1. U.S.-China Trade War Update
Richard Mojica, Member, Miller & Chevalier
Collmann Griffin, Associate, Miller & Chevalier
May 15, 2019

2. Agenda
U.S.-China Trade War Update
Tariff Mitigation Strategies

3. U.S.-China Trade War

4. 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)

5. 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:

6. 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

7. 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.

8. 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

9. Tariff Mitigation Strategies

10. 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

11. 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

12. 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:

13. 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)

14. 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

15. 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

16. 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

17. Economic Sanctions

18. 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

19. 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

20. 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

21. “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

22. “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

23. 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

24. Questions? Richard A. Mojica Member 202.626.1571 rmojica@milchev.com
Collmann Griffin
Associate