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International Aspects of U.S. Government

Erin Felix Government Attorney National Management Association- San Diego Chapter Luis F. Arandia, Jr. March 12, 2020 International and Customs Attorney Overview

• Controls & Sanctions Basics • EAR & ITAR General Overview • Encryption & Huawei Controls • OFAC Sanctions • Issues • BAA / TAA / Berry • USMCA & Tariffs • Other Supply Chain Issues • FARS/DFARS Prohibitions Export Controls Basics Overview of U.S. Government Export Laws

• are highly controlled for various reasons • National Security • Trade Secrets • Statistics Who Controls U.S. Exports?

U.S. Department of Commerce, Bureau of Industry and Security (BIS) • Export Administration Regulations (EAR) • Dual-use items and lower level military • Commerce Control List (CCL)

U.S. Department of State, Directorate of Defense Trade Controls (DDTC) • International Traffic in Arms Regulations (ITAR) • Defense articles, or items • United States Munitions List (USML) Who Controls U.S. Exports?

Homeland Security, U.S. Customs and Border Protection • “Police” the borders • Enforce exports at all U.S. borders

Department of Commerce, Census Bureau • Collects and reports trade statistics

Department of Treasury, Office of Foreign Assets Control • Enforces U.S. mandated embargoes and sanctions Structure of the EAR and ITAR

• The Export Administration Regulations (EAR) • 15 CFR Parts 730-744 • Commerce Control List (CCL)

• The International Traffic in Arms Regulations (ITAR) • 22 CFR Parts 120-130 • U.S. Munitions List (USML) EAR

• Dual Use • Commercial items that can also be used in a military application • “600” series items • ITAR controlled items that moved to the EAR as a result of export control reform • Require a license or exemption to export ITAR

• Hardware • Rockets, fighter jets, body armor, etc.

• Technical Data and Software • Drawings • Schematics • User manuals • Mission management software ITAR- Defense Services

• Furnishing to foreign persons: • Assistance (including training) in the design, development, engineering, manufacture, production, assembly, testing, repair, maintenance, modification, operation, demilitarization, destruction, processing or use of defense articles • Technical data • Military training whether in person or by correspondence and using all types of media.

• Consulting, engineering services, training EAR vs. ITAR- Registration

• ITAR Registration Required • All manufacturers, exporters, temporary importers, and brokers of defense articles. • Occurs annually. • Requires a fee of $2250 plus additional fees for each license application.

• No EAR Registration Required What is an Export?

• Exports • Tangible – shipments through US port via air, ocean, truck, rail, mail, etc. • Intangible – electronic transfers (including email, fax and downloads); verbal discussions; technical assistance • Re-Exports • Shipments from one foreign country to another of US-origin goods, or foreign made goods containing certain US-origin parts, components or materials • In-Country Transfers • Shipment from a party in one country to another party in the same country Technology and Deemed Exports

• Technical information or “technology” relating to a controlled product is also controlled under the export regulations:

• Drawings • Manuals • Blueprints • Photographs • Instructions Recordkeeping

• Parties are required to keep export records for five years from the latest date of export or reexport activity from the U.S. The latest date of such export or reexport activities include: • The date of any known reexport, transshipment, or diversion of such export • The date of any termination of the transaction, whether formally in writing or by other means • In the case of records pertaining to transactions involving restrictive trade practices or boycotts, the date the regulated person receives the boycott-related request or requirement Unauthorized End Users/ End Uses

• Exporters responsible for conducting due diligence to ensure export is not destined for prohibited end-use, end-user, or destination • You cannot proceed with a transaction with knowledge that a violation of the export regulations is occurring or is about to occur • “Knowledge” does not always mean “you knew” • It also means you “should have known” • Cannot self blind • “Know Your Customer” and “Red Flag” Guidance on BIS website BIS Encryption Controls Encryption Overview

• Products employing encryption technologies or functionalities are generally controlled under the Export Administration Regulations (EAR). • Category 5, Part 2 of the EAR Commerce Control List covers: • Cryptographic Information Security (ECCNs 5A002 and 5A992); (e.g., items that use cryptography) • Non-cryptographic Information Security (ECCN 5A003); and • Defeating, Weakening of Bypassing Information Security (ECCN 5A004) Key Terms and Questions

• “Cryptography” - The discipline that embodies principles, means and methods for the transformation of data in order to hide its information content, prevent its undetected modification or prevent its unauthorized use. • “Cryptography” is limited to the transformation of information using one or more ‘secret parameters’ (e.g., crypto variables) and/or associated key management. • Is the product designed to use cryptography/encryption OR does it contain cryptography/encryption, whether from your company or third-party sources? Deemed Encryption Exports

• Releases of controlled technology to foreign persons in the U.S. are "deemed" to be an export to the person’s country or countries of nationality. “ • Increased scrutiny of deemed exports • Specify ECCNs to the sub-paragraph level and provide justification • Have a comprehensive Technology Control Pan and supplement as needed • Provide technology roadmap and business plan updates as needed. Encryption Items NOT Subject to EAR

Publicly Available • Encryption items that are publicly available are not subject to the EAR. Sections 734.3(b)(3) and 734.7 define what is publicly available and published. Common examples are free apps posted online or mass market software available as a free download. • An App made for a smartphone or computer that that meets the Mass Market criteria that is made available free of charge would be considered "publicly available." • Open source encryption source code available for free online. ECCN 5A002.a

To be controlled in 5A002.a, an item must have “information security” as a primary function; be digital communications or networking systems; or be computers or other items having information storage or processing as a primary function

5A002.a (and equivalent software under 5D002 c.1) applies to items that: i. Use ‘cryptography for data confidentiality’; and ii. Have ‘in excess of 56 bits of symmetric key length, or equivalent’; and iii. Have cryptography described in 1 and 2 above where the cryptographic capability is usable, activated, or can be activated by means of "cryptographic activation" not employing a secure mechanism; and iv. Are described under 5A002 a.1 – a.4; and v. Are not described by Decontrol notes. Examples of Items Not Controlled

• Research/Scientific/Analytical • Business process management and business process abstraction and modeling • Scientific visualization tools • Business/Systems Applications • Business process automation- process planning, supply chain management • Transportation- safety and maintenance, public transit operations • Industrial, manufacturing or mechanical systems- robotics, utilities • Academic instruction and testing tools and software • Applied geosciences- mining/drilling, mapping/surveying BIS Cloud Carve-Out

• What encryption standard is required? • National Institute of Standards and Technology (NIST) https://csrc.nist.gov/projects/cryptographic-module-validation- program/validated-modules • Federal Information Processing Standards Publication 140-2 (FIPS 140-2) • End-to-end encryption • Stays encrypted between originator and recipient (uninterrupted) • Originator does not provide to third party • Encrypted when it crosses a border • Originator and recipient may be the same person • Mere ability to access encrypted technology / software is not a release BIS Controls on Huawei Huawei & U.S. Government Indictment

• Huawei Technologies Co., Ltd. (Huawei) is world’s largest telecommunications equipment manufacturer.

• The U.S. Government has determined that there is reasonable cause to believe that Huawei has been involved in activities contrary to the national security or foreign policy interests of the United States.

• Huawei indicted in U.S. District for Eastern District of New York for allegedly violating OFAC Iran sanctions. BIS Entity List

• On May 16, 2019, BIS added Huawei and 68 non-US affiliates to the Entity list for stealing . • Prohibits both US and non-US companies from exporting, reexporting or transferring any item subject to the EAR to Huawei and listed affiliates • Includes commodities, technology and software • Includes a Temporary General License (TGL)

• BIS imposes a license requirement for all items subject to the EAR and a license review policy of presumption of denial. Similarly, no license exceptions are available for exports, reexports, or transfers (incountry) to the persons added to the Entity List Temporary General License

• Temporary General License (TGL) effective May 20, 2019 with renewed expiration dates (currently April 1, 2020). • Transactions in place prior to May 16, 2019 necessary to maintain and support Huawei’s existing and currently fully operation networks and equipment • Transactions necessary to provide and support to existing Huawei handsets that were available prior to May 16 • Disclosure of information regarding security vulnerabilities • Engagement as necessary for the development of 5G standards • Requires exporter to make a certification statement specifying how the transaction meets the scope of the TGL De Minimis & Direct Product Rule

• Certain foreign made items can still be sold: • De minimis--if the items contain a de minimis level of US origin content. Currently at 25%

• Direct Product Rule—if the items are manufactured overseas but are based on certain US technology • Controlled for National Security (NS) reasons • Requires a written assurance

• BIS is currently considering a rule to lower de minimis to 10% and expand the direct product rule to include all US technology. Recent Updates

• August 19, 2019 • BIS added an additional 46 non-US affiliates to the Entity list • Extended the TGL another 90 days

• November 19, 2019 • Extended the TGL another 90 days

• February 19, 2020 • Extended the TGL for only 45 days OFAC Sanctions & Iran Update OFAC Basics

Department of Treasury, Office of Foreign Assets Control • Administers and enforces economic and trade sanctions. • Targets foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction. • Imposes controls on transactions and freezes assets under US jurisdiction. • Many of the sanctions are based on United Nations and other international mandates, are multilateral in scope, and involve close cooperation with allied governments OFAC Sanctioned Countries

• Balkans • Iran • Sudan and Darfur • Belarus • Iraq • South Sudan • Burundi • Lebanon • Syria • Central African Republic • Libya • Ukraine/ • Cuba • • Venezuela • Democratic Republic of the • Nicaragua • Yemen Congo • North Korea • Zimbabwe • Somalia Transactional Screening

Screen ALL parties to a transaction

• BIS • Denied Persons List, Entity List, Unverified List

• DDTC • Debarred Parties List

• OFAC • Specially Designated Nationals and Blocked Person Lists Iran

• U.S. Government has designated Iran as a State Sponsor of Terrorism. The U.S. has economic, trade, scientific, and military sanctions in place.

• OFAC • Comprehensive trade and investment embargo • Specially Designated Nationals and Blocked Persons List • BIS • BIS • Maintains licensing requirements for exports and reexports of most items subject to the EAR • Denied Persons List, Entity List, Unverified List Executive Oder 13902 of Jan. 10, 2020

• In response to Iran’s attacks against U.S. forces and interests, Presidential E.O. targets additional sources of revenue used by the Iranian regime to fund and support its nuclear program, missile development, terrorism and terrorist proxy networks, and malign regional influence. • Authorizes OFAC to impose sanctions against persons operating in or transacting with additional sectors of the Iranian economy, including construction, mining, manufacturing, and textiles. • Adding entities in the steel, aluminum, copper, and iron manufacturing sector to the Specially Designated Nationals and Blocked Person Lists New Sanctioned Entities (Jan. 10, 2020)

• Foreign Purchasers and Transporters of Iranian Steel, and Providers of Critical Materials Needed for Metal Production • Pamchel Trading Beijing Co. Ltd. • Hong Xun (Vessel) and Hongyuan Marine Co. Ltd. (Vessel Owner)

• 13 Iranian Iron and Steel Companies • Mobarakeh Steel Company (biggest steel producer in the Middle East and the biggest direct reduced iron producer in the world).

• Iranian Aluminum and Copier Companies • Iran Aluminum Company (75% of the country’s total aluminum production volume). • National Iranian Copper Industries (leading copper producer in the Middle East and North Africa region). New Sanctioned Entities (Jan. 23, 2020)

• Four international petrochemical and petroleum companies that have collectively transferred the equivalent of hundreds of millions of dollars’ worth of exports from the National Iranian Oil Company (NIOC), an entity instrumental in Iran’s petroleum and petrochemical industries, which helps to finance Iran’s Islamic Revolutionary Guard Corps-Qods Force (IRGC-QF) and its terrorist proxies. • Triliance Petrochemical Co. Ltd. (Triliance), a Hong Kong-based broker with branches in Iran, , , and Germany. • Hong Kong-based Sage Energy HK Limited • Shanghai-based Peakview Industry Co. Limited (Peakview) • Dubai-based Beneathco DMCC Trade Agreement Issues: Domestic Preferences Mulitple U.S. Domestic Preference Regimes

• Buy American Act (BAA) • Trade Agreements Act (TAA) • And More! Agency-Unique Requirements • Berry Amendment/ Specialty Metals Applications (DoD) • Balance of Payments Program (DoD) • Buy America Act (DoT) • Kissell Amendment (DHS) • Others… Key Questions for Analysis of Domestic Preference Issues

• Which federal agency/regulation set are you dealing with? • “Just” the FAR/ DoD (DFARS) / DHS / DoT / etc. • What is the dollar value of the procurement? • What is being delivered under the contract? • Goods? Services? Construction? • COTS? • Where will performance/delivery occur? • Inside or outside the U.S.?

TAKEAWAY: Considering these questions up front is critical – the requirements can vary dramatically depending on the answers Buy American Act – FAR 25.2 and 25.3

• Implements 41 U.S.C. chapter 83, Buy American • Applies a favorable price evaluation preference to offers of “domestic end products” • Restriction, not a strict prohibition • Applies to contracts for • Supplies exceeding the micro-purchase threshold; • Supply portion of a services contract exceeding the micro-purchase threshold; • Contracts for the construction, alteration, or repair of any public building or public work in the United States. BAA Exceptions – FAR 25.103/25.202

• Domestic Non-availability • Class determinations (See FAR 25.104 list) • Individual determinations • Public Interest • Unreasonable Cost • Commissary Resale (Goods only) • Commercial Item Information Technology • Determination and Finding (Construction only) • (OR when a trade agreement or superseding regulation applies!) Inside or Outside the U.S.?

Supplies For Use Construction Services Performed FAR Subpart Inside U.S. Outside U.S. Inside U.S. Outside U.S. Inside U.S. Outside U.S. 25.1 Buy American- Supplies X - - - - - 25.2 Buy American- Construction Materials - - X - - - Contracts Performed Outside the United 25.3 - X - X - X States 25.4 Trade Agreements X X X X X X Evaluating Foreign Offers- Supply 25.5 X X - - - - Contracts American Recovery and Reinvestment 25.6 Act-Buy American statute-Construction X Materials 25.7 Prohibited Sources X X X X X X Other International Agreements and 25.8 X X - X - X Coordination 25.9 Customs and Duties X - - - - - Additional Foreign Acquisition 25.10 X X X X X X Regulations Solicitation Provisions and Contract 25.11 X X X X X X Clauses “Domestic End Product” Defined

• Two-part test : (1) An unmanufactured end product mined or produced in the United States; OR

(2) An end product manufactured in the United States, if– (i) The cost of its components mined, produced, or manufactured in the United States exceeds 50 percent of the cost of all its components; or

(ii) The end product is a COTS item Trade Agreements Act – FAR 25.4

• Implements 19 U.S.C.2501, et seq. • Authorizes the President to waive the BAA restrictions for products and services from “designated countries” with trade agreement with the U.S. • Offers of eligible products receive equal consideration with domestic offers. • Requires the purchase of U.S.-made or designated country end products or services only, unless no compliant offers received or are insufficient to fulfill the requirements • Different from the BAA approach! “Designated Countries” – FAR 25.003

• Government Procurement Agreement (WTO GPA) country • Armenia, Aruba, Australia, ,, , Bulgaria, Canada, , , , , , , France, Germany, , Hong Kong, , Iceland, , , , Japan, Korea (Republic of), , Liechtenstein, , , , Moldova, Montenegro, , , Norway, Poland, , Romania, , Slovak Republic, , , , Switzerland, Taiwan (known in the World Trade Organization as “the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu (Chinese Taipei)”), Ukraine, or United Kingdom; • Agreement (FTA) country • Australia, , Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Korea (Republic of), Mexico, Morocco, Nicaragua, Oman, Panama, , or Singapore; “Designated Countries” – FAR 25.003 (Cont’d)

• A least developed country • Afghanistan, , , Benin, Bhutan, Burkina Faso, Burundi, Cambodia, Central African Republic, Chad, Comoros, Democratic Republic of Congo, Djibouti, Equatorial Guinea, , , Gambia, Guinea, Guinea-Bissau, Haiti, Kiribati, , Lesotho, , Madagascar, Malawi, Mali, Mauritania, , Nepal, Niger, , Samoa, Sao Tome and Principe, Senegal, Sierra Leone, Solomon Islands, Somalia, South Sudan, Tanzania, Timor-Leste, Togo, Tuvalu, Uganda, Vanuatu, Yemen, or ; or • Caribbean Basin country • Antigua and Barbuda, Aruba, Bahamas, Barbados, , Bonaire, British Virgin Islands, Curacao, Dominica, Grenada, , Haiti, , Montserrat, Saba, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Sint Eustatius, Sint Maarten, or Trinidad and Tobago Trade Agreements Act – FAR 25.4

• Generally applies to contracts for • Exceeding the relevant trade agreement threshold; • Supply portion of a services contract exceeding the micro-purchase threshold; • Contracts for the construction, alteration, or repair of any public building or public work in the United States. Trade Agreements Act Procurement Thresholds – FAR 25.402

Supply Contract Service Contract Construction Contract Trade Agreement (equal to or (equal to or (equal to or exceeding) exceeding) exceeding) WTO GPA $182,000 $182,000 $7,008,000 FTAs Australia FTA 83,099 83,099 7,008,000 Bahrain FTA 182,000 182,000 10,802,884 CAFTA-DR (Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua) 83,099 83,099 7,008,000 Chile FTA 83,099 83,099 7,008,000 Colombia FTA 83,099 83,099 7,008,000 Korea FTA 100,000 100,000 7,008,000 Morocco FTA 182,000 182,000 7,008,000 NAFTA -Canada 25,000 83,099 10,802,884 -Mexico 83,099 83,099 10,802,884 Oman FTA 182,000 182,000 10,802,884 Panama FTA 182,000 182,000 7,008,000 Peru FTA 182,000 182,000 7,008,000 Singapore FTA 83,099 83,099 7,008,000 Israeli Trade Act 50,000 - - TAA Exceptions – FAR 25.401

• Small business set-asides • Acquisitions of arms, ammunition, or war materials, or purchases indispensable for national security or national defense purposes • Acquisitions of end products for resale • Acquisitions from certain mandatory government sources per FAR Part 8 • Federal Prison Industries, Inc. (FAR 8.6) • Acquisition from Nonprofit Agencies Employing People Who Are Blind or Severely Disabled; and (FAR 8.7) • Sole source under FAR 6.3/13.501(a) • specifically carved out of trade agreements: TAA Exceptions – FAR 25.401

Bahrain FTA, CAFTA– DR, Chile FTA, Australia (Federal Service Codes from the Federal Procurement Data System Product/Service Code WTO GPA Colombia FTA, NAFTA, and Manual are indicated in parentheses for some services.) and KOREA Oman FTA, Panama Singapore Morocco FTA FTA, and Peru FTA FTA FTA (1) All services purchased in support of military services overseas. X X X X (i) Automatic data processing (ADP) telecommunications and transmission services (D304), (2) X X except enhanced (i.e., value-added) telecommunications services. (ii) ADP teleprocessing and timesharing services (D305), telecommunications network management services (D316), automated news services, data services or other information X X services (D317), and other ADP and telecommunications services (D399). (iii) Basic telecommunications network services ( i.e., voice telephone services, packet-switched data transmission services, circuit-switched data transmission services, telex services, facsimile * * X X services, and private leased circuit services, but not information services, as defined in 47 U.S.C.153(24)). (3) Dredging. X X X X (i) Operation and management contracts of certain Government or privately owned facilities used (4) X X for Government purposes, including Federally Funded Research and Development Centers. (ii) Operation of all Department of Defense, Department of Energy, or the National Aeronautics and Space Administration facilities; and all Government-owned research and development ** X ** X facilities or Government-owned environmental laboratories. (5) Research and development. X X X X (6) Transportation services (including launching services, but not including travel agent services). X X X X (7) Utility services. X X X X Maintenance, repair, modification, rebuilding and installation of equipment related to ships (8) X X (J019). (9) Nonnuclear ship repair (J998). X X U.S.-made vs. Designated Country End Product Definitions

U.S-made End Product: Designated Country End • An article that is: Product: • mined, produced, or • An article that is: manufactured in the United • wholly the growth, product, or States; OR manufacture of a [designated] • “substantially transformed” in country; OR the United States. • “substantially transformed” in a WTO GPA country

back “Substantial Transformation”

• Place where an item is is transformed into a new and different article of commerce with a character, or use distinct from that of the article or articles from which it was transformed

• So who decides where substantial transformation occurs? • Historically CBP • But…

“The whole is greater than the sum of its parts” BAA vs. TAA Summary

BAA TAA • “Component test” for • “Substantial transformation domestic end items test” • Modified test for COTS • Different standard for U.S.- products made items • Price evaluation preference • Purchasing restriction • Applies over the micro- • Applies over the individual purchase threshold trade agreement threshold And More! (Agency-Unique Requirements) • Berry Amendment (DoD) • Balance of Payments Program (DoD) • Extends BAA/TAA requirements to acquisitions of goods and construction performed outside the U.S. and foreign military sales • Separate definition of “Qualifying Country” (not the same as “Designated Country” under TAA • Buy America Act (DoT) • Family of domestic preferences for S&L transportation projects funded with federal contract/grant dollars (FAA, AMTRAK, FHWA, FTA) • Kissell Amendment (DHS) Always check your • Like a Berry Amendment for DHS Agency-specific rules! Department of Defense

• Berry Amendment Specialty Metals Restriction – DFARS 225.7003 (10 U.S.C. 2533b) • Prohibits DoD from purchasing certain items containing “specialty metals,” either as end products or components, unless the specialty metals are melted or produced in the United States • Also applies to the purchase of specialty metals themselves • Applies to • Aircraft • Tank or automotive items • Missile or space systems • Weapon systems • Ships • Ammunition Specialty Metals Defined

• Steel— • With a maximum alloy content exceeding one or more of the following limits: manganese, 1.65 percent; silicon, 0.60 percent; or copper, 0.60 percent; or • Containing more than 0.25 percent of any of the following elements: aluminum, chromium, cobalt, molybdenum, nickel, niobium (columbium), titanium, tungsten, or vanadium; • Metal alloys consisting of— • Nickel or iron-nickel alloys that contain a total of alloying metals other than nickel and iron in excess of 10 percent; or • Cobalt alloys that contain a total of alloying metals other than cobalt and iron in excess of 10 percent; • Titanium and titanium alloys; or • Zirconium and zirconium alloys. Department of Defense

• Berry Amendment – DFARS 225.7002-1 • Prohibits DoD from purchasing certain items, either as end products or components, unless the items have been grown, reprocessed, reused, or produced in the United States • Food • Certain clothing and fabrics • Certain hand or measuring tools • Generally applies to purchases above the simplified acquisition threshold, but lots of exceptions • Unlike the BAA/TAA, no “component test” or “substantial transformation” • Items must generally be wholly from the U.S. (certain de minimis exceptions) Domestic Preferences and the Christian Doctrine

• Overview • A mandatory contract clause that expresses a significant or deeply ingrained strand of public procurement policy is considered to be included in a contract by operation of law • Christian Clause Examples • Termination for Convenience • Disputes • Service Contract Act • The BAA is a Christian clause! • S.J. Amoroso Const. Co. v. United States, 12 F.3d 1072 (Fed. Cir. 1993) • What does this mean for the TAA? The TAA and Acetris

• Acetris, a drug manufacturer, imported the “Active Pharmaceutical Ingredient” (“API”) from and combined the ingredients into pill form in the U.S. • Long history of CBP decisions stating that for drugs, the country of substantial transformation is the location from where the API is sourced • India is not a TAA Designated Country • So….Acetris’ drug is not TAA compliant….right? The TAA and Acetris

• VA agrees – not TAA compliant – but says to go ask CBP and it will follow their decision • Acetris argues to CBP that substantial transformation test is unnecessary because the pill is “manufactured” in New and is therefore a U.S.-made end product • CBP disagrees, says that the pill is not “wholly manufactured” in the U.S. and therefore does not qualify under the definition • Acetris files a pre-award bid protest at the COFC on this issue The TAA and Acetris

• The Court agrees with Acetris, as does the Federal Circuit • The “end item” at issue is the pill, not the API • The FAR implementation is consistent with the TAA statutory language • The FAR definitions differ between U.S.-made and designated country products The TAA and Acetris The TAA and Acetris

• But wait, there’s more…! • The Federal Circuit also found that the responsibility for making determinations lies with the Contracting Officer • Agencies cannot simply delegate the analysis to CBP

• So what does this mean going forward? • Commercial item determinations (DoD vs. civilian agency approaches)…? • DCAA audit findings… Practical Considerations

• Both BAA and TAA apply to end items only • i.e., items actually delivered to the USG • Not a mandatory flowdown to subcontractors • May be necessary, but not always • Prime’s obligation to manage compliance at the USG deliverable level • BAA domestic end product definition only requires analysis of first-level components (not subcomponents of component) but… • Be thoughtful about the impact of changing the end-item level (e.g., spares!) Practical Considerations

• TALK to your Contracting Officer • Are the right clauses included? Which one(s) should apply? • Are there agency-specific requirements? • If under the TAA, what do they need to support their country of origin determination? United States-Mexico-Canada Agreement (USMCA) NAFTA and USCMA Negotiations

• North American (NAFTA) entered into force on Jan. 1, 1994. • Renegotiation talks officially began on August 16, 2017, and concluded on September 30, 2018. • On November 30, 2018, the USMCA was signed by U.S. President Trump, then-President Enrique Peña Nieto of Mexico, and Canadian Prime Minister Justin Trudeau. • On December 13, 2019, USMCA implementing legislation introduced in Congress. • On January 29, 2020, President Trump signed legislation into law. USMCA Signed on Nov. 30, 2018 Key USCMA Changes

• New motor vehicle rules of origin and procedures including: 75% North American content, 70% steel and aluminum requirement, steel must be melted and poured in North America. • NAFTA: 62.5% rule of origin, no steel and aluminum requirement.

• New digital trade provisions • Prohibiting customs duties on electronically transmitted products. • Prohibiting requirements for source code or algorithm disclosure or transfer as a condition of market access. • Require parties to have online consumer production and anti-spam laws, and a legal framework on privacy Key USCMA Changes

• Government Procurement (Mexico and U.S only) • Promote transparency in the tendering process through online tender information and descriptions • Provide online application and documentation processes without cost to the applicant • Allow Mexico to set aside annual procurement contracts of $2.328 billion, annually adjusted for inflation, to Mexican suppliers

• Intellectual Property Rights • Copyright term extended to 70 years • Requires criminal procedures and penalties for trade secret theft, including cybertheft • Extends IPR enforcement, including for copyrights, to the digital environment USMCA Implementation

• USMCA will replace NAFTA once it enters into force. Before USMCA may enter into force, all three countries must ratify the agreement. • Mexico was the first party to ratify the agreement in June 2019 and the first party to approve the amended USMCA on December 12, 2019. • The United States ratified the agreement when President Trump signed the USMCA implementing legislation into law on January 29, 2020 (P.L. 116-113). • Canada is expected to ratify the agreement in the next few months. Basics U.S. Customs and Border Protection

• U.S. Customs and Border Protection (CBP), now a part of the U.S. Department of Homeland Security (DHS), regulates the importation of goods into the United States. CBP was previously called the U.S. Customs Service with the U.S. Department of Treasury • CBP is one of the oldest government agencies, dating back to the fifth act of Congress, in 1789. • CBP Headquarters is located in Washington, D.C. with over 30,000 employees. What are Import Tariffs?

• Tariffs or duties are assessed on of foreign goods, paid by the importer to the U.S. government, and collected by U.S. Customs and Border Protection. • Each imported article has a specific rate, which is determined by several factors, including country of origin and how and what it is made of. • Each article is subject to duty or duty-free entry in accordance with its classification in the Harmonized Schedule of the United States (HTSUS). • The customs duty rate is a percentage that is typically determined on an ad valorem basis or percentage of the total purchased value of the article(s) paid at a foreign country. Tariff Classification

• Every good imported into the United States must be assigned a 10-digit tariff classification under the Harmonized Tariff Schedule of the United States (HTSUS). • In classifying products, companies should consult all relevant legal authorities including the following: • General Rules of Interpretation • The text of the Harmonized Tariff Schedule of the United States (HTSUS) • WCO Explanatory Notes • Customs Ruling Online Search System • CBP “Informed Compliance Publications” Section 301 of the Trade Act of 1974 Section 301 Basics

• U.S. Trade Representative enforcement tool to retaliate against foreign import restraints. • Three categories of acts, policies, or practices of a foreign country that are potentially actionable: 1. Trade agreement violations; 2. Acts, policies or practices that are unjustifiable and that burden or restrict U.S. Commerce; 3. Acts, policies or practices that are unreasonable or discriminatory and that burden or restrict U.S. Commerce Section 301- China Investigation

• The USTR investigation concluded that four broad policies or practices justified U.S. action:

1. China's forced technology transfer requirements; 2. Cyber-enabled theft of U.S. IP and trade secrets; 3. Discriminatory and nonmarket licensing practices; and 4. State-funded strategic acquisition of U.S. assets

• The Administration determined that increased tariffs on U.S. imports from China were an appropriate action to encourage China to alter its policies and practices. Section 301- China Import Tariffs

Tariff List Tariff Rate Effective Date Import Value HTS Lines Subject (approx.) to Duties

List 1 25% July 6, 2018 $34 billion 818

List 2 25% Aug. 23, 2018 $16 billion 279

List 3 25% Sept. 24, 2018 $200 billion 5,733

15% $300 billion List 4A *7.5% Sept. 1, 2019 3,219 (for List 4A & 4b) eff. Feb. 14, 2020* $300 billion List 4B *Suspended* Dec. 15, 2019 555 (for List 4A & 4b) Exclusion Process

• USTR Exclusion Criteria (exclusions.ustr.gov): 1. Whether the product is available only from China; 2. Whether the tariff would severely harm the requesting firm or other US interests; and 3. Whether the product is strategically important to the "Made in China 2025" program or other Chinese plans.

• USTR granted exclusions to approximately 35% of total requests (Lists 1 & 2) and denied remaining 65%. Section 301- EU Investigation

• World Trade Organization (WTO) dispute concerning EU subsidies to Airbus to build large civil aircraft. • WTO Dispute Settlement Body found EU subsidies breached WTO obligations. • WTO authorized U.S. to implement countermeasures as a result of EU’s WTO-inconsistent subsidies (approx. $7.5 billion annually). Section 301- EU Import Tariffs

EU Targeted Imports Avg. Tariff in 2018 (%) Add. Tariff as of Oct. 18, 2019 (%) Aircraft 0 10 Whiskies, Liqueurs 0 25 Wine 0.7 25 Cheese, Dairy 10.8 25 Olives, Olive Products 1.5 25 Machinery, Tools 0.5 25 Pork, Pork Products 0.1 25 Biscuits, Wafers 0 25 Fruit, Fruit Products 9.0 25 Other 1.9 25 Section 301- France Investigation

• 2019 French Digital Services (DST): 3% levy on revenues generated from two categories of “taxable services”: (1) “digital interface” services and (2) “targeted advertising” services.

• USTR Investigation found: 1. DST discriminates against U.S. digital companies 2. Retroactive application (Jan 1, 2019) is burdensome for U.S. companies 3. DST applies to revenue and not income 4. DST unconnected to physical presence in France Section 301- Proposed French Tariffs

• USTR has proposed up to 100% tariffs on French goods. Section 232 of the Trade Expansion Act of 1962 Section 232 Basics

• Allows the President to adjust imports if the Department of Commerce finds certain products are imported in such quantities or under such circumstances as to threaten to impair U.S. national security. • Bureau of Industry and Security (BIS) conducts investigation. If BIS finds imports impair national security, then BIS sends findings and recommendations to the President. • The President decides whether to concur with findings and whether to implement actions. Section 232- Steel Articles (25% tariff)

• Steel articles classified under HTSUS subheadings 7206.10 through 7216.50, 7216.99 through 7301.10, 7302.10, 7302.40 through 7302.90, and 7304.10 through 7306.90, including any subsequent revisions to these HTSUS classifications: • Flat-rolled products (headings 7208, 7209, 7210, 7211, 7212, 7225 or 7226); • Bars and rods (headings 7213, 7214, 7215, 7227, or 7228); • Tubes, pipes and hollow profiles (heading 7304 or 7306); • Ingots, other primary forms and semi-finished products (headings 7206, 7207 or 7224); and • Products of stainless steel (headings 7218, 7219, 7220, 7221, 7222 or 7223) Section 232- Steel Derivatives (Feb 8, 2020)

• Nails, tacks (other than thumb tacks), drawing pins, corrugated nails, staples (other than those of heading 8305) and similar articles, of iron or steel, whether or not with heads of other material (excluding such articles with heads of copper), suitable for use in powder-actuated hand tools, threaded (described in subheading 7317.00.30 • Nails, tacks (other than thumb tacks), drawing pins, corrugated nails, staples (other than those of heading 8305) and similar articles, of iron or steel, whether or not with heads of other material (excluding such articles with heads of copper), of one piece construction, whether or not made of round wire; the foregoing described in statistical reporting numbers 7317.00.5503, 7317.00.5505, 7317.00.5507, 7317.00.5560, 7317.00.5580 or 7317.00.6560 only and not in other statistical reporting numbers of subheadings 7317.00.55 and 7317.00.65; • Bumper stampings of steel, the foregoing comprising parts and accessories of the motor vehicles of headings 8701 to 8705 (described in subheading 8708.10.30) Section 232- Aluminum Articles (10% tariff)

• Unwrought aluminum (heading 7601); • Aluminum bars, rods, and profiles (heading 7604); • Aluminum wire (heading 7605); • Aluminum plate, sheet, strip, and foil (flat rolled products) (headings 7606 and 7607); • Aluminum tubes and pipes and tube and pipe fitting (headings 7608 and 7609); and • Aluminum castings and forgings (HTSUS 7616.99.5160 and 7616.99.5170), including any subsequent revisions to these HTSUS classifications Section 232- Aluminum Derivatives (Feb 8, 2020)

• Stranded wire, cables, plaited bands and the like, including slings and similar articles, of aluminum and with steel core, not electrically insulated; the foregoing fitted with fittings or made up into articles (described in subheading 7614.10.50); • Stranded wire, cables, plaited bands and the like, including slings and similar articles, of aluminum and not with steel core, not electrically insulated; the foregoing comprising electrical conductors, not fitted with fittings or made up into articles (described in subheading 7614.90.20); • Bumper stampings of aluminum, the foregoing comprising parts and accessories of the motor vehicles of headings 8701 to 8705 (described in subheading 8708.10.30 Countries Affected by Section 232

• Effective since March 23, 2018. • Australia is excluded from Section 232 actions on both steel and aluminum. No quota in place. • Argentina is excluded from the additional duties on aluminum. • Argentina, and South Korea are excluded from the additional duties on steel but are instead subject to quota allotments based on negotiated agreements. • All other countries included for steel and aluminum. Exclusion Process

• Only directly affected individuals or organizations located in the United States, who are using steel and or aluminum in business activities in the United States, are eligible parties. • A product exclusion will be granted if the article is not produced in the United States: (1) in sufficient and reasonably available amount, (2) satisfactory quality, or (3) there is a specific national security consideration warranting an exclusion. • http://www.trade.gov/232/steelalum Section 201 of the Trade Act of 1974 Section 201 Basics

• Allows the President to impose temporary duties and other trade measures if the U.S. Commission (ITC) determines a surge in imports is a substantial cause or threat of serious injury to a U.S. industry. • Section 201 cases investigate import surges of fairly traded goods. • The President may opt to implement the ITC’s recommendations, modify them, or do nothing. Section 201- Solar Products

• Solar Cells: An annual tariff-rate quota (TRQ) of 2.5 gigawatts on solar cells for 4 years. All imports under that volume level will enter at the normal U.S. (duty-free) tariff rate. Imports above that level will be assessed a 30% tariff, descending by 5% each year (i.e., 30% in 2018, 25% in 2019).

• Solar Modules: 4-year 30% tariff on solar modules, also descending by 5% each year.

• Effective since February 7, 2018 Section 201- Large Residential Washers

• Large Residential Washers: Annual TRQ of 1.2 million units on imports of the targeted washers. All imports under that level will enter under the normal U.S. tariff rate (ranging from 1% to 1.4%), plus an additional duty rate of 20% in the first year, decreasing by 2% each subsequent year. • Washers above the quota limit to be assessed at the normal U.S. tariff rate, plus a 50% duty rate in the first year, decreasing by 5% each subsequent year. • Large Residential Washer Parts: Annual TRQ on washer parts of 50,000 units in the first year, ascending by 20,000 units each year. All imports under that volume level will enter at the normal (2.4%) tariff rate. All imports over the level will be assessed a 50% tariff, descending by 5% each year. • Effective since February 7, 2018 Countries Affected by Section 201

• Solar Products: Applies to all countries except certain developing country World Trade Organization members (e.g. Brazil, India, and ). Applies to Mexico and Canada.

• Washers and Parts: Applies to all countries except certain developing country World Trade Organization members (e.g. Brazil, India, and Turkey). Canada is exempt. Tariff Mitigation Strategies Strategies

• Review tariff classification and customs valuation • Incorrect tariff classification is most common error • Examine if customs valuation methodology is correct • Apply for Exclusion Requests • Tariff engineering- modifying the design or condition of an imported product to reduce duty expenses associated with that product • Country of origin planning- substantial transformation in a third country

Thank you!

Erin Felix Government Contracts Attorney Washington, D.C. Email: [email protected] Phone: 202-626-8375

Luis F. Arandia, Jr. International Trade and Customs Attorney Dallas, TX Email: [email protected] Phone: 214-661-5508 Disclaimer

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