Trade Trouble – East, West, and South, But North is Settled For Now!

Agriculture Secretary Perdue recently stated the trade damages to be addressed in a new round of farm aid is $15 to $20 billion! The general press is replete with stories about how, as these tariffs continue, companies are making sourcing changes that will be hard to reverse. So, what is the latest news?

First, there is trade with China. It seems clear that unless there is a breakthrough at the G-20 meeting in Tokyo, or shortly thereafter, the anecdotal headaches we hear about will get far more costly. The American Chamber of Commerce in China and the American Chamber of Commerce in Shanghai conducted a survey before List 3 was announced. Even at that point, American companies operating in China acknowledged higher production costs, decreased demand for products, reduced staffing, reduced profits, increased inspections at importation, increased bureaucratic oversight and regulatory scrutiny, slower approval of licenses and permits, higher product rejections, and increasing plans to relocate (but not back to the U.S.).

On a point one can consider only marginally helpful, those with goods on List 3 now have until June 14th to file their entries. To be clear, the goods still must have left China before May 10, and the entry filed no later than June 14th for the 10% to apply. Otherwise, you pay the 25%.

On a somewhat more positive note, if you found the May 21, 2019 Federal Register notice, it published the submission by the U.S. Trade Representative (USTR) to the Office of Management and Budget of a request for expedited approval of a form to be used for List 3 exclusion requests. In that notice, USTR stated it expected the window to open for List 3 exclusion requests around June 30, 2019, which is 10 days after the Tokyo G-20 meeting. If they have not already done so, companies would be wise to start the data gathering process. Among the information to be submitted are product details, whether the product or one comparable can be purchased in the U.S. or other sources outside China, the value and quantity of the product imported in 2017, 2018 and Q1 2019 distinguished by sourcing from China, other third countries and domestically, the degree of severe economic harm caused by the tariffs, and whether or not the applicant submitted any exclusion requests regarding products on List 1 or 2. Those who have prepared exclusion requests for goods on Lists 1 and 2 will instantly recognize the data requirements.

Complicating U.S.-China relations further, on May 15, 2019, a Presidential Document was issued entitled Securing the Information and Communications Technology and Services Supply Chain. It forms the framework permitting the Administration to name companies barred from doing business with U.S. entities on national security grounds. On May 21, 2019, the Bureau of Industry and Security published a Federal Register notice adding Huawei Technologies Co., Ltd. and various affiliates (68 in total) to the Entity List on the ground there is reasonable cause to believe that Huawei “has been involved with activities contrary to the national security or foreign policy interests of the United States.” A May 22, 2019 Federal Register notice reversed that position and issued a Temporary General License effective between May 20, 2019 and August 19, 2019 for these same entities. See Supplement 7 to 15 CFR part 744.

Underscoring that tit-for-tat is very real, China announced on June 1, 2019 the creation of its own “unreliable” entities list. The initial rollout of this new policy took the form of a press briefing. That coverage made clear the criteria which China will rely upon is typically opaque: “foreign enterprises, organizations and individuals could land on this list because they do not obey market rules, violate contracts and block or cut off supply for non-commercial reasons, severely damage the legitimate interests of Chinese companies” or “pose a threat or potential threat to national security.” Almost immediately thereafter, it was announced that FedEx is under investigation in China for misdelivering some packages for Huawei (including returning them to sender or improperly routing them to the U.S.). China stated the purpose of the “unreliable entities list” was to “protect international economic and trade rules and the multilateral trading system, to oppose unilateralism and trade protectionism, and to safeguard China’s national security, social and publish interests,” according to a Ministry of Commerce spokesman.

Then there is the issue of China’s supply of rare earth minerals. China’s official press points out it is only a matter of time before China rolls out a plan to severely limit its exports of these metals which are used to make a variety of electronic products or accessories (including lithium batteries) along with items for U.S. military purposes such as to manufacture night vision goggles, precision-guided weapons and communications/GPS equipment. The latest numbers show that 52% of these metals are found in China and Russia (neither is exactly a friend to the U.S. right now), whereas 18% can be found in Brazil, but only about 1% in the U.S.

Add to this the announcement on May 30th, there will be tariffs imposed on “all goods imported from Mexico.” Even a few days later the most basic questions remain unanswered. Does this statement literally mean all goods from Mexico? What about American products returned which are duty free because unchanged? How about American products used to assemble the final product in Mexico but qualifying for duty free on the American components in the final product? [For you trade nerds – think 9801 and 9802.] What about goods which are of not of Mexican origin? Or are NAFTA qualifying?

Right now, all we have is the timeline – 5% on June 10%, 10% on July 1, 15% on August 1, 20% on September 1 and 25 % on October 1. Every indication right now is these tariffs will be imposed. Then the question becomes: are there grounds on which the tariffs would be removed? The only answer we have right now is if Mexico does “enough” to satisfy President Trump that all reasonable action was taken to stem the tide of migration, the tariffs would be removed. However, the determination as whether “enough” has been done is solely within the discretion of the President in the current proposal.

Having declared in February 2019 the migration situation at the U.S. southern border to be a matter of national security, President Trump has chosen now to invoke IEEPA to support the current action. IEEPA is the International Emergency Economic Powers Act, see 50 U.S.C. 1701 et seq. It authorizes the President to act in the national security interest of the country if dealing with “any unusual and extraordinary threat, which has its source in whole or substantial part outside the United States.”

 Article 302 of NAFTA as currently enacted provides: “… no Party may increase any existing customs duty, or adopt any customs duty, on an originating good.” In other words, the imposition of this additional tariff on NAFTA-qualifying goods violates NAFTA and presents yet another reason why a precisely-worded policy is needed and a claim is possible. Can we also expect a World Trade Organization claim, assuming the bilateral discussions between the two countries do not diffuse the situation?

How does any of this help hardworking American business owners (of any size and in any industry) to keep their companies operating and profitable? This situation makes us all wonder how long it will take for the American public to wake up and realize China and Mexico are not paying these tariffs?

 

© 2019 Mitchell Silberberg & Knupp LLP
This post was written by Susan Kohn Ross of Mitchell Silberberg & Knupp LLP.
Read more on Trade on our Antitrust and Trade Regulation Page.

U.S. Increases Tariffs On Chinese Imports

The president announced this week that special Section 301 tariffs on $200 billion of Chinese imports (List 3) will increase from 10% to 25%. The Office of United States Trade Representative (USTR) issued the official notice of the tariff increase May 8. The rate increase is effective on May 10, 2019.

List 3 is composed of about 6,000 different Harmonized Tariff Schedule of the United States (HTSUS) codes and $200 billion worth of imports; comparatively, the previously imposed List 1 and List 2 collectively cover approximately 1,000 HTSUS codes and $50 billion worth of imports from China.

This rate increase will have a massive effect on almost all industries that rely on imports from China, including agriculture, automotive, electronics, textiles, and energy, just to name a few.

Two other things of particular note from the notice:

(1) increased tariffs will be applied to goods entered for consumption (or withdrawn from warehouse for consumption) on or after 12:01 a.m. Eastern time on May 10, 2019, and exported from China on or after May 10, 2019, so goods that were on the water prior to May 10 will not be affected.

(2) USTR indicates that it will promulgate a product exclusion process in the near future so importers, purchasers, trade associations and other interested parties can request that certain products be excluded from the tariff. Domestic producers will also have the opportunity to object to such exclusion applications.

 

© 2019 BARNES & THORNBURG LLP
You can learn more about trade and tariffs on the National Law Review Global Page.

US Trade Representative Publishes List of Chinese Products Subject to Retaliatory Tariffs

The Office of the US Trade Representative (USTR) published a list of 1,300 Chinese products, valued at $50 billion, on which it intends to impose an additional 25 percent tariff in retaliation for the “harm to the US economy” resulting from certain Chinese industrial policies.  USTR also announced a public comment period to enable interested parties to request that products be removed from the list. In response to this April 3 announcement, China announced its own retaliatory import tariffs on 106 US products.

In Depth

On April 3, the Office of the US Trade Representative (USTR) published a list of 1,300 Chinese products, valued at $50 billion, on which it intends to impose a 25 percent tariff on top of any existing US tariff in retaliation for the “harm to the US economy” resulting from certain Chinese industrial policies. The full US retaliation list, available here, includes products from the chapters listed in Annex I below.

In conjunction with its list, USTR announced a public comment period to enable interested parties to request that products be removed from, or added to, the list. Comments must be filed by May 11, 2018. The agency will also hold a public hearing on May 15, 2018, for parties wishing to comment further on the list. USTR has not set a specific deadline for implementing the new tariffs, but said it will provide “final options” to President Trump after the comment and hearing process conclude.

In addition to the proposed retaliatory tariffs, President Trump has also directed the Secretary of the Treasury to develop new restrictions on inbound Chinese investments aimed at preventing Chinese-controlled companies and funds from acquiring US firms with sensitive technologies. The US Treasury Department has until May 21, 2018, to develop these restrictions, which will be in addition to the restrictions already imposed by the Committee on Foreign Investment in the United States (CFIUS).

In response to the administration’s April 3 announcement, China announced its own retaliatory import tariffs on 106 US products. Its retaliation products, listed below in Annex II, will face 25 percent tariffs should the Trump administration move forward with its announced tariffs.

After China issued its retaliatory tariff list, President Trump directed USTR on April 5 to assemble an additional $100 billion worth of retaliatory tariffs against Chinese goods on the grounds that China had unfairly retaliated against American farmers and manufacturers rather than addressing its own “misconduct.” The specific additional tariffs, once announced by USTR, will be subject to a review and public comment period similar to the one now underway for USTR’s initial $50 billion list.

McDermott is actively engaged in this issue and can assist Firm clients and contacts affected by the announcement, including with the preparation of comments and other advocacy efforts to influence products on the list. Please contact any of the authors to seek assistance or learn more.

This post includes contributions from Leon Liu from  China Law Offices.

Annex I

HTS Chapters Represented on the USTR Retaliatory List*

HTS Chapter Product
28 Inorganic chemicals; organic or inorganic compounds of precious metals, of rare-earth metals, of radioactive elements or of isotopes
29 Organic chemicals
30 Pharmaceutical products
38 Miscellaneous chemical products
40 Rubber and articles thereof
72 Iron and steel
73 Articles of iron or steel
76 Aluminum and articles thereof
83 Miscellaneous articles of base metal
84 Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof
85 Electrical machinery and equipment and parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such articles
86 Railway or tramway locomotives, rolling-stock and parts thereof; railway or tramway track fixtures and fittings and parts thereof; mechanical (including electro-mechanical) traffic signaling equipment of all kinds
87 Vehicles other than railway or tramway rolling stock, and parts and accessories thereof
88 Aircraft, spacecraft, and parts thereof
89 Ships, boats and floating structures
90 Optical, photographic, cinematographic, measuring, checking, precision, medical or surgical instruments, and apparatus; parts and accessories thereof
91 Clocks and watches and parts thereof
93 Arms and ammunition; parts and accessories thereof
94 Furniture; bedding, mattresses, mattress supports, cushions and similar stuffed furnishings; lamps and lighting fittings, not elsewhere specified or included; illuminated sign illuminated nameplates and the like; prefabricated buildings

 

* Not all products contained in each chapter are represented.  For the complete list, visit: https://ustr.gov/sites/default/files/files/Press/Releases/301FRN.pdf

 

Annex II

Unofficial Translation of China’s Retaliation List

No. Product HTS Code
1. Yellow soybean 12019010
2. Black soybean 12019020
3.

 

Corn 10059000
4. Cornflour 11022000
5. Uncombed cotton 52010000
6. Cotton linters 14042000
7. Sorghum 10079000
8. Brewing or distilling dregs and waste 23033000
9.

 

Other durum wheat 10011900
10. Other wheat and mixed wheat 10019900
11. Whole and half head fresh and cold beef 02011000
12. Fresh and cold beef with bones 02012000
13. Fresh and cold boneless beef 02013000
14. Frozen beef with bones 02021000
15. Frozen boneless beef 02022000
16. Frozen boneless meat 02023000
17. Other frozen beef chops 02062900
18. Dried cranberries 20089300
19. Frozen orange juice 20091100
20. Non-frozen orange juice 20091200
21. Whiskies 22083000
22. Unstemmed flue-cured tobacco 24011010
23. Other unstemmed tobacco 24011090
24. Flue-cured tobacco partially or totally removed 24012010
25. Partially or totally deterred tobacco stems 24012090
26. Tobacco waste 24013000
27. Tobacco cigars 24021000
28. Tobacco cigarettes 24022000
29. Cigars and cigarettes, tobacco substitutes 24029000
30. Hookah tobacco 24031100
31. Other tobacco for smoking 24031900
32. Reconstituted tobacco 24039100
33. Other tobacco and tobacco substitute products 24039900
34. SUVs with discharge capacity of 2.5L to 3L 87032362
35. Other vehicles equipped with an ignited reciprocating piston internal combustion engine and a drive motor that can be charged by plugging in an external power source. Cylinder capacity displacement exceeding 2500ml, but not exceeding 3000ml for SUVs (4 wheel drive) 87034052
36. Vehicles with discharge capacity of 1.5L to 2L 87032342
37. Other vehicles equipped with an ignited reciprocating piston internal combustion engine and a drive motor that can be charged by plugging in an external power source. Cylinder capacity displacement exceeding 1000ml, but not exceeding 1500ml for SUVs (4 wheel drive) 87034032
38. Passenger cars with discharge capacity 1.5L to 2L, 9 seats or less 87032343
39. Other vehicles equipped with an ignited reciprocating piston internal combustion engine and a drive motor that can be charged by plugging in an external power source. Cylinder capacity displacement exceeding 1000ml, but not exceeding 1500ml for 9 passenger cars and below 87034033
40. Passenger cars with discharge capacity of 3L to 4L, 9 seats or less 87032413
41. Other vehicles equipped with an ignited reciprocating piston internal combustion engine and a drive motor that can be charged by plugging in an external power source. Cylinder capacity displacement exceeding 3000ml, but not exceeding 4000ml for 9 passenger cars and below 87034063
42. Off-road vehicles with discharge capacity of 2L to 2.5L 87032352
43. Other vehicles equipped with an ignited reciprocating piston internal combustion engine and a drive motor that can be charged by plugging in an external power source. Cylinder capacity displacement exceeding 2000ml, but not exceeding 2500ml for off-road vehicles 87034042
44. Passenger cars with discharge capacity of 2L to 2.5L, 9 seats or less 87032353
45. Other vehicles equipped with an ignited reciprocating piston internal combustion engine and a drive motor that can be charged by plugging in an external power source. Cylinder capacity displacement exceeding 2000ml, but not exceeding 2500ml for 9 passenger cars and below 87034043
46. Off-road vehicles with discharge capacity of 3L to 4L 87032412
47. Other vehicles equipped with an ignited reciprocating piston internal combustion engine and a drive motor that can be charged by plugging in an external power source. Cylinder capacity displacement exceeding 3000ml, but not exceeding 4000ml for off-road vehicles 87034062
48. Diesel-powered off-road vehicles with discharge capacity of 2.5L to 3L 87033312
49. Other vehicles equipped with an ignited reciprocating piston internal combustion engine and a drive motor that can be charged by plugging in an external power source. Cylinder capacity displacement exceeding 2500ml, but not exceeding 3000ml for diesel-powered off-road vehicles 87035052
50. Passenger cars with discharge capacity of 2.5L to 3L, 9 seats or less 87032363
51. Other vehicles equipped with an ignited reciprocating piston internal combustion engine and a drive motor that can be charged by plugging in an external power source. Cylinder capacity displacement exceeding 2500ml, but not exceeding 3000ml for 9 passenger cars and below 87034053
52. Off-road vehicles with discharge capacity of less than 4L 87032422
53. Other vehicles equipped with an ignited reciprocating piston internal combustion engine and a drive motor that can be charged by plugging in an external power source. Cylinder capacity displacement not exceeding 4000ml for off-road vehicles 87034072
54. Other vehicles which are equipped with an ignited reciprocating piston internal combustion engine and a drive motor and can be charged by plugging in an external power source 87034090
55. Other vehicles that are equipped with a compression ignition type internal combustion engine (diesel or semi-diesel) and a drive motor, other than vehicles that can be charged by plugging in an external power source 87035090
56. Other vehicles which are equipped with an ignition reciprocating piston internal combustion engine and a drive motor and can be charged by plugging in an external power source 87036000
57. Other vehicles that are equipped with a compression-ignition reciprocating piston internal combustion engine and a drive motor that can be charged by plugging in an external power source 87037000
58. Other vehicles that only drive the motor 87038000
59. Other vehicles 87039000
60. Other gasoline trucks of less than 5 tons 87043100
61. Transmissions and parts for motor vehicles not classified 87084099
62. Liquefied Propane 27111200
63. Primary Shaped Polycarbonate 39074000
64. Supported catalysts with noble metals and their compounds as actives 38151200
65. Diagnostic or experimental reagents attached to backings, except for goods of tariff lines 32.02, 32.06 38220010
66. Chemical products and preparations for the chemical industry and related industries, not elsewhere specified 38249999
67. Products containing PFOS and its salts, perfluorooctanyl sulfonamide or perfluorooctane sulfonyl chloride in note 3 of this chapter 38248700
68. Items listed in note 3 of this chapter containing four, five, six, seven or octabromodiphenyl ethers 38248800
69. Contains 1,2,3,4,5,6-HCH (6,6,6) (ISO), including lindane (ISO, INN) 38248500
70. Primarily made of dimethyl (5-ethyl-2-methyl-2oxo-1,3,2-dioxaphosphorin-5-yl)methylphosphonate and double [(5-b Mixtures and products of 2-methyl-2-oxo-1,3,2-dioxaphosphorin-5-yl)methyl] methylphosphonate (FRC-1) 38249100
71. Containing pentachlorobenzene (ISO) or hexachlorobenzene (ISO) 38248600
72. Containing aldrin (ISO), toxaphene (ISO), chlordane (ISO), chlordecone (ISO), DDT (ISO) [Diptrix (INN), 1,1,1-trichloro-2 ,2-Bis(4-chlorophenyl)ethane], Dieldrin (ISO, INN), Endosulfan (ISO), Endrin (ISO), Heptachlor (ISO) or Mirex (ISO). 38248400
73. Other carrier catalysts 38151900
74. Other polyesters 39079999
75. Reaction initiators, accelerators not elsewhere specified 38159000
76. Polyethylene with a primary shape specific gravity of less than 0.94 39011000
77. Acrylonitrile 29261000
78. Lubricants (without petroleum or oil extracted from bituminous minerals) 34039900
79. Diagnostic or experimental formulation reagents, whether or not attached to backings, other than those of heading 32.02, 32.06 38220090
80. Lubricant additives for oils not containing petroleum or extracted from bituminous minerals 38112900
81. Primary Shaped Epoxy Resin 39073000
82. Polyethylene Terephthalate Plate Film Foil Strips 39206200
83. Other self-adhesive plastic plates, sheets, films and other materials 39199090
84. Other plastic non-foam plastic sheets 39209990
85. Other plastic products 39269090
86. Other primary vinyl polymers 39019090
87. Other ethylene-α-olefin copolymers, specific gravity less than 0.94 39014090
88. Other primary shapes of acrylic polymers 39069090
89. Other primary shapes of pure polyvinyl chloride 39041090
90. Polysiloxane in primary shape 39100000
91. Other primary polysulphides, polysulfones and other tariff numbers as set forth in note 3 to chapter 39 are not listed. 39119000
92. Plastic plates, sheets, films, foils and strips, not elsewhere specified 39219090
93. 1,2-Dichloroethane (ISO) 29031500
94. Halogenated butyl rubber sheets, strips 40023990
95. Other heterocyclic compounds 29349990
96. Adhesives based on other rubber or plastics 35069190
97. Polyamide-6,6 slices 39081011
98. Other primary-shaped polyethers 39072090
99. Primary Shaped, Unplasticized Cellulose Acetate 39121100

100.

Aromatic polyamides and their copolymers

39089010

101.

Semi-aromatic polyamides and their copolymers

39089020

102.

Other polyamides of primary shape

39089090

103.

Other vinyl polymer plates, sheets, strips

39201090

104.

Non-ionic organic surfactants

34021300

105.

Lubricants (containing oil or oil extracted from bituminous minerals and less than 70% by weight)

34031900

106.

Aircraft and other aircraft with an empty weight of more than 15,000kg but not exceeding 45,000kg

88024010

© 2018 McDermott Will & Emery.

New Rules Offer Clarity On China’s Outbound M&A Crackdown

On August 18, 2017, China’s State Council issued guidelines clarifying rules passed a year ago by the State Administration of Foreign Exchange (SAFE) limiting outbound investments as cover-up to move money out of China.

The new guidelines provide different policies for Chinese companies’ investment overseas, broadly dividing overseas investment into three categories:

  • investments in “real estate, hotels, entertainment, sport clubs, [and] outdated industries” are restricted;

  • investments in sectors that could “jeopardize China’s national interest and security, including output of unauthorized core military technology and products” and investments in gambling and pornography are prohibited; and

  • investments in establishing R&D centers abroad and in sectors like high-tech and advanced manufacturing enterprises that could boost China’s Belt and Road Initiative, and investments that would benefit Chinese products and technology will be encouraged by Chinese outbound regulators.

These guidelines are new and we have to wait and see how they will be interpreted and implemented by regulators. Still, there may be reasons to believe they will have a net positive effect on the China-U.S. M&A market. The new guidelines bring about greater certainty to buyers, lenders and targets on whether a deal will get approved by Chinese regulators.

The volume and size of Chinese outbound M&A is already on an upward trajectory in the second quarter of 2017, as buyers are already getting more acclimated to SAFE rules announced at the end of 2016 restricting the outflow of Chinese capital. Chinese buyers completed 94 deals totaling $36 billion in Q2, compared to the 74 deals totaling $12 billion in Q1. The current Chinese outbound M&A trend, coupled with greater certainty under the new guidelines, is likely to result in more Chinese outbound M&A deals during the last quarter of 2017, as well as in 2018.

This post was written by Shang Kong & Zhu Julie Lee of Foley & Lardner LLP © 2017

For more legal analysis go to The National Law Review

US Launches Investigation into China’s Technology Transfer & IP Practices

United States Trade Representative (“USTR”) Robert E. Lighthizer launched an investigation under Section 301 of the Trade Act of 1974 (“Section 301”) into acts, policies, and practices of the Chinese government as they relate to “technology transfer, intellectual property [IP], and innovation.” The August 18 announcement of the investigation came just days after President Donald Trump signed a memorandum directing the USTR to consider whether to launch an investigation of China’s IP laws and practices that “may inhibit United States exports, deprive United States citizens of fair remuneration for their innovations, divert American jobs to workers in China, contribute to our trade deficit with China, and otherwise undermine American manufacturing, services, and innovation.”

While Section 301 was a frequently used tool between the 1970s and 1990s (including when Ambassador Lighthizer was Deputy USTR during the 198os), the number of such investigations declined significantly after the World Trade Organization (WTO) dispute settlement system was established. Use of Section 301, however, is consistent with this Administration’s apparent willingness to use a broader range of trade tools to more aggressively combat potential unfair trade practices.

Section 301 allows—and, in certain circumstances, requires—the USTR to investigate and take unilateral retaliatory action in response to certain trade-related harms. The USTR must take appropriate action if the rights or benefits of the United States under any trade agreement are denied, violated, or otherwise harmed, or if its international legal rights are infringed in a way that burdens or restricts U.S. commerce. The USTR may take action at his or her discretion if an act, policy, or practice is unreasonable or discriminatory and burdens or restricts U.S. commerce. Among other things, a Section 301 action may be taken if a foreign country denies adequate and effective intellectual property protection or fair and equitable market opportunities, even if its behavior is consistent with its obligations under the World Trade Organization’s (“WTO”) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement).

The Federal Register notice launching the investigation highlights concerns that the Chinese government uses the transfer of foreign technology and intellectual property to advance its industrial policy goals. The USTR investigation will first examine acts, policies, and practices of the Chinese government that fall into the following four categories:

  1. The use of “a variety of tools, including opaque and discretionary administrative approval processes, joint venture requirements, foreign equity limitations, procurements, and other mechanisms to regulate or intervene in U.S. companies’ operations in China, in order to require or pressure the transfer of technologies and intellectual property to Chinese companies;”

  2. Acts, policies, and practices that “reportedly deprive U.S. companies of the ability to set market-based terms in licensing and other technology-related negotiations with Chinese companies and undermine U.S. companies’ control over their technology in China;”

  3. Direction and/or unfair facilitation of “systematic investment in, and/or acquisition of, U.S. companies and assets by Chinese companies to obtain cutting-edge technologies and intellectual property and generate large-scale technology transfer in industries deemed important by Chinese government industrial plans;” and

  4. Conduct or support of “unauthorized intrusions into U.S. commercial computer networks or cyber-enabled theft of intellectual property, trade secrets, or confidential business information” (as well as the harm they may cause to U.S. companies and the competitive advantages they may bring to Chinese companies).

Beyond the categories enumerated above, which are focused on technology/IP transfer and cyber-theft, the USTR notice also invites submissions of “information on other acts, policies and practices of China relating to technology transfer, intellectual property, and innovation described in the President’s Memorandum,” leaving open the possibility for the investigation to widen. The announced scope of the investigation highlights the discretionary factors to be considered under the statute, indicating that USTR is not focused solely on actual violations of China’s obligations under international trade law.

Consistent with the statute, the notice provides that USTR has 12 months to make a determination as to whether action is warranted. If it is determined that action is warranted, USTR may consider a broad range of retaliatory tools, including the withdrawal of trade concessions, the imposition of duties or other import duties, and “all other appropriate and feasible action within the power of the President that the President may direct the Trade Representative to take…to enforce such rights or to obtain the elimination of such act, policy, or practice…[with actions that may be taken being] within the power of the President with respect to trade in any goods or services, or with respect to any other area of pertinent relations with the foreign country.” Retaliatory actions may be targeted at industries other than those directly linked to the identified harm. USTR also has the discretion to come to an agreement with the foreign country’s government to eliminate or obtain compensation for the identified harm. As required by law, USTR has requested formal consultations with the Chinese government regarding the issues under investigation.

The behavior targeted by this Section 301 investigation reflects concerns of the international business community in China. For instance, 43 percent of companies responding to AmCham China’s annual Business Climate Survey in 2017 reported that reducing the need to engage in technology transfer would have at least a somewhat significant impact on increasing their investment levels in China. These companies may find this investigation to be an opportunity to advance their specific concerns. Meanwhile, Chinese companies that may be at risk for retaliatory action under Section 301, and U.S. companies potentially vulnerable to counter-retaliation by Chinese authorities, should carefully monitor the situation.

The Chinese government has expressed its concerns about the investigation. Suggesting that the United States is sending the wrong signal to the international community, a statement from the Ministry of Commerce asserts, “The United States’ disregard of World Trade Organization rules and use of domestic law to initiate a trade investigation against China is irresponsible, and its criticism of China is not objective.” While launching an investigation of China’s unfair trade practices is not, in and of itself, inconsistent with U.S. WTO obligations, imposition of some—though not all—of the retaliatory measures authorized under U.S. law could potentially violate WTO rules. China’s statements indicate that should the U.S. investigation lead to unilateral retaliatory action, China will respond in various ways, including by considering a challenge to such measures at the WTO.

The USTR notice calls for written comments by interested persons to be submitted by September 28. The interagency Section 301 Committee, which is chaired by the USTR, is scheduled to hold a hearing in Washington, D.C., on October 10. Requests to appear at the hearing are also due on September 28.

Zhijing Yu  contributed to the preparation of this article.

 This post was written by Ashwin Kaja, Gina M. Vetere and Timothy P. Stratford of  Covington & Burling LLP © 2017
For more legal analysis go to The National Law Review

State Department Makes Predictions about EB Cut-Off Date Movement

Notably, the State Department stated with certainty that the EB-2 Rest of the World category likely will retrogress in the coming months.

At a recent American Immigration Lawyers Association meeting, the US Department of State made comments about Employment-Based (EB) cut-off date movement in the final third of the fiscal year. This Immigration Alert summarizes the comments made by the State Department and what they could mean for EB cut-off date movement in the upcoming months.

EB-1: China and India

US Citizenship and Immigration Services announced that the “final action date” of January 1, 2012 will control for the China and India EB-1 categories. These have apparently exhausted close to 50% of the entire EB-1 limit for the 2017 fiscal year. This cut-off date is expected to be maintained until the end of September, when the fiscal year ends. The final action cut-off date for the China and India EB-1 categories may once again become current at the start of the new fiscal year on October 1, 2017, but there is no guarantee that this will happen.

EB-1: Rest of the World

The EB-1 Rest of the World category (i.e., countries other than China, India, Mexico, the Philippines, El Salvador, Guatemala, and Honduras) should remain current for the foreseeable future.

EB-2: India

A slight advancement in the EB-2 India category will occur in June, but it is unlikely that this category will once again reach the most advanced final action cut-off date that was reached last year. The State Department stated that it may maintain the existing final action date through the end of September, but there is no guarantee that this will occur.

EB-2: China

EB-2 China will advance by less than one month to March 1, 2013 in June. The State Department noted that the EB-2 China category should continue to advance slowly and will probably exhaust its per-country limit before the end of the year.

EB-3: China

EB-3 China’s final action date of October 1, 2014 will continue to apply in June. As a result of a significant EB-3 downgrade volume, retrogression in this category is possible in the final months of the fiscal year.

EB-2: Worldwide

The State Department noted that the EB-2 category has experienced significant usage, and stated with certainty that a final action cut-off date will be imposed for the EB-2 Rest of the World category in August—or even as early as JulyThis cut-off date, once imposed, should remain unchanged through the end of September, with a small advancement possible in September and a return to currency in October.

EB-3: Rest of the World

The EB-3 Rest of the World category will move forward by one month in June to April 15, 2017. The State Department expects further forward movement in this category for the rest of the fiscal year.

EB-3: India

The State Department noted that the EB-3 India category will advance in June from March 25, 2005 to May 15, 2005. Continued forward movement is expected in July and August. The State Department predicts that the July cut-off date for the EB-3 India category will advance to October 15, 2005.

How This Affects You

It is highly likely that the cut-off date movement predicted by the State Department will occur. Persons seeking permanent residence through the EB process should take note of this predicted movement and plan accordingly. In particular, persons in the EB-2 Rest of the World category may wish to consider filing adjustment of status applications before the anticipated retrogression in this category occurs in July or August. Once this retrogression occurs, only persons with priority dates before the new cut-off date will be able to file such applications.

This post was written by A. James Vázquez-Azpiri of Morgan, Lewis & Bockius LLP.

Trump, Xi Kick Off Economic Relationship

china economic relationshipOn Friday, April 14, the U.S. Department of Treasury published a widely anticipated semi-annual report detailing the foreign exchange practices of America’s major trading partners. Although he regularly called for China to be labeled as a “currency manipulator” as a candidate, President Donald J. Trump and his administration declined to use the occasion of this report to do so. Mr. Trump previewed this decision days earlier in an interview with the Wall Street Journal, reflecting the consensus among economists that the Chinese “are not currency manipulators.” While, according to many economists, the Chinese government did keep the value of the Renminbi (“RMB”; also known as the “Chinese yuan”) at an artificially low level for many years, Chinese policymakers have been hard at work trying to prop up the currency since 2014 due, in part, to a strengthening U.S. dollar and surging capital outflows.

The decision not to label China as a currency manipulator comes on the heels of the first in-person meeting between Mr. Trump and Chinese President Xi Jinping. On April 6 and 7, Mr. Trump hosted Mr. Xi at his Mar-a-Lago estate in Florida for a two-day summit, an important weather vane for near-term relations between the United States and China. Despite concerns that strategic differences over thorny issues such as North Korea and the South China Sea or harsh rhetoric regarding U.S.-China trade relations from Mr. Trump in advance of the meeting might sour the mood, both sides came out of the meetings with a buoyant step. The two sides agreed to implement a new, comprehensive framework for bilateral negotiations that will shape U.S.-China engagement in the years to come. Further, U.S. and Chinese officials announced a plan to reach agreement, within 100 days, on steps that can be taken to address trade-related frictions between the two countries.

For much of the Obama presidency, bilateral negotiations between the U.S. and China were centered around two main events: the U.S.-China Strategic and Economic Dialogue (“S&ED”) and the Joint Commission on Commerce and Trade (“JCCT”). During this first face-to-face encounter, Mr. Trump and Mr. Xi agreed to a new framework for high-level negotiations called the “U.S.-China Comprehensive Dialogue,” which is to cover four main tracks: diplomacy and security, economics, law enforcement and cybersecurity, and society and culture. Few details have been released as to how the new dialogue will work in practice, and which of the components of the S&ED and JCCT might be preserved in this new framework.

The 100-day plan for trade negotiations is aimed at addressing trade frictions, particularly with regard to increasing U.S. exports and reducing the U.S. trade deficit with China. Few details about what the 100-day plan will entail have been released, and many details are yet to be negotiated. However, it appears that these negotiations will focus on securing Chinese commitments on a range of U.S. exports including beef (banned in China since 2003) and other agricultural products, steel, oil, and gas. Additionally, the Chinese might provide greater market access for U.S. investments in the financial sector—e.g., in securities and insurance. U.S. Treasury Secretary Steven Mnuchin explained during a press briefing that there was a “very wide range of products that we discussed.” According to some reports, at least some Chinese commitments proposed at this early stage may have originally been intended for offer in the context of the bilateral investment treaty negotiations between the U.S. and China, the prospects for which are now less certain.

The current dynamics present significant opportunities for individual businesses and industry groups. Businesses seeking access to the Chinese market for exports or investment should consider engaging with U.S. policymakers to leverage the situation and make a case for addressing their specific needs during the current round of negotiations. Even if the 100-day plan does not bring about the kind of comprehensive economic benefits potentially possible under a bilateral investment treaty, companies with interests in China should see this as an opportunity to seek relief in a Chinese business environment that, according to over 80% of member companies responding to an AmCham China survey, has become less friendly to foreign business than in the past.

© 2017 Covington & Burling LLP

China’s Quantum Cryptography: Tales from (Quantum) Crypt

China Quantum CryptographyThe dream of hack-proof communication just got a little closer to reality. On August 16, 2016, China launched the world’s first “quantum satellite,” a project the Chinese government hopes will enable it to build a communication system incapable of being hacked. Such a system, if perfected, would allow for encrypted communications between any two devices with absolute certainty that the encryption could not be broken, and with a built-in mechanism for alerting the sender/receiver if someone tried.If you are interested in truly understanding the mechanics of quantum cryptography, I would highly recommend the article “How Quantum Cryptography Works.” For the purpose of this post, a very basic explanation is as follows:

In order to encrypt a two way communication, the sending party (who we will call “Alice”) typically encodes a message using a key and sends the message to the receiving party (who we will call “Bob”), who then decrypts the message using the same key. Since modern technology makes it possible to engineer almost unbreakable keys, the best way for an eavesdropper (who we will call “Eve”) to access the message is to find the key itself, which is vulnerable because it also needs to be communicated between Alice and Bob, but can’t itself be encrypted, or else Bob won’t be able to use it.

Quantum cryptography would allow Bob and Alice to use a new key for every message AND guarantee that if Eve tries to intercept the key, they will know. Quantum entanglement is a physical phenomenon that can cause certain particles to become “entangled” such that a change in one will elicit a predictable change in the other, no matter how far apart the entangled particles are, and without any measurable (by current scientific standards) communication between them. If Alice and Bob share entangled particles, Alice can transmit the information for a new key to Bob for every communication by altering the directional spin of her particles, which in turn will alter the spin of Bob’s particles. A complicated process of measuring particle spin and cross-checking information between Alice and Bob (more fully explained in the article linked to above) is then used to generate the key.

Since so far as science is currently aware there is nothing “communicated” between the entangled particles, there is nothing for Eve to intercept unless she can actually access Bob’s particles. Meanwhile, Heisenberg’s uncertainty principle states that anytime the spin of one of these particles is measured, the very act of measuring it changes the spin of that particle. This means that if Eve does manage to physically access Bob’s entangled particles and measures them to try and get Alice’s key before passing the particles back to Bob, Bob will know the particles were intercepted because the key he thinks he got from Alice won’t work to unlock Alice’s message after he and Alice cross-check their information, since Eve’s measuring of Bob’s particles caused the spin of those particles to change. Furthermore, since Eve is not able to cross-check her information with Alice, even if she is able to listen to Bob and Alice cross-checking their information, Eve will not be able to use her information to formulate the correct key to decode Alice’s message.

The ability to send completely secure messages between any two points has myriad applications for data security. From a commercial standpoint, it could mean the ability for enterprises to remote access data without fear of interception. It could also mean an increase in the security of customer information (especially information that is legally required to be protected, such as personally identifiable information) and a corresponding decrease in the risk of a security breach that might result in damage to a company’s brand, increased compliance costs, or potential litigation awards and expenses. For consumers, it could mean the ability to communicate private information securely in an age where so many online transactions require the sending of sensitive information over the internet.

More troubling (or liberating, depending on your point of view) are the challenges quantum cryptography poses for law enforcement and national security. Agencies such as the CIA, FBI, and NSA currently depend on access to third party data networks, such as e-mail clients and telecommunication companies, for a large part of their data collection and monitoring activities. Under the “third-party doctrine” when Alice sends a message to Bob, if a copy of that message is kept by the medium they use to communicate (e.g. by Alice’s e-mail client), a government agency can request a copy of that information directly from Alice’s e-mail client without needing to get a warrant, and without telling Alice or Bob about the request. Quantum cryptography could allow Alice to send an encrypted message to Bob such that, even if a government agency gets a copy of the message itself from Alice’s e-mail client, they will not be able to decrypt it without help from either Alice or Bob.

Quantum cryptography still has a long way to go before it lives up to its promise, and there will almost certainly be bumps along the way. Yet, if the Chinese satellite launch does kick start the quantum cryptography revolution, commercial enterprises, consumers, governments, hackers, and lawyers alike will need to find ways to respond to the new challenges it creates.

ARTICLE BY Adam Waks of Proskauer Rose LLP
© 2016 Proskauer Rose LLP.

Increased Sanctions on North Korea Focus on China and Russia

Last week, President Obama significantly increased sanctions on North Korea through Executive Order 13722, which implements the North Korea Sanctions and Policy Enhancement Act of 2016 (H.R. 757). The Executive Order’s prohibitions and blocking provisions, and designation criteria are substantially more expansive than that Act. Concurrently with the issuance of the Executive Order, OFAC announced the designations of 17 North Korean government officials and organizations, 15 entities, two individuals, and identified 40 blocked vessels under various sanctions authorities.

While neither Congress nor the President imposed secondary sanctions per se, China and Russia should  interpret the Executive Order as a clear warning about their economic ties with North Korea. In the Iran sanctions program, secondary sanctions require that a foreign financial institution “knowingly facilitate or conduct a significant financial transaction” for a particular individual or entity. This evidentiary standard greatly limited the use of those sanctions authorities. The new sanctions against North Korea are clearly aimed at foreign business interests, but unlike secondary sanctions, this new authority does not have an evidentiary impediment to its implementation.

Transportation, Mining, Energy, and Financial Services

Subsection 2(a)(i) of the Executive Order authorizes the Secretary of the Treasury to identify industries in the North Korean economy, the participants of which may be designated solely based on their operating within that industry. The Secretary of the Treasury determined that entities within the transportation, mining, energy, and financial services industries are subject to designation. The Treasury Department’s Office of Foreign Assets Control (OFAC) then designated Ilsim International Bank and Korea United Development Bank for operating in the financial services industry.

OFAC’s authority to derivatively designate any bank that provides services to any identified North Korean bank creates de facto secondary sanctions. Executive Order 13722 authorizes OFAC to designate any individual or entity that provides services to any identified Korean bank. Therefore, any financial institution that provides an identified North Korean bank with an account, serves as an intermediary, confirms or advises a letter of credit, or provides any other service can be designated. The most likely targets of these derivative actions are Russian and Chinese financial institutions.

North Korean Slave Labor and Coal

The Executive Order authorizes OFAC to designate businesses that “have engaged in, facilitated, or been responsible for the exportation of workers from North Korea, including exportation to generate revenue for the Government of North Korea.” According to open source reporting, North Korea has between 50,000 and 100,000 “state-sponsored slaves” predominantly located in China and Russia. The North Korean regime earns between $1.2 and $2.3 billion annually in foreign currency through these slave laborers. Apart from the appalling human rights violations, this practice finances the North Korean nuclear and missile development programs.

In addition to companies that utilize North Korean slave labor, entities that deal in metal, graphite, coal, or software to or from North Korea are now subject to designation, “where any revenue or goods received may benefit the Government of North Korea.” United Nations Security Council Resolution 2270 of March 2, 2016 address the sale of coal and iron from North Korea, but in a very limited manner. Unlike the United States sanctions program, the prohibitions do not apply to transactions  “exclusively for livelihood purposes and unrelated to generating revenue for the DPRK’s nuclear or ballistic missile programs.” As a result of these substantial limitations, any application of the sanctions on coal and iron are likely to be enforced unilaterally by the United States.

Chinese companies are clearly the most susceptible to this designation criteria. According to the press release announcing the Executive Order and designations, “coal generates over $1 billion in revenue per year for North Korea.” Open source reporting also indicates that in 2015, North Korea supplied China with 19.63 metric tons of coal.

Return to a Comprehensive Sanctions Program

In addition to the designation criteria highlighted above, Executive Order 13722 also transitions U.S. sanctions against North Korea back into a comprehensive sanctions program. All property and interests in property of the North Korean government are now blocked, and the Department of Commerce licensing requirements are now supplemented with a prohibition on the exportation of goods and services.

OFAC released a series of 9 General Licenses to address issues that commonly arise from comprehensive programs. These include authorization of certain legal services, certain services in support of nongovernmental organizations,  transactions related to intellectual property, and noncommercial personal remittances.

Article By Jeremy P. Paner of Holland & Hart LLP.
Copyright Holland & Hart LLP 1995-2016.

Top Manufacturing Trends to Watch for in 2016

Cybersecurity

Manufacturers continued to face challenges and find opportunities related to cybersecurity in 2015, and those trends can only be expected to intensify in 2016. New laws and new threats (discussed in more detail here and here) have either incentivized or required manufacturers to evaluate their cybersecurity strengths and weaknesses, then capitalize on the former and work to eliminate the latter. In light of the rapid evolution of cybersecurity technology and threats, manufacturers can expect to devote, or continue to devote, significant resources to cybersecurity issues in 2016.

Disruptive Technology/Internet of Things

Smart products, big data, and analytics are not just for tech companies anymore. Many manufacturers are now constantly looking for ways to leverage these tools to improve their process, their products, and their customers’ satisfaction, and those who aren’t may be falling behind. In an increasingly connected world, manufacturers need to keep pace and ensure that their products not only stay relevant, but push the envelope whenever possible. Potential regulation of the open Internet (discussed here) only complicates matters, and gives manufacturers more reason to carefully watch this trend in 2016.

Regulatory Developments in China

In 2015, manufacturers saw dramatic changes in China’s regulatory landscape (discussed in more detail here, here, and here), including new restrictions on hazardous substances for electronics manufacturers, data-flow and content restrictions, and currency devaluations that significantly complicated the international trade landscape. Additional changes are surely coming in 2016, with new implementing measures for defective auto product recalls and a more aggressive climate policy being only some of the changes to watch. Manufacturers currently operating or selling products in China or looking to expand there in 2016 should pay close attention to these and other developments.

© 2016 Foley & Lardner LLP