/>iThis edition provides essential insights for sectors including Automotive, Energy and Cleantech, Pharmaceuticals, Technology Investments, and Textiles, as well as for in-house counsel, compliance professionals, and importers.
In this November 2024 edition, we cover:
- Trump’s second term trade policy: tariffs and protectionism.
- Treasury’s final rule on outbound investments in Chinese tech sectors.
- Mexico’s judicial overhaul: implications for trade and investment.
- Forced labor enforcement intensifies: new UFLPA Entity List additions and Canada’s legislative moves.
- ITC’s decision on aluminum extrusions: a temporary reprieve for importers.
- CIT ruling on protest decisions: implications for importers.
1. Tariffs, Tariffs, Tariffs: Trump’s Trade Policy in His Second Term
It is no secret that trade is top of mind for President-elect Donald Trump. Trade policy during his first term was marked by protectionism, unpredictability, and the broad use of special tariffs to gain leverage over foreign adversaries (and allies in some cases).
More recently on the campaign trail, Trump called tariffs the “most beautiful word in the dictionary.” If the past is prologue, we expect Trump’s second term to lean even more aggressively into the protectionist trade policies of his first term. Some of the actions he has proposed taking, possibly in the first 100 days, include:
- Higher tariffs across the board (potentially 10% to 20% on all imports).
- Imposition of 60% tariffs on all Chinese goods, revoking China’s Most Favored Nation status, and banning essential imports from China.
- Tariffs on Mexican imports ranging from 25% to 100% as a means of getting the Mexican government to “close its borders” to illegal immigration and the exportation of drugs to the United States.
- Tariffs on countries seeking an alternative to the US dollar.
- Company- or product-specific tariffs on companies that shift manufacturing out of the United States.
- Reciprocal tariffs placed on imports to match those placed on US exports.
Trump is also likely to have a friendly US Congress to support his policies, with the Republicans taking back control of the US Senate and quite possibly the US House of Representatives. We believe Congress’s top priority will continue to be countering foreign entities of concern, such as China and Russia. Section 301 tariffs are likely here to stay, although Congress may advocate for a tariff exclusion process, particularly for consumer goods to combat inflation. De minimis reform and stricter rules on outbound investment, first proposed during the outgoing Administration, may also find bipartisan support in Congress.
And the Fox Says…: Trade policy will be front and center under President-elect Trump, with a focus on protectionism, isolationism, and using tariffs as a tool to gain concessions from foreign countries. Companies will need to adapt quickly in a fluid trade environment and be proactive in assessing their supply chains and business footprints. Supply chain diversification will be key, as any country could become the next target for tariffs.
2. Treasury Issues Final Rule Restricting Outbound Investments in Sensitive Chinese Sectors
The final rule, issued on October 28, implements the US Department of Treasury’s (Treasury) Outbound Investment Security Program (OIP), which prohibits or requires notification for certain investments by US persons in “countries of concern” (so far just China, including Hong Kong and Macau). Three sectors are targeted: semiconductors and microelectronics, quantum information technology, and artificial intelligence (AI).
The final rule is complex and highly technical. A few (heavily abridged) key definitions to understand this new regulatory regime are:
- Covered transaction: Certain types of investments (acquiring equity interest, providing loan or debt financing, acquiring assets, etc.) that involve a “covered foreign person.”
- Covered foreign person: A person of a “country of concern,” an entity with a significant financial connection with (e.g., derives majority of its revenue from) such a person, or a joint venture partner from a country of concern engaged in a covered activity.
- Covered activity: Certain activities within the three targeted sectors noted above.
The new rule bans “prohibited transactions,” which are covered transactions involving a list of specified high-tech activities. Be on alert if your investment involves advanced chipmaking, developing quantum computers, or creating high-powered AI systems or systems for military, intelligence, or mass surveillance uses. Other “covered transactions” are termed “notifiable transactions,” which require reporting certain transaction information to Treasury (e.g., description of the investment, why/how it is subject to OIP requirements, transaction value, etc.).
These obligations are generally triggered when a US person has knowledge — actual or constructive — that a transaction is covered.
Some investments that otherwise would be prohibited or notifiable are “exempted,” including investments in publicly traded securities or securities issued by investment companies. In rare instances, Treasury may grant exemptions to further the US national interest.
And the Fox Says…: This program creates risks for US investors in Chinese technology, who can face hefty penalties for violations, including violations by their controlled foreign entities or of which they did not have actual knowledge. The rule takes effect January 2, 2025. ArentFox Schiff is among a limited number of firms with attorneys already experienced with the OIP and stands ready to assist parties seeking to navigate this new territory.
3. Overview of Mexico’s Judicial Overhaul and What That Means for Investors and Trade
On October 1, Claudia Sheinbaum took office as Mexico’s first woman president. Sheinbaum has since made good on her promise to continue the legacy of her mentor and predecessor, Andrés Manuel López Obrador, by backing his judicial reform. At a high level, the judicial reform will transform the country’s judiciary from an appointed-based system into a system of electing judges at all federal levels, including the Mexico Supreme Court, by popular vote over the next three years.
The judicial overhaul has been very controversial, drawing criticism for, among other things, its potential to undermine the independence of Mexican courts. Some of the anticipated impacts on international trade and investment are as follows:
- Foreign companies are curbing their investments, with some reports stating that approximately $35 billion in investments has not been implemented as a result of the reforms.
- Foreign investors’ ability to challenge state actions in Mexico may be curtailed. In the past, the electricity sector successfully challenged a 2021 proposed electricity reform favoring the Federal Electricity Commission (CFE). With the new judicial reform, such challenges may be less fruitful in the future.
- Less competition in energy and mining sectors. For example, an October 30 reform put Mexican Petroleum company Pemex and the CFE under government control allowing the CFE to generate 54% of national electricity. Read our alert on Mexico’s new mining laws here.
- The judicial reforms also raise questions on whether Mexico could be found in violation of the United States-Mexico-Canada Agreement (USMCA), as the agreement has different provisions that call for independent courts free from political influence. Additionally, these reforms will likely be a focus of debate and scrutiny by the United States and Canada ahead of the 2026 USMCA review by the three countries.
And the Fox Says…: It is important for the trade and business community to closely monitor the impact of Mexico’s judicial reforms on US-Mexican trade. While the incoming Trump Administration has not been formally formed, we expect the future US Trade Representative (USTR) to take a more aggressive approach in pressing Mexico for clarity on how these reforms might impact the US business community. Indeed, Republican members of Congress have been critical that USTR Katherine Tai has not shown the “urgency” required to address Mexico’s constitutional reforms.
4. Forced Labor Enforcement Updates: Additions to the UFLPA Entity List and Issuance of WRO, Concerns Over Entities in the Pharmaceutical Sector, and Canada Initiates Public Consultations
Additions to the UFLPA Entity List and New WRO
The US Department of Homeland Security (DHS) has added four textile entities to the Uyghur Forced Labor Prevention Act (UFLPA) Entity List, which now includes 78 entities. These recent additions are part of ongoing enforcement initiatives directed at the textile and apparel industry following DHS’s Updated Textile Enforcement Strategy.
US Customs and Border Protection (CBP) issued a Withhold Release Order (WRO) against Somaliland-based frankincense supplier Asli Maydi. These products are often used in fragrance and skincare products. The issuance of this WRO follows CBP’s plan to bolster existing forced labor initiatives, including issuing WROs.
Concerns in the Pharmaceutical Sector
Senator Marco Rubio recently called on DHS and the US Food and Drug Administration (FDA) to add two pharmaceutical companies, Xinjiang Nuziline Bio-Pharmaceutical Co. and SEL Biochem Xinjiang Co., to the UFLPA Entity List and remove the entities from the FDA’s Registered Drug Establishments Site. Senator Rubio is expected to be named President-elect Trump’s secretary of state and could potentially have more influence, as he will head an agency that is a member of the Forced Labor Enforcement Task Force.
Canada Aims to Strengthen Forced Labor Laws
On the heels of US lawmakers urging Canada to impose stricter forced labor laws under their USMCA obligations, Canada has initiated public consultations on new legislative measures to strengthen its laws against importing goods made with forced labor. Proposed changes include “minimum traceability” requirements and a revised cost-recovery model for importers of suspected goods. Comments may be submitted through November 15 at this link. Canada may soon cease to be an export destination for goods detained in the United States for UFLPA concerns.
And the Fox Says…: Forced labor enforcement in the United States continues to ramp up as enforcement agencies bolster resources directed at preventing goods made with forced labor from entering the country. We expect a similar trend internationally, particularly as the likely incoming Secretary of State, Marco Rubio, was the author of the UFLPA. These developments could impact multinational companies doing business in both the United States and Canada importing goods under the USMCA, underscoring the importance of a robust global strategy.
5. The ITC’s Negative Decision Blocks Duties on Aluminum Extrusions: A Temporary Win for Importers Amid Potential Appeals
On October 30, the US International Trade Commission (ITC) reached a negative determination in its final phase of the antidumping and countervailing duty (AD/CVD) investigations concerning aluminum extrusions from China, Colombia, Ecuador, India, Indonesia, Italy, Malaysia, Mexico, South Korea, Taiwan, Thailand, Turkey, United Arab Emirates, and Vietnam. The ITC vote was 2-1, with Commissioners David S. Johanson and Jason E. Kearns voting that the US aluminum extrusion industry is not materially injured by imports (in essence, voting against the imposition of the orders), Chair Amy A. Karpel voting that the industry is materially injured (in essence, voting in favor of the imposition of the orders), and Commissioner Rhonda K. Schmidtlein abstaining from the vote.
As a result, for the time being, there will be no AD/CVD orders on the products subject to these investigations. However, petitioners have the right to appeal the ITC’s determination within 30 days of the publication of the negative determination in the Federal Register. Ultimately, an appeal to the US Court of International Trade (CIT) or to a binational panel under the USMCA (in the case of Mexico) could result in a change in the Commission’s vote and orders being imposed if the case is remanded and the Commission’s vote changes.
And the Fox Says…: In light of the negative determination, AD/CVD cash deposits will be refunded by CBP. Importers who remitted cash deposits to CBP should carefully monitor the liquidation of their entries to ensure that duties are properly refunded. If duties are not properly refunded, protests will need to be filed to recover the refunds.
6. CIT’s Under the Weather Decision Proves to Be a Rainy Day for Protests
Protests are often used by importers to challenge CBP decisions, such as Harmonized Tariff Schedule (HTS) classifications or country of origin determinations. Protest decisions can have significant duty impacts on importers because a change in HTS classification or country of origin can correspond to a change in duty rate applied to merchandise at entry. A recent CIT ruling signals that protest decisions are subject to reversal without the opportunity for public notice and comment.
In Under the Weather v. United States, CBP initially approved an importer’s protests, finding that the importer’s pop-up tent “pods” were properly classified in a duty-free provision. However, CBP headquarters (HQ) subsequently issued a ruling, without the opportunity for notice and comment, determining that the tent pods were more properly classified under a provision with an 8.8% duty rate, a decision that in practice overturned the original protest decisions.
The importer challenged CBP HQ’s ruling, arguing that CBP must follow public notice and comment procedures to change a protest decision. The CIT disagreed, stating that such procedures were not required because CBP’s Office of Rulings and Regulations was not involved in the original protest decisions, and therefore the protests did not constitute a “prior interpretive ruling or decision” requiring public notice and comments.
And the Fox Says…: The CIT’s decision in Under the Weather affirms that protest decisions can be overturned by CBP HQ rulings in certain cases without the opportunity for public comments. Further, importers should consider whether to file an application to request further review in the event CBP intends to deny their protest.
Additional Authors: James Kim, Maya S. Cohen, Derek Ha, William G. Stroupe II, Jodi Tai, Birgit Matthiesen, Kelsey Griswold-Berger
