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U.S.-China Trade War Update
Richard Mojica, Member, Miller & Chevalier Collmann Griffin, Associate, Miller & Chevalier May 15, 2019
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Agenda U.S.-China Trade War Update Tariff Mitigation Strategies
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U.S.-China Trade War
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U.S.-China Trade Talks Break Down
April 2019: U.S.-China trade talks in “final lap” and “very productive,” according to U.S. and Chinese officials May 2019: U.S.-China trade talks break down U.S. officials accuse China of “playing games with us” and backsliding on commitments, i.e., removing references to specific Chinese laws U.S. Trade Representative Robert Lighthizer (left) China top trade negotiator Liu He (right)
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Import Repercussions – U.S. Announces Tariff Increases
Tariffs will stay at 25% on $50B of “List 1” and “List 2” products Tariffs jump from 10% to 25% on $200B worth of “List 3” products Tariff increase applies to exports to U.S. on or after May 10, 2019 Goods exported prior to May 10 are not subject to additional tariffs, so long as U.S. entry is prior to June 1, 2019 USTR announces exclusion process for List 3 products, with details TBD May 10/June 1 Deadlines: Exclusion Process Announcement:
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Import Repercussions – U.S. Proposes New Tariffs
USTR requests comments for additional 25% tariffs on essentially all remaining Chinese products—“List 4” Approx. $300B worth of imports Narrow exceptions for certain pharmaceuticals, medical goods, rare earths, & critical minerals USTR now seeking comments on practicability and economic harm from tariffs Comments due June 17, 2019 Requests to testify at public hearing due June 10, 2019
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Export Repercussions – China Retaliates
China: 5%-25% retaliatory tariffs on $ 60B worth of U.S. products already covered by tariffs: Tariffs cover (i) food products, (ii) building materials, (iii) consumer goods, (iv) transport, (v) electronics, (vi) natural resources, & (vii) chemicals Tariffs take effect on June 1 More tariffs possible 25% tariffs on 2,493 items from current 10% 20% tariffs on 1,078 items from current 10% 10% tariffs on 974 items from current 5% 5% tariffs to continue on 595 items.
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Export Repercussions – Customs Bond Sufficiency
Customs bonds are calculated based on historical duty liability: Continuous bond = 10% of duties, taxes, & fees paid for the 12 month period Single-entry bond ≥ total entered value + any duties, taxes, & fees Increased Section 301 duties → higher duties, taxes, & fees Insufficient or exhausted bond → no entry of additional merchandise until new bond is obtained Monitor bond sufficiency
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Tariff Mitigation Strategies
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Tariff Mitigation Strategies – Exclusion Requests
Product-specific exclusion process will be available for List 3 Likely similar to process for Lists 1 & 2 Requestor must show all of the following: Product not “strategically important” and/or connected to Made in China 2025 No availability outside China Tariff will cause severe economic harm to U.S. interests Exclusion will be administrable – i.e., physical description, not intended end-use
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Exclusion Requests – Winners
Forklift Counterweight Ball Bearings Salad Spinners Not strategically important – Low-tech cast iron casting Available only from China -- U.S. mills are overcapacity Economic harm – Costly part of every U.S.-made forklift Administrable – Easily describable Not strategically important – low-tech intermediate good Available only from China Economic harm – Crucial manufacturing input for many products Not strategically important -- low-tech consumer good Economic harm – Submission from small/medium company; significant portion of company business
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Exclusion Requests – Losers
Forklift Motor Driver Commercial Drink Blender Car Autopilot “Brain” Not strategically important Available only from China No economic harm – Tiny percentage of cost of U.S.-made forklift & importer revenue Administrable – Easily describable Non-Chinese availability – Higher-cost version available from Korea Economic harm – Crucial product for small company Strategically important – High-tech product that likely benefited from Chinese industrial policy Economic harm – Crucial & costly part of car autopilot system Made ins China 2025 targets: (1) advanced information technology; (2) robotics and automated machine tools; (3) aircraft and aircraft components; (4) maritime vessels and marine engineering equipment; (5) advanced rail equipment; (6) new energy vehicles; (7) electrical generation and transmission equipment; (8) agricultural machinery and equipment; (9) new materials; and (10) pharmaceuticals and advanced medical devices. See Findings of the Investigation Into China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation Under Section 301 of the Trade Act of 1974, USTR, March 22, 2018, available at:
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Exclusion Requests – Takeaways
Exclusions are rarely granted and take several months Approval rate for List 1 (after 7 months): 55% denied 3% still under review by USTR 55% still under review by CBP for administrability 18% granted No approvals/denials for List 2 Start preparing exclusion requests in advance USTR List 1 Exclusion Requests (10,837 as of May 10)
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Tariff Mitigation Strategies – Others
Exemptions through Notice & Comment Reassess Classification Country of Origin Tweak Supply Chain Wireless Fitness Tracker Initially covered by List 3 After notice & comment, exemption added for 10-digit HTSUS code Comments for List 4 due by June 10 Clock w/ Temp Display Includes both clock & meteorological features Clock features provide “essential character,” so tariff-free HTSUS code for clocks Tooth Whitening Device Assembled in China, LED “lamp” made in U.S. COO is U.S., b/c mere assembly in China, crucial component (LED “lamp”) made in U.S. Seamless Underwear Tubular knitting, cutting, sewing in China Move cutting & sewing to Vietnam Under apparel rules, COO is Vietnam
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Trade Deal May Still Be Possible
Demand: Market Access Lower tariff and non-tariff barriers on U.S. exports Reduce +$300 billion trade deficit Stop subsidizing companies Response (to date): Resume purchases of U.S. soy beans, rice, and LNG Cut tariffs on U.S. cars and agricultural goods Demand: IP Reform End forced tech transfers for JVs and foreign ventures Greater intellectual property rights enforcement Stop cyber-intrusions into U.S. companies, gov’t Announce new expanded punishments for IP infringement Pledge to treat state, private and foreign firms equally Considering a law that would forbid the practice of forced tech transfer Demand: Enforcement Mechanism for Deal Tariffs gradually removed to ensure compliance Tariff “snap-back’ if China reneges on commitments References to specific Chinese laws that must be changed Response (to date) Removal of all tariffs Last-minute revisions that scuttled deal reportedly removed references to specific Chinese laws in agreement
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Increase in Customs Enforcement
U.S. Customs and Border Protection (“CBP”) has increased enforcement in response to China tariffs Increase in CF-28s (requests for information) regarding classification, country of origin New “Audit Survey Program” by CBP Centers of Excellence & Expertise focused on first sale programs Document any changes to classification, country of origin, first sale in anticipation of CF-28 or survey
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Economic Sanctions
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U.S. Economic Sanctions Administered by Office of Foreign Assets Control (“OFAC”) Complex; constantly changing Country-based (North Korea, Iran) Activity-based (Russian unconventional oil) List-based (terrorists, kingpins, oligarchs) New sanctions on Cuba, Iran, Venezuela in 2019 Dozens of designations and enforcement actions in 2019
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Framework for OFAC Compliance Commitments
Framework for OFAC Compliance Commitments (May 2019) Sets forth OFAC compliance expectations Management Commitment Risk Assessment Internal Controls Testing & Auditing Training Useful for building compliance programs Useful for negotiating penalties with OFAC
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Sanctions Risk Assessment
Compliance expectations depend on risk factors: Large, int’l, fluctuating customer base Overseas branches, correspondent accounts with foreign banks Electronic products and services (i.e., account transfers, e-banking) High number of fund transfers Targeted sectors: energy, finance, shipping, defense articles, high-tech Targeted countries: Iran, Syria, North Korea, Russia, Venezuela, Cuba, Diversion Risk: China, Dubai
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“Root” Causes of Sanctions Violations (1 of 2)
Lack of formal Sanctions Compliance Program Misinterpreting OFAC regs. Facilitating transactions by Non-U.S. persons Exporting or re-exporting U.S.-origin goods, services or tech to sanctioned persons or countries Utilizing U.S. financial system for sanctionable conduct
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“Root” Causes of Sanctions Violations (2 of 2)
Sanctions screening software or filter failures Improper due diligence on customers/client De-centralized compliance functions Non-standard payment or commercial practices Individual employee misconduct
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Case Studies from 2019 Financial Services Supply Chain Shipping
Diversion in China UniCredit Group German, Austrian, & Italian subsidiaries of int’l Bank Allegedly maintained U.S. dollar accounts on behalf of Islamic Republic of Iran Shipping Lines (“IRISL”) $611 million penalty e.l.f. Cosmetics, Inc. California beauty company Purchased false eyelashes from suppliers in China Chinese supplies allegedly sourced materials from North Korea Nearly $1 million penalty MID-SHIP Group LLC New York shipping co. Subsidiaries in China & Turkey allegedly negotiated three charterparty agreements using Iranian vessels $472,000 penalty Stanley Black & Decker Connecticut hardware co. Acquired subsidiary in China in 2011 Chinese subsidiary allegedly continued sales to Iran $1.9 million penalty
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Questions? Richard A. Mojica Member 202.626.1571 rmojica@milchev.com
Collmann Griffin Associate
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