerce’s decision to grant exclusions to other parties but to deny Thyssenkrupp relief (even in instances in which it requested no exclusion) “results in an unconstitutional lack of uniformity in the application of tariffs imposed on merchandise in the same HTSUS classification and denies Thyssenkrupp the protection afforded by the Uniformity Clause of Article I, Section 8 of the U.S. Constitution.” See Update of April 28, 2020. The U.S. government subsequently moved to dismiss the complaint for failure to state a claim since Thyssenkrupp particularly had not been injured because it had made no claim either for an exclusion that had been denied or for imported merchandise identical to the merchandise imported by others that had been excluded from Section 232 duties.

In its March 10 opinion, the CIT granted the U.S. government’s motion to dismiss, finding that “the exclusion process promulgated by Commerce does not violate the Uniformity Clause of the Constitution and does not reflect an improper construction of the President’s Proclamations.” The decision targeted two key challenges advanced by Thyssenkrupp: (1) the Section 232 exclusion process discriminated against steel and aluminum importers based on geography pursuant to the Uniformity Clause; and (2) the exclusion process violated the Uniformity Clause because identical products received exclusions in some instances but not in others. Thyssenkrupp effectively argued that the Section 232 steel and aluminum exclusion process should apply to the product/tariff classification at issue and not to the company, which is how the Office of the U.S. Trade Representative has conducted the China Section 301 tariff exclusion process.

For the first challenge, the CIT determined that the steel and aluminum Proclamations “are defined in non-geographic terms,” allowing any “directly affected party located in the United States” to apply for an exclusion because the purpose of the Uniformity Clause is to prevent the federal government from discriminating between states when levying taxes and duties. “[E]ven if Thyssenkrupp could overcome this hurdle,”  the CIT stated, it had failed to plead facts that show “actual geographic discrimination” or “any indication that Congress sought to benefit [one state over another] for reasons that would offend the purpose of the Clause.”

For the second challenge, Thyssenkrupp argued that the process is arbitrary, capricious, and not in accordance with law because “the process fails to provide automatic product-based exclusions once an exclusion has been granted to an importer for a particular product category.” The U.S. government argued that Commerce’s decision to grant exclusions “based on an analysis of specific products only after a request for an exclusion is made by an importer is a permissible implementation of the exclusion process, and is consistent with the purpose and plain meaning of the Proclamations.” Referencing an abundance of legal precedent, the CIT found that “Commerce has broad discretion” to implement the exclusion procedures and that, “[w]here an agency action is reasonable, and not ‘plainly erroneous or inconsistent’ with Congressionally delegated authority through Presidential action or statute, we owe the agency ‘great deference.’” The CIT concluded that Commerce’s interpretation of the Presidential Proclamations in its implementing regulations is lawful.

Since April 2020, we have collaborated with foreign law firm partners to monitor and report on the most relevant government measures worldwide addressing the COVID-19 pandemic. The newest version of the guide includes a concise, corporate-focused and user-friendly list of government measures and covers areas like tax, restructuring, business immigration, government contracts and international trade.

View or Download (PDF): Global Guide to Government Measures Taken in Response to COVID-19.

This month’s update includes new information as of early February 2021 for Australia, Belgium, Canada, Chile, Costa Rica, Czech Republic, El Salvador, European Union, France, Germany, Guatemala, Hungary, India, Indonesia, Israel, Italy, Japan, Mexico, Panama, Philippines, Poland, Republic of Korea, Russia, Spain, Thailand, Turkey, United Kingdom, United States and Vietnam.

Countries around the world continue to reintroduce or strengthen health and safety measures previously implemented in March 2020, and later relaxed, to restrict public gatherings or movement of persons to address the rising number of COVID-19 cases. In Europe, some country-wide lockdowns were put in place. Other countries continue to keep social distancing requirements in place and have introduced new regional curfews or lockdown requirements based on the numbers of infections within local populations. In the United States, states and counties continue to differ in their approaches to both business closures/reopenings and face mask requirements. In Asia and the Americas, the general trend indicates that countries have adopted a risk-based system to identify high-risk populations and to restrict their activities accordingly. In Asia, international travel restrictions have been eased in some countries, with a focus on workers. That said, following the discovery of new COVID-19 variants, some countries introduced travel bans from countries with the presence of the new variants.

Governments continue to support workers and employers affected by the economic instability caused by the pandemic. Most have taken various measures, including tax deferrals, incentives or exemptions and loan facilities, to address the difficulties endured by businesses. Measures include business subsidies, short-term compensation procedures, social security benefits or other regulations to ensure that workers receive personal protective equipment and/or do not face discrimination. In the United States, Congress enacted the Consolidated Appropriations Act of 2021 to provide additional benefits for businesses and extended some provisions of the original CARES Act.

As to government contracts, some governments issued measures to address COVID-19-related economic difficulties, including easing the termination of contracts for force majeure or introducing emergency procurement regimes to speed up the procurement process. Further, some governments have introduced measures to facilitate the rollout of COVID-19 vaccines. Additionally, there is increased attention on investment and regulations involving critical infrastructure in the Americas and Europe to support COVID-19 mitigation efforts.

In the area of international trade, some countries continue to restrict exports of certain personal protective equipment and have introduced measures subjecting foreign investments to increased scrutiny, especially investments linked to public health emergencies. Foreign investment in health care and related infrastructure continues to be regulated in light of the pandemic around the world.