On August 2, 2021, the U.S. Court of International Trade (CIT) held a status conference and issued its second order revising certain deadlines originally established in its July 6 decision and order granting the plaintiff group’s motion for a preliminary injunction in the ongoing Section 301 tariff refund litigation involving imports of certain Chinese products. The preliminary injunction suspended liquidation of unliquidated entries subject to List 3 and List 4A Section 301 duties which, the plaintiff group alleges, are not authorized under the original investigation of the U.S. Trade Representative (USTR) into China’s actions adversely affecting U.S. intellectual property rights, innovation, or technology development. Because the plaintiff group and the U.S. government defendants remain at odds in establishing the process for suspending liquidation of unliquidated entries, the CIT has adjusted the following deadlines:

  1. an August 9, 2021 deadline for filing a status report;
  2. an August 20, 2021 deadline for the government defendants to establish the repository for entering unliquidated entry information; and
  3. an August 20, 2021 deadline for additional proposed modifications by the parties to the CIT’s preliminary injunction order.

The September 2, 2021 deadline, however, temporarily restraining U.S. Customs and Border Protection (CBP) from liquidating unliquidated entries was not addressed and currently remains in place.

Nearly a year and a half after former President Donald Trump declined to impose Section 232 tariffs on imports of titanium sponge (see Update of February 28, 2020), the Department of Commerce has released its full public report on the investigation, which found that these imports indeed threatened to impair the national security of the United States. Despite former President Trump’s decision to forego any Section 232 import restrictions or tariffs on titanium sponge and to form instead a working group to address concerns, the report’s findings are nevertheless noteworthy. The report determined that:

  • The United States imports 68 percent of the titanium sponge needed to fulfill domestic demand, with most of it coming from Japan and smaller quantities from Kazakhstan and Ukraine. The report notes a “burgeoning capacity” to manufacture the product in China: Between 2004 and 2018, Chinese titanium sponge production capacity increased approximately 1,050 percent.
  • Titanium sponge is essential to the manufacturing and maintenance of U.S. defense systems.
  • Congress has implicitly recognized that titanium sponge is critical to national security by including titanium as a strategic material in the Specialty Metals Clause (10 U.S.C. § 2533b).
  • Titanium sponge is also vital for critical infrastructure and supports 15 of the 16 critical infrastructure sectors identified by the Department of Homeland Security.

While the United States was the first country to commercialize titanium sponge production in the 1950s, the report states that U.S. titanium sponge production capacity has declined significantly, with only one producer by 2019 capable of producing the product for defense, commercial and industrial applications. As a result, imports satisfy most of U.S. sponge demand, with U.S. titanium sponge production and inventories satisfying only 32 percent of U.S. sponge demand in 2018. The report acknowledges that another factor impacting the health and competitiveness of the U.S. industry is the growing use of titanium scrap.

Despite this national security concern, the Department of Commerce found that “an adjustment of tariffs on imported titanium sponge will not address the distortionary effect of non-market producers such as Russia, and eventually China, on the global titanium sponge market.” An alternative approach was proposed that would allow the U.S. government to temporarily compensate the domestic titanium sponge industry under Title VII of the Defense Production Act of 1950 “for the difference between its comparatively higher production prices and lower global sale prices, affording U.S. industry time to make the investments required to reduce production costs to a level comparable with other market producers, and additional government stockpiles of U.S.-origin titanium sponge or U.S.-melted titanium in a stable form such as ingots.” The report notes the possibility of “multilateral negotiations among the world’s market titanium sponge producers to constructively address low prices, low inventory levels, and other factors that harm the U.S. and other market producers.”

Over the past year, there have been many legal and regulatory developments that critically impacted trade and investments between China and the United States. Given the broad impact and frequency of these changes, we are providing quarterly consolidated updates on key changes. For recent past developments, please also see our March 2021 update.

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On July 22 and again on July 30, 2021, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned several Cuban individuals and entities in connection with actions to suppress peaceful, pro-democratic protests in Cuba that began on July 11, 2021. According to Treasury Secretary Janet Yellen, “The Cuban people are protesting for the fundamental and universal rights they deserve from their government. Treasury will continue to enforce its Cuba-related sanctions … to support the people of Cuba in their quest for democracy and relief from the Cuban regime.” In separate remarks to the press, President Joseph Biden stated that the United States would “continue to add sanctions on individuals that carry out … the regime’s abuses.” The president also announced that he has directed the State Department and the Treasury Department to provide him within the next month recommendations of how to maximize the flow of remittances to the Cuban people “without the Cuban military taking their cut.”

The July 22, 2021 sanctions targeted the Cuban Minister of Defense Alvaro Lopez Miera and the Brigada Especial Nacional del Ministerio del Interior (SNB, and aka the Boinas Negras or Black Berets) of the Cuban Ministry of the Interior (MININT). According to OFAC, the minister of defense has played an “integral role in the repression of ongoing protests in Cuba.” Additional information on the designation and placement of this official and the SNB on OFAC’s SDN List is available here.

The July 30, 2021 sanctions targeted the Policia Nacional Revolucionaria (PNR) of the Cuban Ministry of the Interior, and Oscar Callejas Valcarce (Director of the PNR) and Eddy Sierra Arias (Deputy Director of the PNR). According to OFAC, the PNR has confronted and arrested peaceful demonstrators in Havana since the beginning of July 2021. Additional information on the designation and placement of the PNR and these two officials on OFAC’s SDN List is available here.

As a result of these sanctions, all property and interests in property of these persons and entities that are blocked pursuant to the Cuban Assets Control Regulations, 31 C.F.R. part 515 (CACR), continue to be blocked, and U.S. persons and others subject to U.S. jurisdiction are generally prohibited from dealing with or in property in which these Cuban officials and government agencies hold an interest.

The Committee on Foreign Investment in the United States (CFIUS or the “Committee”), an inter-agency committee headed by the Department of the Treasury, has released its 2020 Annual Report to Congress (Report). CFIUS is authorized to review transactions that could result in the control of U.S. businesses by foreign persons or companies, as well as non-controlling investments by foreign persons or companies in certain U.S. businesses which are involved in critical technology, critical infrastructure, or the gathering of sensitive personal data, in order to determine the effect of such transactions on the national security of the United States. CFIUS is required to provide an annual report to Congress containing various cumulative and summary information related to transaction filings. This 2020 Report covers transactions filed with CFIUS in calendar year 2020, and is the first Report to describe the CFIUS process after full implementation of Foreign Investment Risk Review Modernization Act (FIRRMA).

The Report notes that in 2020, CFIUS conducted assessments of 126 “short-form” declarations of covered transactions. These assessments resulted in CFIUS directing 34 parties to file mandatory notices with the Committee, requesting 28 parties to file a full notice, and notifying 81 parties that CFIUS had completed all action thus, essentially, clearing the transaction. In 16 instances, CFIUS staff were unable to complete any actions, and in one instance the parties withdrew their filing. With the Pilot Program for filing declarations implemented in 2018 becoming a formal process as of February 2020, the number of such declarations has increased rapidly – in 2018, 20 declarations were filed; in 2020, 126 declarations were filed. The majority of these filings were in the (i) electric power and transmission, (ii) software, (iii) computer systems, (iv) aerospace, (v) semiconductor, and (vi) data processing industries. It is notable that more than 60% of the declarations resulted in clearance, as there had been some uncertainty over whether the declaration process was likely to lead to definitive decisions.

For full notices of covered transactions, the Report indicates that 187 reviews were conducted in 2020. Of these reviews, CFIUS conducted 88 second-stage investigations and concluded its review of 16 transactions after the adoption of various mitigation measures to address national security concerns. Twenty-nine notices were withdrawn by the involved parties and the Committee rejected one notice due a material change in the transaction.

Notably, in 2020, former President Donald Trump issued an order prohibiting the acquisition of Musical.ly by ByteDance, Ltd., a rare CFIUS occurrence. The majority of the 2020 notices involved the Finance, Information, and Services sector, accounting for 43% of covered transactions, and 36% of these filings pertaining the manufacturing sector. The remaining filings involved the manufacturing, mining, utilities, construction wholesale trade, retail trade, and transportation sectors.

For the first time in several years, China was not the top country involving the foreign investor. The Report notes that in 2020, the top five foreign investor countries were: (i) 19 notices for covered transactions involved Japan, (ii) 17 involved China, (iii) 14 were related to the United Kingdom, (iv) 11 involved foreign investment from Canada, and (v) 11 notices involved France.

In 2020, the Report notes that CFIUS approved the withdrawal of 29 notices. In 15 of these instances, the parties filed a new notice in 2020 and CFIUS concluded action in three of those cases. In seven reviews, the parties withdrew their notice and abandoned their transaction after either CFIUS informed them that it was unable to identify mitigation measures that would resolve the national security concerns or after the Committee proposed mitigation measures that the parties did not accept.

Finally, the 2020 Report provided information from the Committee regarding its efforts to identify and review “non-notified transactions” (i.e., where the involved parties moved forward with a covered transaction without notifying CFIUS). CFIUS staff identified 117 such transactions that were subsequently brought to the attention of the Committee for consideration. As a result, the parties in 17 of these transactions were requested to file post-transaction notices.

Key Notes:

  • On July 13, the U.S. government released an updated version of the Xinjiang Supply Chain Business Advisory advising U.S. companies of the widespread, PRC-government sponsored forced labor and intrusive surveillance practices targeting ethnic and religious minorities in Xinjiang.
  • The Advisory urges U.S. companies with supply chains, ventures or investments connected to Xinjiang to undertake heightened due diligence efforts.
  • S. companies that do not exit supply chains or ventures connected to Xinjiang are at high risk of violating U.S. law.

On July 13, 2021, the U.S. government released an updated version of the Xinjiang Supply Chain Business Advisory (“Advisory”), originally released in July 2020. The Advisory warns U.S. companies that the People’s Republic of China (PRC) government continues to engage in “horrific abuses in the Xinjiang Uyghur Autonomous Region (Xinjiang) and elsewhere in China, targeting Uyghurs, ethnic Kazakhs, and ethnic Kyrgyzin,” including state-sponsored forced labor and other human rights abuses amidst ongoing genocide and crimes against humanity. Importantly, it highlights the high risk to businesses with supply chain or investment links to Xinjiang, which include risk of U.S. customs violations and seizure of goods and U.S. export control and sanctions violations. The U.S. Department of Labor and the Office of the U.S. Trade Representative have now joined as co-signatories to the Advisory, along with the U.S. Departments of State, Treasury, Commerce and Homeland Security. Companies should note that, although the Advisory highlights risks under U.S. law, the same activity may also violate non-U.S. laws targeting modern slavery or human rights abuses in various jurisdictions.

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On July 23, 2021, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced a settlement agreement with Payoneer Inc. (“Payoneer”), a publicly traded New York-based online money transmitter and provider of prepaid access.  Payoneer agreed to pay a civil penalty of approximately $1.4 million to settle its potential liability for 2,260 apparent violations of multiple sanctions programs.   According to OFAC, Payoneer “processed payments for parties located in the Crimea region of Ukraine, Iran, Sudan, and Syria, and also processed payments on behalf of sanctioned persons” on OFAC’s List of Specially Designated Nationals (“SDN”) List.

OFAC indicated that between February 2013 and February 2018, Payoneer processed 2,260 transactions totaling just over $800,000 to prohibited parties, and that most of the violations were not reported to OFAC via the voluntary self-disclosure process.  The apparent violations were the result of “multiple sanctions compliance control breakdowns”, including (i) weak algorithms that allowed close matches to SDN List entries not to be flagged, (ii) failure to screen for Business Identifier Codes (BICs) even when SDN List entries contained them, (iii) during backlog periods, allowing flagged and pended payments to be automatically released without review, and (iv) lack of focus on sanctioned locations because the company was not monitoring IP addresses or flagging addresses in sanctioned locations.

As a result, there were apparent violations of OFAC’s sanctions regulations pertaining to the Crimea region of Ukraine, Zimbabwe, Iran, Sudan, Syria and Weapons of Mass Destruction proliferators.  While OFAC determined that the violations were non-egregious, the fact that only 19 were voluntarily disclosed led to several aggravating factors and a determination that resulted in the higher civil penalty.  The aggravating factors were: (1) that Payoneer failed to exercise “a minimal degree of caution or care for its sanctions compliance obligations” when it allowed sanctioned and listed persons to open accounts and conduct transactions “as a result of deficient sanctions compliance processes that persisted for a number of years”; and, (2) Payoneer had “reason to know” the location of the users as being located in jurisdictions and regions subject to sanctions based on information in its possession, “including billing, shipping, or IP addresses, or copies of identification issued in jurisdictions and regions subject to sanctions”.  The fact that six different sanctions programs were involved was also considered an aggravating factor.

As noted by OFAC, “this action highlights that money services businesses—like all financial service providers—are responsible for ensuring that they do not engage in unauthorized transactions prohibited by OFAC sanctions.”  OFAC continues to highlight that risks can be mitigated by developing “a tailored, risk-based sanctions compliance program” as suggests in its “Framework for OFAC Compliance Commitments” guidance.

On July 20, 2021,  the U.S. Court of International Trade (CIT) issued an order revising certain deadlines established in its July 6 decision and order granting the plaintiff group’s motion for a preliminary injunction in the ongoing Section 301 tariff refund litigation involving imports of certain Chinese products. The preliminary injunction suspended liquidation of unliquidated entries subject to List 3 and List 4A Section 301 duties, which, the plaintiff group alleges, are not authorized under the original investigation of the U.S. Trade Representative (USTR) into China’s actions adversely affecting U.S. intellectual property rights, innovation, or technology development.  Because the plaintiff group and the U.S. government defendants have been unsuccessful so far in establishing the process for suspending liquidation of unliquidated entries, the CIT has adjusted the following deadlines:

  • The U.S. government defendants now have until August 6, 2021 to establish a repository for the funds;
  • Both the plaintiff group and the U.S. government defendants have until August 6, 2021 to submit additional proposed modifications to the July 6 preliminary injunction order;
  • The parties will appear before the CIT on July 23, 2021 and on August 2, 2021 for status conferences, where both parties must “bring an individual authorized to make decisions for the respective Party”; and
  • The temporary restraining order deadline on CBP liquidations of unliquidated entries has been extended from August 3, 2021 until September 2, 2021.

On July 20, 2021, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced that it has issued General License (GL) 5G, “Authorizing Certain Transactions Related to the Petróleos de Venezuela, S.A. 2020 8.5 Percent Bond on or After October 21, 2021,” which continues to delay U.S. persons’ ability to enforce bondholder rights to the CITGO shares serving as collateral for the Petróleos de Venezuela, S.A. (PdVSA) 2020 8.5% bond until on or after October 21, 2021 – the previous deadline had been July 21, 2021. Effective July 20, 2021, this GL 5G replaces GL 5F. Additionally, OFAC modified frequently asked question #595 to address the scope of GL 5G.

With this new General License, U.S. persons remain prohibited until October 21, 2021 from engaging in any transactions related to the sale or transfer of CITGO shares in connection with the PdVSA 2020 8.5% Bond, unless specifically authorized by OFAC. In the modified FAQ 595, OFAC notes a favorable licensing policy toward those seeking to apply for a specific license in an effort to reach an agreement on proposals to “restructure or refinance payments due to the holders of the PdVSA 2020 8.5% bond.” See Update of December 23, 2020 for prior OFAC activity on this issue.

On July 14, 2021, the Federal Trade Commission (FTC) published in the Federal Register (86 Fed. Reg. 37022-35) its final rule for “Made in USA” and other “unqualified U.S.-origin claims” on product labels. The final rule is effective on August 13, 2021.

The final rule codifies a longstanding FTC policy and practice that a product or service with an unqualified U.S.-origin claim, whether express or implied, on its label cannot contain more than a de minimis amount of foreign origin. The final rule also addresses mail order catalogs or mail order promotional material that include a seal, mark, tag, or stamp that identifies a product with an unqualified U.S.-origin claim.

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