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 imprisonment and alleged previous poisoning 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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On March 4, 2021, the Department of Commerce’s Bureau of Industry and Security (BIS) announced further export restrictions on Burma initially implemented in February 2021. See Update of February 18, 2021. These actions are in response to the coup in Burma on February 1, 2021, in which the military overthrew the democratically elected civilian government. Since that time, the Burmese military has continued to arrest government leaders and escalated its violent response to protestors.

Restrictions on Exports to Burma

BIS has placed new restrictions on exports and reexports to Burma, and transfers (in-country) within Burma, of sensitive items subject to the Export Administration Regulations (EAR) by moving Burma from Country Group B and placing it in the more restrictive Country Group D:1 category for license application reviews. Also, in this notice, BIS has formalized in the EAR its February 18 determination to remove license exceptions (i) Shipments of Limited Value (LVS), (ii) Shipments to Group B Countries (GBS), (iii) Technology and Software under Restriction (TSR), and (iv) Computers (APP) as eligible exceptions for use on exports to Burma. Further, with its placement in Country Group D:1, the following additional license exceptions are no longer available for Burma: (i) Temporary Imports, Exports, Reexports and Transfers (TMP) for shipments of national security (NS) controlled items, (ii) Servicing and Replacement Parts and Equipment (RPL), (iv) certain provisions of Aircraft, Vessel and Spacecraft (AVS), (v) Additional Permissive Reexports (APR) for shipments of NS items, (v) Encryption Commodities (ENC) for certain encryption items, software and technologies.

BIS will also apply restrictions under the EAR on exports, reexports, or transfers of certain “military end use” or “military end user” restrictions for Burma, resulting in a license requirement for exports of certain items intended for military use or users. License applications to export or reexport items to Burma for a military end use or military end user will be reviewed under a “presumption of denial.” Finally, BIS will apply the license application review policy for “national security” (NS) purposes for any exports and reexports to Burma and restrict exports of any items that would make a “significant contribution to the military potential” of Burma or would “prove detrimental to the national security of the United States.” Thus, Burma will now be treated similarly to BIS’ policy in this area of license reviews for China, Russia, and Venezuela.

Entity List Additions

BIS has also added four entities to the Entity List under the destination of Burma:

  • Burma’s Ministry of Defence
  • Burma’s Ministry of Home Affairs
  • Myanmar Economic Corporation
  • Myanmar Economic Holdings Limited

BIS has imposed a license requirement for all items subject to the EAR that are destined for Burma and a license review policy of “presumption of denial” for transactions involving these entities. The two commercial entities are known to be owned and operated by the Ministry of Defense. In addition, no license exceptions are available for exports, reexports, or transfers (in-country) to these entities.

Savings Clause

BIS has stated that shipments of items removed from eligibility for a License Exception or export or reexport without a license (NLR) as a result of these new export restrictions or these entities being placed on the Entity List that were en route aboard a carrier to a port of export or reexport, on March 8, 2021, pursuant to actual orders for export or reexport to Burma, may proceed under their previous eligibility.

The Office of the U.S. Trade Representative (USTR) has announced that it will continue to exclude Section 301 duties on imports of certain Chinese medical care products needed to address the COVID-19 pandemic. The current exclusions were set to expire on March 31, 2021 (see Update of December 23, 2020); however, with this announcement, the exclusions will continue until September 30, 2021.

The exclusions cover a variety of Chinese medical care products, including but not limited to: face shields; certain sterile drapes and covers; gloves; face masks; hot and cold packs; otoscopes; certain woven gauze sponges; certain non-woven fabrics; certain microscopes; certain dispensers and hand pumps for liquids; certain plastic aprons for personal protection; certain molded acrylonitrile-butadiene-styrene (ABS) tubes; certain adhesive polyethylene films, sheets and strips; and certain parts and components for X-ray and MRI equipment. These exclusions are available for any product that meets the description in the annexes accompanying the USTR announcement. The scope of each exclusion is determined by the 10-digit Harmonized Tariff Schedule subheadings and the product descriptions in the annexes.

On March 5, 2021, the United States and the European Union (EU) issued a joint statement announcing a suspension of World Trade Organization (WTO)-authorized retaliatory tariffs in the trade  dispute involving government subsidies for large civilian aircraft.  The statement notes the suspension “will cover all tariffs both on aircraft as well as on non-aircraft products, and will become effective as soon as the internal procedures on both sides are completed.” This announcement comes one day after the United States and the United Kingdom announced a similar suspension (see Update of March 4, 2021), and today’s joint statement indicates that both the EU and the United States are committed to reaching a “comprehensive and durable negotiated solution to the Aircraft disputes.”  It also notes that “key elements” of any ultimate solution will include “disciplines on future support in this sector, outstanding support measures, monitoring and enforcement, and addressing the trade distortive practices of and challenges posed by new entrants to the sector from non-market economies, such as China.”

In this longstanding dispute, the WTO Dispute Settlement Body has authorized the EU to impose $4 billion in retaliatory tariffs annually on U.S. products and authorized the United States to impose $7.49 billion in retaliatory tariffs annually on EU products.  For additional background on this dispute and the resulting retaliatory tariffs regarding EU subsidies to Airbus and U.S. subsidies to Boeing, see SmarTrade Updates of October 4, 2019, December 9, 2019, February 17, 2020, August 13, 2020, October 15, 2020 and November 11, 2020.

On March 4, 2021, the United States and the United Kingdom released a joint statement announcing a suspension of World Trade Organization (WTO)-authorized retaliatory tariffs in the WTO’s longest-running trade dispute involving government subsidies for large civilian aircraft.  The statement notes that the UK ceased applying retaliatory tariffs on January 1, 2021, and that the U.S. will suspend its retaliatory tariffs on March 4, 2021.  Both parties agreed to suspend their retaliatory tariffs for a period of four months, until July 4, 2021.  These moves are an effort to “de-escalate the issue and create space for a negotiated settlement to the Airbus and Boeing disputes.”  The Office of the U.S. Trade Representative (USTR) hopes that this temporary suspension will allow time to settle the dispute and then begin to seriously address “the challenges posed by new entrants to the civil aviation market from non-market economies, such as China.”  The UK’s Department for International Trade stated that it will “continue to engage with the U.S. to agree [to] a fair settlement to the dispute, that removes punitive tariffs” but reserved the right to re-impose these tariffs “if satisfactory progress towards an agreeable settlement is not made.”

In this dispute, the WTO Dispute Settlement Body has authorized the EU to impose $4 billion in retaliatory tariffs annually on U.S. products, and authorized the United States to impose $7.49 billion in retaliatory tariffs annually on EU products. This agreement between the United States and the United Kingdom addresses only the suspension of retaliatory tariffs on trade between the two countries; the U.S. retaliatory tariffs on EU goods from Germany, France and Spain and the EU’s retaliatory tariffs on U.S. goods remain in place.

For additional background on this dispute and the resulting retaliatory tariffs regarding EU subsidies to Airbus and U.S. subsidies to Boeing, see SmarTrade Updates of October 4, 2019, December 9, 2019, February 17, 2020, August 13, 2020, October 15, 2020 and November 11, 2020

 

 

The U.S. Court of International Trade (CIT) has called into question the “First Sale Rule” tariff mitigation strategy deployed by an increasing number of companies to reduce Section 301 tariffs on China-sourced goods. In Meyer Corp. v. U.S., No. 13-00154, Slip Op. 21-26 (March 1, 2021), the CIT questioned whether the First Sale Rule should be used in matters involving imports from non-market economy (NME) countries like the People’s Republic of China (PRC). While the CIT declined to expressly rule on that issue (but, in an unusual step, suggested that the U.S. Court of Appeals for the Federal Circuit do so in a future ruling), the CIT potentially increased the burden on importers seeking approval for First Sale Rule consideration. Companies utilizing the First Sale Rule should closely monitor actions by U.S. Customs and Border Protection (CBP) in the wake of this decision, as CBP is the approving authority for First Sale Rule use.

The  First Sale Rule is a common strategy used to reduce the value of goods sold through multiple parties (i.e., “middlemen”) and targets the customs valuation on the “first sale,” typically between the foreign producer and distributor. This initial sale reduces the value of the goods for customs purposes as that first transaction does not include the distributor’s mark-up and other associated costs. If approved in advance by CBP, the importer will pay duties on the reduced value of the good, lowering the overall duties paid.

Pursuant to Nissho Iwai America Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992), the “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 distortive nonmarket influences. CBP has interpreted the Nissho Iwai test to require an importer to provide (1) a detailed description of the roles of each of the parties involved in a multi-tiered transaction and (2) a complete paper trail relating to the imported merchandise that shows the structure of such transaction. See Determining Transaction Value in Multi-Tiered Transactions, T.D. 96-87, 30 Cust.Bull. 52 (Jan. 2, 1997).

In the CIT case, Meyer Corporation, via its various entities located in Thailand, the PRC (including Hong Kong and Macau) and a HoldCo in the British Virgin Islands, produced kitchenware (including popular name-brand products) and distributed those products globally, including the United States. Meyer provided detailed requests for First Sale Rule authorization to CBP that were approved. Later, however, CBP audited the determinations and declined to apply the First Sale Rule because Meyer could not demonstrate arm’s length transactions between the parties since its Chinese “parent” did not provide the financial information CBP requested in discovery. Litigation ensued.

In the CIT decision, the court stressed that U.S. importers have consistently ignored the fourth part of the Nissho Iwai test – “absent any distortive nonmarket influences.” Beyond questioning whether the First Sale Rule could even apply in matters involving PRC-sourced goods, the CIT potentially raised the burden for importers (and their consultants) to provide direct evidence that the various transactions are not affected by NME status. The CIT queried whether parties must provide evidence demonstrating factors such as: an absence of restrictive stipulations associated with an individual exporter’s business and export licenses; any legislative enactments decentralizing control of companies; other formal measures by the government decentralizing control of companies; the ability to set export prices independently of the government; the authority to negotiate and sign contracts and other agreements without the approval of a government authority; the possession of autonomy from the government regarding the “selection” of management; and the ability to retain the proceeds from sales and make independent decisions regarding the disposition of profits or financing of losses. The CIT also opined that “first sale” documentation may not always rest with the producer but with holding companies that may need to provide documentation and transparency.

The CIT ultimately based its decision on the lack of evidence provided by the importer on these key factors and the apparent “resistance” from Meyer’s “parent,” a non-party, to CBP’s discovery request concerning non-market influences. U.S. importers, however, should closely monitor CBP’s interpretation of this decision and review any use of the First Sale Rule in their tariff mitigation strategies to account for these potential changes.

On March 1, 2021, the Office of the United States Trade Representative (USTR) released President Joseph Biden’s 2021 Trade Agenda and 2020 Annual Report. Providing an overview of “a comprehensive trade policy in support of the administration’s effort to help the U.S. recover from the COVID-19 pandemic and build back better,” the report states that President Biden’s trade agenda addresses four national challenges: (1) building a stronger industrial and innovation base so the future is made in America; (2) building sustainable infrastructure and a clean energy future; (3) building a stronger, caring economy; and (4) advancing racial equity across the board.

The report notes that “[c]entral components of the 2021 trade agenda will be the development and reinforcement of resilient manufacturing supply chains, especially those made up of small businesses, to ensure that the United States is better prepared to confront future public health crises.” The report makes clear that the COVID-19 pandemic remains the greatest threat to the U.S. economy and that the president’s domestic policies will first address stopping the spread of the virus and safely re-opening the economy. The agenda encompasses a commitment to long-term investments to strengthen domestic production of essential medical equipment and an expansion of industrial capacity to meet future public health crises.

The 2021 trade agenda will also be an essential part of the president’s Build Back Better agenda and will seek “to protect and empower workers, drive wage-driven growth, and lead to better economic outcomes for all Americans.” The report states that workers “will have a seat at the table” in the development of trade policies and that the Biden administration will review past trade policies for their impacts on, and unintended consequences for, workers. In addition, the administration’s trade team will work with allies to achieve commitments to fight forced labor and to increase transparency and accountability in global supply chains.

The 2021 trade agenda includes plans to negotiate and implement strong environmental standards that are “critical to a sustainable climate pathway” and “efforts to advance racial equity and supporting underserved communities.” These efforts will include the negotiation and implementation of strong environmental standards and the development of market and regulatory approaches to address greenhouse gas emissions. The 2021 trade agenda will support domestic initiatives that “eliminate social and economic structural barriers to equality and economic opportunity,” barriers which were further exposed during the COVID-19 pandemic for their “persistent economic disparities on communities of color.”

The Biden administration’s 2021 trade agenda states that the “China challenge will require a comprehensive strategy and more systematic approach than the piecemeal approach of the recent past.” The administration will use “all available tools” to address the range of China’s unfair trade practices that continue to harm U.S. workers and businesses and will particularly address the human rights abuses of the Chinese government’s forced labor program. The Biden administration will coordinate with U.S. allies to pressure the Chinese government to end its unfair trade practices and will further efforts to hold China accountable to its trade obligations.

The report states that President Biden’s trade agenda will, through bilateral and multilateral engagement, “seek to build consensus around trade policies that address the climate crisis, bolster sustainable renewable energy supply chains, level the playing field, discourage regulatory arbitrage, and foster innovation and creativity.” Such efforts will include repairing partnerships and alliances and restoring U.S. leadership around the world. The report makes clear that President Biden intends for the United States to reengage and be a leader in international organizations, including the World Trade Organization (WTO) and that the administration will rely on strong trade enforcement to make certain U.S. trade partners live up to their commitments.

The portion of the 2020 annual report focusing on trade agreements offers a summary of the status and activities of various agreements and ongoing negotiations. It also provides an overview of the various USTR and other agencies’ trade enforcement activities.

A fact sheet outlining key highlights of the report is available here.

On February 24, 2021, President Joseph Biden signed an executive order seeking “to create more resilient and secure supply chains for critical and essential goods.” Noting shortages over the past year of medicine, food and computer chips, the president stated that, “While we cannot predict what crisis will hit us, we should have the capacity to respond quickly in the face of challenges. The United States must ensure that production shortages, trade disruptions, natural disasters and potential actions by foreign competitors and adversaries never leave the United States vulnerable again.” The executive order directs federal government departments and agencies to initiate a review of U.S. supply chains and identify ways to secure U.S. supply chains against a range of risks and vulnerabilities.

The executive order directs an immediate 100-day review across all federal agencies to address vulnerabilities in the supply chains of four key products:

  • Active pharmaceutical ingredients (APIs), which are the part of a pharmaceutical product containing the active drug.
  • Critical minerals, which are part of defense, high-tech, and other products used for national defense and emergencies.
  • Semiconductors and advanced packaging, which are necessary for innovation and technological advances.
  • Large capacity batteries, which are necessary for new energy technologies like electric vehicle batteries.

The 100-day review “will identify near term steps the administration can take, including with Congress, to address vulnerabilities in the supply chains for these critical goods.”

The executive order also directs a one-year review of a broader set of U.S. supply chains, including: (1) the defense industrial base; (2) the public health and biological preparedness industrial base; (3) the information and communications technology (ICT) industrial base; (4) the energy sector industrial base; (5) the transportation industrial base; and (6) supply chains for agricultural commodities and food production. Under this more in-depth review, federal departments and agencies are instructed to review a variety of risks to supply chains and industrial bases, including identifying critical goods and materials within supply chains, the manufacturing or other capabilities needed to produce those materials, and any vulnerabilities created by failure to develop domestic capabilities. This assessment will also include identifying locations of key manufacturing and production assets, the availability of substitutes or alternative sources for critical goods, the state of workforce skills and gaps for all sectors, and the role of transportation systems in supporting supply chains and industrial bases. At the conclusion of the review, each department and agency must make specific policy recommendations to address risks.

The Assistant to the President for National Security Affairs (APNSA) and the Assistant to the President for Economic Policy (APEP) have been tasked with coordinating these reviews and any actions necessary to implement this executive order. At the conclusion of the one-year review, the APNSA and the APEP must provide President Biden reports reviewing the actions and making recommendations. They will also establish and oversee a quadrennial supply chain review, including processes and timelines regarding ongoing data gathering and supply chain monitoring.

On February 18, 2021, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) entered into a $507, 375 settlement with BitPay, Inc. (“BitPay”) for 2,102 apparent violations of multiple sanctions programs. BitPay, a cryptocurrency company offering payment processing solutions for merchants to accept digital currency as payment for goods and services, agreed to settle its potential civil liability for allowing persons who appear to have been located in the Crimea region of Ukraine, Cuba, North Korea, Iran, Sudan, and Syria to transact with merchants in the United States and elsewhere.

According to the settlement announcement, BitPay had location information, including Internet Protocol (IP) addresses and other location data, about those persons prior to effecting the transactions. BitPay “received digital currency payments on behalf of its merchant customers from those merchants’ buyers who were located in sanctioned jurisdictions, converted the digital currency to fiat currency, and then relayed that currency to its merchants.” While BitPay would screen its direct customers (i.e., the merchants) against OFAC’s Specially Designated Nationals (SDN) List to ensure they were not located in a sanctioned country, BitPay did not screen the location data concerning the merchants’ buyers. As a result, persons in these sanctioned jurisdictions were able to engage in approximately $129,000 worth of digital currency-related transactions.

The statutory maximum civil monetary penalty that could have been applied for these apparent violations was $619,689,816. OFAC, while stating that BitPay did not voluntarily self-disclose the apparent violations, noted several mitigating factors and determined that the violations were non-egregious under its enforcement guidelines. This settlement highlights that crypto-currency companies offering digital currency payment services face significant sanctions compliance risk. Like more traditional banking and financial institutions, crypto-currency companies that facilitate or engage in online commerce or process transactions using digital currency are expected to implement robust screening procedures to ensure that they do not engage in unauthorized transactions prohibited by OFAC sanctions.

On February 18, 2021, the Department of Commerce’s Bureau of Industry and Security (BIS) issued a notice in the Federal Register announcing formal actions to limit exports and reexports of sensitive goods to Burma’s military and security services as previously announced by press release. See Update of February 12, 2021. In response to the military coup of February 1, the notice states that “the United States Government is reviewing all available actions to hold the perpetrators of the coup responsible.” As previously announced in its press release, BIS has adopted a more restrictive export license review policy of presumption of denial of items requiring a license for export and reexport to Burma’s (i) Ministry of Defense, (ii) Ministry of Home Affairs, (iii) armed forces, and (iv) security services.

Also as previously announced, BIS has suspended license exceptions that were previously available to Burma. The following license exceptions are suspended for exports or reexports to Burma, or transfers (in-country) within Burma, either in whole or in part: (i) Shipments of Limited Value (LVS), (ii) Shipments to Group B Countries (GBS), (iii) Technology and Software under Restriction (TSR), and (iv) Computers (APP).