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

This edition provides essential insights for sectors including Automotive, Electric Mobility, Fashion & Retail, and National Security, as well as for in-house counsel, compliance professionals, and customs brokers.

In this September 2024 edition, we cover:

1. USTR finalizing most (but not all) proposed Section 301 tariff increases and exclusions.
2. Canada’s new surtaxes and the EU’s CVDs on Chinese EV imports.
3. An uptick in customs-related FCA cases — watch out for those whistleblowers!
4. The House Select Committee’s warnings to US automotive parts suppliers on illegal transshipment.
5. An anticipated increase in forced labor enforcement as the DHS partners with Kharon to combat forced labor and the DOL updates List of Goods Produced by Child Labor or Forced Labor.
6. The potential impact of the 2024 presidential election on US-China trade policies (part 1).
7. Recent export controls updates, including a new license exemption for defense trade between Australia, the United Kingdom, and the United States.

1. USTR (Finally) Finalizes Section 301 Tariff Modifications

Just ahead of our publication, the US Trade Representative (USTR) issued a notice finalizing certain Section 301 tariff increases and exclusions on Chinese goods, with several notable changes from the proposed actions earlier this year. While we are still analyzing the notice and will issue a full-length alert soon, the major changes include:

1. Changes to the implementation date for tariff increases initially proposed by the USTR in May 2024. The tariff increases for products such as battery parts, electric vehicles (EVs), solar cells, and critical minerals will begin September 27. The remaining tariff increases will take effect on either January 1, 2025, (e.g., semiconductors) or January 1, 2026 (lithium-ion non-EV batteries).
2. The addition of five new subheadings to the exclusion process for machinery used in domestic manufacturing. Companies relying on this equipment will need to apply for these non-solar machinery exclusions and will have an opportunity to comment. The opening date for this new, limited process to request tariff exclusions will be announced in a separate notice at a later date.
3. For solar manufacturers, 14 exclusions were maintained for solar wafer and cell manufacturing equipment, but five exclusions for solar module equipment were removed in the final notice. The temporary exclusions for solar manufacturing equipment will be retroactive to January 1 (adding five months to the proposed retroactivity period) and effective until May 31, 2025.
4. The expansion of existing tariffs to include certain new products. Notably, the USTR has proposed a 50% tariff on polysilicon and wafers, critical inputs for the solar and semiconductor industries, and a 25% tariff on certain tungsten products. A separate public comment process will be opened for these proposed expansions.

And the Fox Says…: While this long-awaited notice provides some much-needed clarity around the Section 301 modifications, some changes remain pending, such as the timeline and process for requesting exclusions for domestic manufacturing equipment. In the meantime, companies should carefully review the new proposals and consider commenting, especially if you are affected by the proposed tariff increases on polysilicon, wafers, or tungsten products or utilize machinery for domestic manufacturing.

Contributors: James Kim, Leah Scarpelli, David R. Hamill

2. Canada and the EU Take Aim at Chinese EV Imports

In late August, Canada announced a sweeping 100% surtax on Chinese EV imports, effective October 1. This move targets not only passenger EVs but also certain electric and hybrid vehicles, trucks, buses, and delivery vans. The full list of affected vehicles and their tariff codes can be found here. Additionally, starting October 15, a 25% surtax will be applied to select Chinese steel and aluminum products. These measures come amid broader scrutiny of Chinese imports by Western economies and follow the European Union’s (EU) recent steps toward countervailing duties (CVDs) on Chinese battery electric vehicles (BEVs).

The Canadian government’s actions include a consultation process on whether to extend these measures to other sectors, such as batteries, semiconductors, solar products, and critical minerals. These moves underscore Canada’s effort to align with allies on trade actions targeting China, particularly in sectors related to EV production and critical infrastructure.

On the EU front, the European Commission’s draft findings of its anti-subsidy investigation, published on August 20, highlight plans to impose CVDs on BEVs imported from China, with final determinations expected by October 30. These measures will likely last for five years and may be extended depending on future reviews.

And the Fox Says…: These surtaxes and CVDs indicate a clear trend: governments are increasingly focused on the risks associated with Chinese imports in key industries. For businesses, understanding the evolving landscape, including the impact of trade agreements like the United States-Mexico-Canada Agreement (USMCA) and new burdens to trace and show accountability of supply chains, has become the new regulatory normal. As these policies evolve, companies should take proactive measures to mitigate risk and ensure compliance.

Contributors: Birgit Matthiesen, James Kim, Antonio J. Rivera

3. FCA Cases Spotlight Customs Violations Amid Pending Ninth Circuit Ruling

Recent developments in False Claims Act (FCA) litigation highlight the growing intersection between customs violations and FCA enforcement. In one case, Alexis, a womenswear company, agreed to a $7.7 million settlement following allegations that it underpaid customs duties by failing to report assists to the value of imported apparel.

In another case, Delta Uniforms and its owner were ordered to pay more than $1.3 million after being found liable for evading customs duties. The court found that the company used a “double-invoicing scheme” to undervalue goods. The judgment included treble damages and a substantial civil penalty due to the long-running nature of the fraud and the owner’s knowledge of the illegality.

These cases are occurring against the backdrop of Island Industries, Inc. v. Sigma Corp., currently pending before the Ninth Circuit, which is considering the threshold question of whether FCA violations can be predicated on customs law violations or whether recovery of customs duties is limited to remedies under 19 U.S.C. § 1592.

And the Fox Says…: Most customs FCA cases are known as “reverse false claims act” cases, which involve false statements or omissions to the government resulting in an underpayment of duties — often stemming from undervaluation or double invoicing, misclassification, incorrect origin declarations, or evasion of anti-dumping or CVDs. Notably, an importer can be liable simply for acting knowingly, with no actual intent to defraud. Due to the nature of the FCA’s statutory scheme of awarding duties owed plus treble damages and a penalty per violation, even small discrepancies can lead to significant financial consequences, with FCA lawsuits taking years to resolve. In many cases, the whistleblower, who receives a portion of the government recovery, is a company employee or a competitor. Textiles and apparel importers have been the subject of many recent public settlements based on FCA claims.

Contributors: James Kim, Angela M. Santos

4. The House Select Committee’s Warnings to US Automotive Parts Suppliers

The House Select Committee on the Strategic Competition Between the United States and the Chinese Communist Party recently sent letters to several US automotive parts suppliers, warning the companies that they may be sourcing products that have been illegally transshipped to evade Section 301 tariffs. The Select Committee’s letter alleges that supplier Qingdao Sunsong’s subsidiary may be transshipping goods made in China through Thailand. The letters also request that the firms provide information on their purchasing history with Qingdao Sunsong and their due diligence efforts to confirm the country of origin declared at entry.

And the Fox Says…: The House Select Committee’s questionnaires issued to automotive parts suppliers are a reminder that importers must map their supply chains and conduct due diligence to confirm the country of origin of their imported goods. The country of origin of your goods can significantly impact duty rates, particularly when goods are processed or have inputs from China, due to the Section 301 tariffs.

Contributors: Lucas A. Rock, Angela M. Santos

5. Indications That Forced Labor Enforcement Will Continue to Intensify

Kharon and the DHS UFLPA Entity List Announce Deal

Technology risk assessment platform Kharon and the US Department of Homeland Security’s (DHS) Uyghur Forced Labor Prevention Act (UFLPA) Entity List office recently announced a partnership this summer. This announcement follows the US Customs and Border Protection’s (CBP) partnership with Kharon in 2023. DHS analysts will now have access to the Kharon platform to support their research of entities with potential connections to forced labor and the Xinjiang Uyghur Autonomous Region (XUAR).

New Products Added to the DOL’s Forced Labor List

The US Department of Labor (DOL) recently published its updated List of Goods Produced by Child or Forced Labor. The 2024 edition adds 72 goods to the list, including 37 products that have not been previously included. The DOL’s List covers a variety of sectors including agriculture, manufacturing, mining, cotton, garments, coffee, and many more. Additions to the List in 2024 include aluminum from China, garments from Mauritius, and furniture and lumber from Belarus.

And the Fox Says…: With additional funding, CBP and the Forced Labor Enforcement Task Force now have significant resources to enforce the UFLPA. The government’s partnership with technology risk assessment platforms such as Kharon, Sayari, and others will facilitate targeting efforts and better identify potential connections to XUAR… which likely means more detentions!

CBP will likely consult the DOL List for future forced labor enforcement initiatives. We expect that sectors implicated as “at risk” of forced labor or child labor risks outside of China may be the subject of future withhold release orders, which will ban those covered goods from importation into the United States. If importers are sourcing products or components from sectors and regions identified in the List, they should implement robust due diligence processes to ensure forced labor is not in their supply chains to prepare for future government actions. 

Contributors: Lucas A. Rock, Angela M. Santos

6. Decoding the 2024 Presidential Election: Part 1 - The Future of US-China Tariffs and Trade Policies

As the presidential election season is in full swing, the future of the US international trade policy will be reshaped by the election of either Former President Donald Trump or Vice President Kamala Harris. At this point, Trump’s trade policy positions are more defined, having secured the GOP nomination earlier this year. Meanwhile, Harris is still in the process of unveiling her policy priorities following her recent nomination. However, what’s past is prologue as it relates to tariffs and China.

Trump’s “America First” approach, characterized by unilateral actions, trade deficit reduction, and US industry protection, would likely persist if he is reelected. Indeed, Trump has proposed a 10%-20% tariff on all imports and a 60% tariff on Chinese goods, along with a plan to revoke China’s Most Favored Nation trade status and phase out all essential Chinese imports over four years, with safeguards to prevent China from bypassing these restrictions.

On the other hand, given recent actions by the Biden Administration, Harris’s trade policy would likely retain the existing tariffs on Chinese goods, perhaps with some adjustments. During the summer, the Biden Administration proposed increases on “strategic sectors” and an exclusion process for certain machinery in Harmonized Tariff Schedule Chapters 84 or 85 and solar equipment. A Harris administration would likely adopt a more measured approach to China than Trump’s aggressive plan. Harris has often emphasized strengthening American manufacturing and supply chains, promoting domestic production of critical goods, and diversifying supply chains to reduce US dependency on any single country.

And the Fox Says…: Despite the distinct differences between the two presidential candidates regarding tariffs and China, it’s anticipated that the use of tariffs will be a key strategy under either administration. Consequently, it’s crucial for manufacturers and importers to persist in mitigating potential tariffs and seeking opportunities for duty savings. The AFS team has extensive experience in advising companies on all aspects of global supply chains and duty mitigation. Stay tuned as we monitor future election developments that may impact the trade world.

Contributors: Mario A. Torrico, Angela M. Santos

7. US Government Aligns Export Controls with Allied Countries

A new exemption under the International Traffic in Arms Regulations (ITAR) strengthens the partnership of Australia, the United Kingdom (UK), and the United States (AUKUS) by lifting licensing requirements for defense trade. Meanwhile, the Bureau of Industry and Security (BIS) introduced restrictions on a slew of advanced technologies to align with the Implemented Export Controls (IEC) of international partners.

AUKUS Exemption Under the ITAR

We previously discussed the proposed AUKUS exemption by the Directorate of Defense Trade Controls (DDTC), which went into effect on September 1. The result: exports, reexports, retransfers, and temporary imports of defense articles and technical data; the performance of defense services; and brokering activities between and among the three countries qualify for a new ITAR exemption under 22 CFR §126.7. They no longer require DDTC authorization — mostly — if the transferor and recipient are both approved ITAR registrants (for US parties) or authorized users (for Australian/UK parties). The authorized user lists are available in DDTC’s online licensing system.

Not exempted are cluster munitions, F-22 aircraft, and anything else on the Excluded Technology List. However, a new expedited licensing scheme for Australia, the UK, and Canada provides for adjudication within 45 days for those that do not qualify for the AUKUS exemption.

Expanded Controls on Advanced Technologies

While DDTC eased licensing requirements, BIS expanded export controls in an interim final rule released September 6. Some of the newly controlled items include additive manufacturing equipment (under new Export Classification Control Numbers [ECCN] 2B910, 2D910 and 2E910), coating system technology for gas turbine engines (ECCN 2E903), quantum processors (ECCN 3A901), cryogenic cooling systems (ECCN 3A904), scanning electron microscopes for imaging chips (ECCN 3B903), cryogenic wafer probing equipment (ECCN 3B904), quantum computers (ECCN 4A906), and gate all-around chipmaking technology (3E905).

BIS also introduced License Exception IEC for countries with similar export controls as the United States. The list of eligible destinations can be found here.

And the Fox Says…: Efforts to harmonize US export controls with allied countries present a double-edged sword — they ease the regulatory burden of doing business in those destinations, while growing the list of controlled items elsewhere. Companies in quantum computing, semiconductors, additive manufacturing, and coating technologies for aerospace need to carefully review the new IEC controls and update their compliance systems. Those looking to utilize the AUKUS exemption should consult counsel to ensure they meet all eligibility criteria.

Contributors: Derek Ha, Sylvia G. Costelloe, Kay C. Georgi