As the (Customs and Trade) World Turns: May 2024

This edition offers critical insights for industries including Automotive, Electric Mobility, Electronics, Energy & Cleantech, Fashion & Retail, Manufacturing and Consumer Products, as well as foreign investors and compliance professionals.

In this May 2024 edition, we cover:

1. USTR’s report on its four-year review of the Section 301 investigation.
2. Commerce’s new regulations expanding its trade remedies toolkit.
3. CBP’s new WRO on work gloves from a Chinese manufacturer.
4. Proposed enhancements to CFIUS enforcement powers.
5. The latest on several trade bills, including on de minimis, GSP renewal, and MTB.
6. The CIT’s decision on the classification of notebooks.

1. USTR Issues Four-Year Review Report on Section 301 Investigation, But More to Come

Major news in the trade world: the Office of the US Trade Representative (USTR) released its much-anticipated four-year review report on the Section 301 investigation into China’s technology transfer, intellectual property (IP), and innovation practices. While we plan to issue a comprehensive analysis soon, some early observations can be made.

USTR notes in its report that, while tariffs imposed since 2018 have led to some positive changes, many of China’s technology transfer practices persist. As a result, USTR will maintain the Section 301 tariffs and is proposing several modifications to them. The most significant proposed changes include tariff adjustments targeting products used in clean energy and technology “strategic sectors”:

USTR is also recommending an exclusion process targeting machinery used in domestic manufacturing, aiming to exempt products essential for US industries but not readily available from non-Chinese sources. We expect USTR to issue a Federal Register notice soon announcing its proposed modifications, likely involving a public comment process before any new and increased tariffs take effect, so the current 301 tariffs remain the status quo at the moment.

And the Fox Says…: Many questions still remain, particularly regarding the specific scope of the tariff adjustments (no list of Harmonized Tariff Schedule (HTS) codes has yet been issued) and the implementation details of the exclusion process. In an election year, given the current state of US-China relations, we expect the Section 301 tariffs to remain high. It will be important for companies to start evaluating the potential impacts of the strategic tariff adjustments, consider duty mitigation strategies, and assess how these changes align with supply chain and compliance plans. More detailed guidance will follow in our upcoming full analysis.

Contributors: James Kim, Angela M. Santos

2. The New Commerce Regulations Expand the Trade Remedies Toolkit

Important changes to the regulations applied by the US Department of Commerce (Commerce) in trade remedy cases such as antidumping (AD) and countervailing duty (CVD) proceedings came into effect on April 24.

The amendments range from significant policy changes to rules that codify existing practices. Key changes reflected in the final rule include:

1. Transnational Subsidies: The new regulations allow Commerce to investigate third-country subsidies, known as transnational subsidies, for the first time. Previously, the regulations prohibited Commerce from investigating them.
2. Market Distortions: The new regulations explain how and when Commerce can determine that a “particular market situation” exists in AD investigations. Such determinations allow Commerce to reject a company’s costs and sales prices because of distortions in the market.
3. Labor, Environmental, and IP Considerations: The new regulations also allow Commerce to treat weak or unenforced labor, environmental, and IP laws and regulations as subsidies. Uncollected fines levied against a company for such violations can also treated as countervailable subsidies. 

A more detailed discussion of the key amendments will be provided in future alerts.

And the Fox Says…: These amendments reflect significant policy changes, such as Commerce’s new authority to address transnational subsidies. Several provisions are more likely to impact exporters with Chinese affiliations that may be benefitting from Chinese subsidies, but the breadth of the amendments will impact market economy exporters as well.

For the first time, Commerce will consider the impact of weak or nonexistent labor, environmental, and IP protections on costs and prices. In practical terms, if Commerce believes that a foreign producer has lower costs because it is not bound by workplace safety laws, environmental regulations, or anti-forced labor laws, it can address that. On these novel concepts, we expect that Commerce will develop its practice on a case-by-case basis. Therefore, it remains to be seen how they will be implemented and if the resulting determinations will withstand judicial scrutiny.

Contributors: Diana Dimitriuc Quaia

3. CBP Issues New Withhold Release Order Against Chinese Glove Manufacturer After a 17-Month Reprieve

After a long reprieve from new Withhold Release Orders (WROs), US Customs and Border Protection (CBP) issued a WRO last month covering work gloves manufactured by Shanghai Select Safety Products Co., Ltd., and its two subsidiaries, Select (Nantong) Safety Products Co. Limited and Select Protective Technology (HK) Limited. CBP issued the WRO based on information that the gloves were produced using convict labor, in violation of 19 U.S.C. § 1307. Shipments of gloves covered by the WRO will be immediately detained at all US ports of entry.

This enforcement action underscores CBP’s commitment to its continued enforcement of forced labor laws for goods produced abroad. Moreover, this action is significant as it marks the first WRO issued in over 17 months and the first WRO issued against a Chinese entity since the passage of the Uyghur Forced Labor Prevention Act (UFLPA). The UFLPA, which has been CBP’s primary tool for addressing forced labor concerns in China since June 2022, creates a rebuttable presumption that all goods produced, in whole or in part, in the Xinjiang Uyghur Autonomous Region, or by an entity on the UFLPA Entity List, are produced with forced labor and are therefore barred from entry into the United States.

And the Fox Says…: As we predicted in our 2024 Forced Labor Guide, CBP is preparing to increase the number of WROs issued in 2024, in addition to ramping up enforcement of the UFLPA. These actions are enabled by increased funding and driven in part by Congressional attention on this issue. Currently, CBP oversees and enforces 52 WROs under 19 U.S.C. § 1307, and this most recent WRO against Shanghai Select Safety Products may be indicative of additional actions to come. Businesses and importers should remain alert for developments in forced labor enforcement, ensure compliance with all labor laws, and prepare for similar actions in the future. We will continue to monitor these developments closely and provide timely updates to keep you informed.

Contributors: Ashley Tomillo, Mario A. Torrico, Angela M. Santos

4. CFIUS Proposes Enhancements to Enforcement Powers

The Committee on Foreign Investment in the United States (CFIUS) introduced a proposal aimed at significantly strengthening its enforcement capabilities, enabling stricter oversight of foreign investments. The April 15 Notice of Proposed Rulemaking expands the scope of CFIUS’s authority to request information on transactions, particularly those not initially notified to the Committee. It also clarifies CFIUS’s ability to require information to monitor and enforce mitigation agreements, lowers the bar for CFIUS to issue subpoenas, and proposes other procedural changes. Finally, the proposed regulations could notably increase penalties for failure to comply with mandatory declaration requirements to as much as $5 million or the value of the transaction per violation.

For more details and insights, refer to our article published here.

And the Fox Says…: With CFIUS setting its sights on tighter enforcement, cross-border mergers, acquisitions, and other foreign investments are likely to face increased scrutiny. Early engagement on CFIUS issues can streamline processes and mitigate risks, ensuring smoother transactions and protecting deals from regulatory scrutiny.

Contributors: James Kim, Sylvia G. Costelloe

5. Congress Takes Aim at De Minimis, GSP Renewal, and MTB

The US House Ways and Means Committee recently approved a bill that would renew the Generalized System of Preferences (GSP) program retroactive to December 31, 2020. The GSP, which expired at the end of 2020, is a trade preference program that promotes economic growth in developing countries by granting preferential status to certain qualifying goods. The bill would require participating nations to meet certain environmental and human rights standards and would provide an expedited petition process for the addition/removal of products to the GSP.

The House has also introduced several bills addressing reforms to the Section 321 de minimis program, which currently allows most shipments valued under $800 to enter the United States duty-free. The Section 321 program has been hotly contested as of late over concerns of lack of oversight and enforcement, particularly for shipments from China. The House Ways and Means Committee approved the End China’s De Minimis Abuse Act, a bill that would prohibit the use of Section 321 de minimis for goods subject to AD/CVD, Section 301, Section 232, or Section 201 tariffs. This bill differs from bipartisan legislation we reported on in our March installment, which would eliminate de minimis exemptions for imports from non-market economies. A separate bill, the US Foreign-Trade Zone (FTZ) Parity Act, would extend Section 321 program access to FTZs.

Most recently, the House Ways and Means Trade Subcommittee introduced a new Miscellaneous Tariff Bill (MTB) that would reduce or eliminate tariffs on products that are not available domestically, retroactive to January 1, 2021 (with some exceptions for Chinese goods subject to Section 301 tariffs) through 2025. The MTB would cover largely manufacturing inputs, but also many consumer goods and fashion products.

And the Fox Says…: After expiring in 2020, the renewal of GSP has regained momentum in US Congress, though the renewal of the Trade Adjustment Assistance has been proposed as a tradeoff for GSP and remains a hurdle. Importers who source goods from developing countries should consider whether their products are potentially eligible for GSP preferential treatment in the event it is renewed and whether refunds may be available if the legislation renews GSP retroactively.

Companies that use or are interested in the de minimis program should monitor these new bills. If passed, the FTZ Parity Act will facilitate more shipments through FTZs and can significantly benefit FTZ operators and users and may save importers the cost and logistics of consolidating and repacking goods in a foreign country. Conversely, importers using the de minimis program for shipments subject to AD/CVD or Section 201, 232, or 301 duties should monitor the status of the End China’s De Minimis Abuse Act as it can significantly impact their business and the use of the Section 321 program.

Passage of the MTB, which expired in December 2020, could be a significant duty recovery and savings opportunity for many importers. Should MTB pass, importers should consider applying for refunds, retroactive to January 1, 2021.

The likelihood of these proposals becoming law is subject to ability of a divided Congress to compromise on a path forward with limited legislative days remaining on their 2024 calendar.

Contributors: Kelsey Griswold-Berger, Lucas A. Rock, Angela M. Santos

6. Is a Notebook With a Calendar a Diary? The Court of International Trade Says So

The Court of International Trade’s (CIT) recent classification decision on notebooks may have broader impacts on other multi-purpose goods. In Blue Sky the Color of Imagination, LLC, v. United States, No. 21-00624 (Ct. Int’l Trade 2024) , the CIT held that notebooks containing calendars are properly classified as diaries in Harmonized Tariff Schedule of the United States (HTSUS) subheading 4820.10.2010, a duty-free provision but subject to Section 301 duty of 25%.

The CIT rejected both the plaintiff-importer’s classification at entry (4910.00.2000, as calendars printed on paper) and CBP’s proposed classification (4820.10.4000, as other paper products). In reaching its decision, the CIT reasoned that notebooks containing calendars are “diaries” for purposes of classification under the HTSUS because diaries are “both retrospective journals, and prospective scheduling device.” According to the CIT, the notebooks at issue in Blue Sky are used to write things that you must remember to do, falling within the broad definition of a diary.

And the Fox Says…: The CIT’s decision demonstrates that, even where tariff classifications do not result in a change in normal duty rates, they can have significant impacts on other special duties such as Section 301 duties that can carry a rate of up to 25%.

Although the importer-plaintiff in Blue Sky intends to challenge the CIT’s decision, the CIT’s current decision may implicate importers of multi-purpose paper products. Importers of paper products, especially those substantially similar to the products at issue in Blue Sky, should be prepared to revise their classifications in accordance with the CIT’s decision. The CIT’s reasoning also demonstrates the complexities of classifications under the HTSUS, and the need for comprehensive procedures to ensure the correct classifications are being used for imported merchandise.

Contributors: Jannat Irshad, Lucas A. Rock, Angela M. Santos