The Department of the Treasury’s Office of Foreign Assets Control (OFAC) and the Department of State have announced further sanctions toward Iran by designating and placing on the Specially Designated Nationals (SDN) List a China-based supplier of graphite electrodes, 12 Iranian producers of steel and other metals products, three foreign-based sales agents of a major Iranian metals and mining holding company, and a subsidiary of the Islamic Republic of Iran Shipping Lines (IRISL). According to an OFAC press release, the Iranian metals sector “is an important revenue source for the Iranian regime, generating wealth for its corrupt leaders and financing a range of nefarious activities, including the proliferation of weapons of mass destruction and their means of delivery, support for foreign terrorist groups, and a variety of human rights abuses, at home and abroad.” A State Department press release stated, “The United States will continue to aggressively implement sanctions with respect to the Iranian regime, those who evade sanctions, and others who enable the regime to fund and carry out its malign agenda of repression and terror.”

These actions were taken pursuant to Executive Order 13871, which imposes sanctions on several sectors of the Iranian economy, including Iran’s steel sector. See also Update of May 10, 2020. The list providing detailed information on each designated entity is available here. As a result of these designations, all property and interest in property of these SDNs and any entities in which they own a 50% or greater interest are blocked and may not be dealt with by U.S. persons. Foreign persons dealing with these entities may also expose themselves to U.S. sanctions, and any foreign financial institutions that knowingly conduct or facilitate a significant transaction for or on behalf of these sanctioned entities may be subject to U.S. correspondent or payable-through account sanctions.

While the Office of the U.S. Trade Representative (USTR) was set to impose additional import duties of 25 percent starting January 6, 2021, these retaliatory tariffs have now been further suspended according to a press release. These additional tariffs on certain products from France are in response to that country’s continued collection of a Digital Services Tax (DST) that a USTR investigation determined discriminated against U.S. companies. The USTR published a comprehensive report on France’s DST on December 2, 2019, and announced that the tax is “unreasonable or discriminatory and burdens or restricts U.S. commerce” pursuant to Section 301 of the Trade Act of 1974. For additional background on the investigation and USTR’s decision to implement the additional tariffs, see Update of July 13, 2020.

While determining that the additional tariffs were necessary, the USTR in July 2020 suspended application of the duties for 180 days to allow for continued negotiations with France. Those negotiations have stalled, however, and the effort so far of the Organization for Economic Cooperation and Development (OECD) to negotiate an agreement for a new international tax structure that would supersede the need for digital services taxes has also been unsuccessful. USTR has now stated that the tariffs will be further delayed “in light of the ongoing investigation of similar DSTs adopted or under consideration in ten other jurisdictions.” Those investigations remain ongoing, and the suspension of the tariff action against France “will promote a coordinated response in all of the ongoing DST investigations.”

If eventually applied, the additional 25 percent duties will be applied to products covered by 21 Harmonized Tariff Schedule (HTS) subheadings, including: Chapter 33 (Essential oils and resinoids; perfumery, cosmetic or toilet preparations); Chapter 34 (Soap, organic surface-active agents, washing preparations, lubricating preparations, artificial waxes, prepared waxes, polishing or scouring preparations, candles and similar articles, modeling pastes, “dental waxes” and dental preparations with a basis of plaster); and Chapter 42 (Articles of leather, saddlery and harness, travel goods, handbags and similar containers, and articles of animal gut (other than silkworm gut).

The full list of French products that would be covered by the 25 percent tariff is available at Annex A to USTR’s Federal Register notice of July 16, 2020.

On January 5, 2021, President Donald Trump issued an executive order declaring that beginning on February 19, 2021, “any transaction by any person, or with respect to any property, subject to the jurisdiction of the United States, with persons that develop or control the following Chinese connected software applications, or with their subsidiaries, … : Alipay, CamScanner, QQ Wallet, SHAREit, Tencent QQ, VMate, WeChat Pay, and WPS Office” will be prohibited. In addition to having to identify the transactions and persons that develop or control these Chinese apps by February 19, the Secretary of Commerce must also provide a report making recommendations “to prevent the sale or transfer of United States user data to, or access of such data by, foreign adversaries, including through the establishment of regulations and policies to identify, control, and license the export of such data.”

The Executive Order states that by accessing personal electronic devices such as smartphones, tablets, and computers, these Chinese apps “access and capture vast swaths of information from users, including sensitive personally identifiable information and private information.” President Trump stated that such data collection could provide China (PRC) with access to U.S. citizens’ sensitive personal and proprietary information. The president added, “The continuing activity of the PRC … to steal or otherwise obtain United States persons’ data makes clear that there is an intent to use bulk data collection to advance China’s economic and national security agenda.” President  Trump took similar action earlier in 2020 against social media apps, TikTok and WeChat. See Updates of August 7, 2020 and October 5, 2020.

This latest action against Chinese software and communication company originates from President Trump’s  May 15, 2019 Executive Order on “Securing the Information and Communications Technology and Services Supply Chain,” that declared a national emergency as to the threats against information and communications technology and services in the United States. It delegated authority to the Secretary of Commerce to prohibit transactions posing an unacceptable risk to the national security of the United States or the security and safety of U.S. persons. See Update of May 16, 2019 for additional details.

On December 31, 2020, the U.S. Department of Homeland Security’s Federal Emergency Management Agency (“FEMA”) published a temporary final rule (“Rule”) that extends and modifies the most recent rule issued on August 10, 2020 to continue to restrict the exports of the four categories of personal protective equipment (PPE) and respirators as well as a new fifth category of specific syringes and hypodermic needles, due to increased demand for influenza and COVID-19 vaccines (“Covered Materials”).  For more information on the previous rules, please see Updates dated April 7,  April 22, and August 10.  The new Rule expires on June 30, 2021.

Per the Rule, the list of Covered Materials was modified to reflect current domestic needs.  The Covered Materials will be allocated for domestic use and may not be exported from the United States without explicit FEMA approval.  As of December 31, 2020, the Covered Materials are:

  1. Surgical N95 filtering facepiece respirators;
  2. PPE surgical masks, including masks that meet the fluid barrier protection standards pursuant to ASTM F 1862 and Class I or Class II flammability tests under CPSC CS 191-53, NFPA Standard 702-1980 or UL 2154 standards;
  3. PPE nitrile gloves, including exam gloves, surgical gloves, and such nitrile gloves intended for the same purposes;
  4. Level 3 and 4 surgical gowns and surgical isolation gowns that meet all of the requirements in ANSI/AAMI PB70 and ASTM F2407-06 and are classified by surgical gown barrier performance based on AAMI PB70; and
  5. Syringes and hypodermic needles (whether distributed separately or attached together) that are either: (i) piston syringes that allow for the controlled and precise flow of liquid that are compliant with ISO 7886-1:2017 and use only Current Good Manufacturing Practices (CGMP) processes; or (ii) hypodermic single lumen needles that have engineered sharps injury protections as described in the Needlestick Safety and Prevention Act.

U.S. Customs and Border Protection (CBP) will continue to detain the shipments of Covered Materials temporarily, during which time FEMA will determine whether to return for domestic use, to issue a rated order, or to allow the export of part or all of the shipment.   All exemptions and procedures previously applicable and identified by FEMA will remain in effect.  For more information on the exemptions to this Rule, please see Update dated April 21, 2020.

Key Notes:

  • Many products and software that use encryption are eligible for export without a license under U.S. export controls if certain requirements are followed.
  • Mass market and other items described under License Exception ENC may be exported without a license if the exporter either: (1) confirms the product’s classification through BIS’s Commodity Classification Automated Tracking System (CCATS) or (2) if self-classified, submits an annual report on February 1 of each calendar year.
  • Apps and software available for download internationally or provided to non-U.S. parties are considered exported software.

Category 5, Part 2 of the Commerce Control List describes several common “mass-market” items. This includes apps and other software that use standard encryption as well as IoT devices and a broad range of other commercial products. The Export Administration Regulations (EAR) release many of these mass-market and other less-sensitive items from export licensing requirements, which may require that some steps be taken by the exporter.

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The Office of the U.S. Trade Representative (USTR) announced that it will add on January 12, 2021 “certain products of certain EU member States” to the list of products subject to additional duties in the ongoing World Trade Organization (WTO) dispute with the European Union (EU) over subsidies for large civil aircraft.  In October 2019, the United States was authorized by a WTO dispute settlement panel to impose additional duties on approximately $7.5 billion in EU products as a result of the WTO Large Civil Aircraft litigation.  See Update of October 4, 2019 and February 17, 2020.  In a separate but related WTO dispute in September 2020, the EU was authorized to impose its own additional tariffs on approximately $4 billion in U.S. products.  See Update of November 11, 2020.

In implementing these additional tariffs, the USTR in a press release stated, “the EU used trade data from a [benchmark reference] period in which trade volumes had been drastically reduced due to the horrific effects on the global economy from the COVID-19 virus”; according to the USTR, this resulted in the EU imposing tariffs “on substantially more products than would have been covered if it had utilized a normal period.”  Despite objections from the USTR, the EU has refused to change its approach.  In response, the USTR announced these additional tariffs “to keep the two actions proportionate to each other” and will change its reference period to the same period used by the EU.

The new EU products subject to the additional tariffs will be “goods of France and Germany, as these countries have provided the greatest level of WTO-inconsistent large civil aircraft subsidies.”  These goods include aircraft manufacturing parts, certain non-sparkling wine, and certain cognac and other grape brandies.  See forthcoming Federal Register notice.  The EU quickly responded by issuing a statement indicating that this action disrupts ongoing negotiations and that it “will engage with the new U.S. administration at the earliest possible moment to continue these [WTO dispute] negotiations and find a lasting solution to the dispute.”

 

 

The Department of Commerce’s Bureau of Industry and Security (BIS) issued a final rule on December 28, 2020, in which it amended the Export Administration Regulations (EAR) to revise the Country Group designations for Ukraine, Mexico and Cyprus.  The EAR designates countries in Country Groups (A, B, D and E) which reflect each country’s export control policy, multilateral regime membership, system, and practice.  These Country Groups generally serve as a basis for the availability of certain license exceptions for exports to the listed countries.

In this final rule, BIS moved Ukraine from Country Group D:1 (more restrictive license requirements) to Country Group B (less restrictive). For Ukraine, the final rule notes that the country is a member of the four multilateral export control regimes (Australia Group; Missile Technology Control Regime; Nuclear Suppliers Group; Wassenaar Arrangement), and that it works with the United States on a variety of export control matters.  The change in group allows a less restrictive  licensing policy for the export and reexport to Ukraine of items listed on the Commerce Control List (CCL), which will no longer be subject to the case-by-case licensing policy, but instead will be subject to a licensing policy of approval.

In the final rule, BIS added Mexico and Cyprus in Country Group A:6 (making them available for License Exception Strategic Trade Authorization (STA)) although both also remain on Country Group B as well.

For Mexico, the final rule notes that the country is a member of three multilateral export control regimes (Australia Group; Nuclear Suppliers Group; Wassenaar Arrangement), and that it has national security interests and policies compatible with those of the United States.   For Cyprus, the final rule notes that the country is a member of the European Union (EU) and that the EU’s export control regulations implement the controls of the four multilateral export control regimes and apply to all members.

Importantly, Cyprus also remains listed in Country Group D:5 (U.S. Arms Embargoed Countries), where exports and licensing requirements continue to necessitate a review of and compliance with the restrictions on items in a 9×515 or ‘‘600 series’’ Export Control Classification Numbers (ECCN).

These Country Group changes were effective as of December 28, 2020.

 

On December 22, 2020, the U.S. International Trade Commission (USITC) released a report providing information on the U.S. industries producing COVID-19 related goods and the market, trade and supply chain challenges and constraints affecting the availability of such goods. The report follows an earlier report that identified such goods treating and responding to the COVID-19 pandemic. That report identified the goods’ source countries, tariff classifications and applicable duty rates. For additional details on this earlier report, see Update of May 5, 2020.

The December 2020 report was prepared at the request of the U.S. House of Representatives’ Committee on Ways and Means and the U.S. Senate Committee on Finance  (see Update of August 24, 2020) and focuses primarily on the availability of goods from the onset of the COVID-19 pandemic through September 2020. The report notes that “some of the initial supply chain challenges have eased but a number remain. The improvement is attributable in part to U.S. manufacturers’ launching or boosting production, increased imports of critical COVID-19 related goods, and a better understanding of the virus. However, as the pandemic continues, difficulties remain, and for certain COVID-19 related goods, supply constraints are not expected to wane until 2022.” The report analyzes four key industry sectors: medical devices, personal protective equipment, pharmaceuticals, soaps and cleaning compounds. The report also includes case studies on ventilators, N95 respirators, surgical masks, surgical and isolation gowns, medical and surgical gloves, test kits, vaccines and hand sanitizers. These studies provide information on supply chain challenges and constraints, including a discussion of factors affecting domestic production and factors affecting imports of finished goods and key inputs.

According to the USITC:

  • U.S. demand for all products covered in the case studies substantially increased in the first half of 2020, as compared to 2019, leading to significant shortages.
  • The United States produced all goods covered in the case studies before the pandemic, as well as many of the inputs. The U.S. industry supplied only a relatively small share of the domestic market for certain medical PPE, such as medical gloves and gowns, but supplied a large share of the domestic market for goods like ventilators, vaccines, N95 respirators, and hand sanitizers.
  • U.S. imports of most COVID-19 related goods covered in the case studies increased substantially beginning around April or May 2020, depending on the product.
  • Some of the initial supply chain challenges have eased, such as those for ventilators, but a number remain, including for many PPE items.
  • The major factors affecting domestic production of COVID-19 related goods include the availability and costs of inputs, the time and cost of bringing additional production capacity online (including purchasing and installing new machinery), and the time needed to recruit and train new workers.
  • The most significant factor affecting imports was that global demand significantly exceeded available supply of many COVID-19 related goods, making it difficult for U.S. importers to procure sufficient quantities.

On December 23, 2020, the Department of Commerce’s Bureau of Industry and Security (BIS) published a final rule in the Federal Register that removes Hong Kong as a “separate destination” under the Export Administration Regulations (EAR). This rule follows U.S. Secretary of State Michael Pompeo’s May 2020 announcement that Hong Kong no longer warrants treatment under U.S. laws as autonomous from China, and implements President Donald Trump’s July 2020 Executive Order directing BIS “to suspend or eliminate different and preferential treatment for Hong Kong.”  The final rule became effective on December 23, 2020.

Specifically, the final rule makes the following changes with respect to exports, reexports or in-country transfers of items subject to the EAR to Hong Kong:

  • Removes the Hong Kong entry from the Commerce Country Chart (Supplement No. 1 to Part 738 of the EAR), such that “[l]icense requirements for Hong Kong will now be governed by the Commerce Country Chart entry for China;”
  • Removes Honk Kong’s eligibility to receive different license exceptions from China; and
  • Amends the Electronic Export Information (EEI) filing requirement for exports of items on the Commerce Control List to Hong Kong.

These changes are in addition to the removal of license exceptions for exports to Hong Kong made earlier this year by BIS in its July 31, 2020 final rule. For more information on those exceptions, please see update dated July 31, 2020.

Consequently, Hong Kong now will fall into Country Group D and is subject to national security, chemical and biological, missile technology and arms embargo restrictions in the EAR. Additionally, exports, reexports and in-country transfers of items subject the EAR to Hong Kong will also be subject to the new Military End User Rule (“MEU Rule”). For more information on the MEU Rule, please see update dated December 23, 2020.

The rule also includes a savings clause, which provides that all export and reexport shipments that may no longer be made under BIS’s No License Required (NLR) designation and were either on dock for loading, on lighter, laden aboard an exporting or transferring carrier, or en route aboard a carrier to a port of export or reexport on December 23, 2020 to Hong Kong, may proceed to their destination under NLR until January 22, 2021.

The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced that it has issued General License (GL) 5F (Authorizing Certain Transactions Related to the Petróleos de Venezuela, S.A. 2020 8.5 Percent Bond on or After July 21, 2021), which continues to delay U.S. persons’ ability to enforce bondholder rights to the CITGO shares serving as collateral for the Petróleos de Venezuela, S.A. (PdVSA) 2020 8.5% bond until on or after July 21, 2021 – the previous deadline had been January 19, 2021. Effective December 23, 2020, this GL 5F replaces GL 5E.  Additionally, OFAC modified frequently asked question #595 to address the scope of GL 5F.

With this new General License, U.S. persons remain prohibited until July 21, 2021 from engaging in any transactions related to the sale or transfer of CITGO shares in connection with the PdVSA 2020 8.5% Bond, unless specifically authorized by OFAC. In the modified FAQ 595, OFAC notes a favorable licensing policy toward those seeking to apply for a specific license in an effort to reach an agreement on proposals to “restructure or refinance payments due to the holders of the PdVSA 2020 8.5 percent bond.”  See  Update of October 6, 2020 for additional background on this issue.