The U.S. Court of International Trade (CIT) has called into question the “First Sale Rule” tariff mitigation strategy deployed by an increasing number of companies to reduce Section 301 tariffs on China-sourced goods.  In Meyer Corp. v. U.S., No. 13-00154, Slip Op. 21-26 (March 1, 2021), the CIT questioned whether the First Sale Rule should be used in matters involving imports from non-market economy (NME) countries like the People’s Republic of China (PRC).  While the CIT declined to expressly rule on that issue (but, in an unusual step, suggested that the U.S. Court of Appeals for the Federal Circuit do so in a future ruling), the CIT potentially increased the burden on importers seeking approval for First Sale Rule consideration.   Companies utilizing the First Sale Rule should closely monitor actions by U.S. Customs and Border Protection (CBP) in the wake of this decision, as CBP is the approving authority for First Sale Rule use.

The  First Sale Rule is a common strategy used to reduce the value of goods sold through multiple parties (i.e., “middlemen”) and targets the customs valuation on the “first sale”, typically between the foreign producer and distributor.  This initial sale reduces the value of the goods for customs purposes as that first transaction does not include the distributor’s mark-up and other associated costs.  If approved in advance by CBP, the importer will pay duties on the reduced value of the good, lowering the overall duties paid.

Pursuant to Nissho Iwai America Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992), the “first sale” rule requires (1) bona fide sales that are (2) clearly destined for the United States (3) transacted at arm’s length and (4) absent any distortive nonmarket influences.  CBP has interpreted the Nissho Iwai test to require an importer to provide (1) a detailed description of the roles of each of the parties involved in a multi-tiered transaction; and (2) a complete paper trail relating to the imported merchandise that shows the structure of such transaction. See Determining Transaction Value in Multi-Tiered Transactions, T.D. 96-87, 30 Cust.Bull. 52 (Jan. 2, 1997).

In the CIT case, Meyer Corporation, via its various entities located in Thailand, the PRC (including Hong Kong and Macau) and a HoldCo in the British Virgin Islands, produced kitchenware (including the popular Rachael Ray-labeled and Paul Deen-labeled products) and distributed those products globally, including the United States.  Meyer, via PwC, provided detailed requests for First Sale Rule authorization to CBP that were approved.  Later, however, CBP audited the determinations and declined to apply the First Sale Rule because Meyer could not demonstrate arm’s length transactions between the parties since its Chinese “parent” did not provide the financial information CBP requested in discovery.  Litigation ensued.

In the CIT decision, the court stressed that U.S. importers have consistently ignored the fourth part of the Nissho Iwai test — “absent any distortive nonmarket influences.”  Beyond questioning whether the First Sale Rule could even apply in matters involving PRC-sourced goods, the CIT potentially raised the burden for importers (and their consultants) to provide direct evidence that the various transactions are not affected by NME status.  The CIT queried whether parties must provide evidence demonstrating factors such as:  an absence of restrictive stipulations associated with an individual exporter’s business and export licenses; any legislative enactments decentralizing control of companies; other formal measures by the government decentralizing control of companies; the ability to set export prices independently of the government; the authority to negotiate and sign contracts and other agreements without the approval of a government authority; the possession of autonomy from the government regarding the “selection” of management; and the ability to retain the proceeds from sales and make independent decisions regarding the disposition of profits or financing of losses.  The CIT also opined that “first sale” documentation may not always rest with the producer but with holding companies that may need to provide documentation and transparency.

The CIT ultimately based its decision on the lack of evidence provided by the importer on these key factors and the apparent “resistance” from Meyer’s “parent”, a non-party, to CBP’s discovery request concerning non-market influences.  U.S. importers, however, should closely monitor CBP’s interpretation of this decision and review any use of the First Sale Rule in its tariff mitigation strategies to account for these potential changes.

On March 1, 2021, the Office of the United States Trade Representative (USTR) released President Joseph Biden’s 2021 Trade Agenda and 2020 Annual Report. Providing an overview of “a comprehensive trade policy in support of the administration’s effort to help the U.S. recover from the COVID-19 pandemic and build back better,” the report states that President Biden’s trade agenda addresses four national challenges: (1) building a stronger industrial and innovation base so the future is made in America; (2) building sustainable infrastructure and a clean energy future; (3) building a stronger, caring economy; and (4) advancing racial equity across the board.

The report notes that “[c]entral components of the 2021 trade agenda will be the development and reinforcement of resilient manufacturing supply chains, especially those made up of small businesses, to ensure that the United States is better prepared to confront future public health crises.” The report makes clear that the COVID-19 pandemic remains the greatest threat to the U.S. economy and that the president’s domestic policies will first address stopping the spread of the virus and safely re-opening the economy. The agenda encompasses a commitment to long-term investments to strengthen domestic production of essential medical equipment and an expansion of industrial capacity to meet future public health crises.

The 2021 trade agenda will also be an essential part of the president’s Build Back Better agenda and will seek “to protect and empower workers, drive wage-driven growth, and lead to better economic outcomes for all Americans.” The report states that workers “will have a seat at the table” in the development of trade policies and that the Biden administration will review past trade policies for their impacts on, and unintended consequences for, workers. In addition, the administration’s trade team will work with allies to achieve commitments to fight forced labor and to increase transparency and accountability in global supply chains.

The 2021 trade agenda includes plans to negotiate and implement strong environmental standards that are “critical to a sustainable climate pathway” and “efforts to advance racial equity and supporting underserved communities.” These efforts will include the negotiation and implementation of strong environmental standards and the development of market and regulatory approaches to address greenhouse gas emissions. The 2021 trade agenda will support domestic initiatives that “eliminate social and economic structural barriers to equality and economic opportunity,” barriers which were further exposed during the COVID-19 pandemic for their “persistent economic disparities on communities of color.”

The Biden administration’s 2021 trade agenda states that the “China challenge will require a comprehensive strategy and more systematic approach than the piecemeal approach of the recent past.” The administration will use “all available tools” to address the range of China’s unfair trade practices that continue to harm U.S. workers and businesses and will particularly address the human rights abuses of the Chinese government’s forced labor program. The Biden administration will coordinate with U.S. allies to pressure the Chinese government to end its unfair trade practices and will further efforts to hold China accountable to its trade obligations.

The report states that President Biden’s trade agenda will, through bilateral and multilateral engagement, “seek to build consensus around trade policies that address the climate crisis, bolster sustainable renewable energy supply chains, level the playing field, discourage regulatory arbitrage, and foster innovation and creativity.” Such efforts will include repairing partnerships and alliances and restoring U.S. leadership around the world. The report makes clear that President Biden intends for the United States to reengage and be a leader in international organizations, including the World Trade Organization (WTO) and that the administration will rely on strong trade enforcement to make certain U.S. trade partners live up to their commitments.

The portion of the 2020 annual report focusing on trade agreements offers a summary of the status and activities of various agreements and ongoing negotiations. It also provides an overview of the various USTR and other agencies’ trade enforcement activities.

A fact sheet outlining key highlights of the report is available here.

On February 24, 2021, President Joseph Biden signed an executive order seeking “to create more resilient and secure supply chains for critical and essential goods.” Noting shortages over the past year of medicine, food and computer chips, the president stated that, “While we cannot predict what crisis will hit us, we should have the capacity to respond quickly in the face of challenges. The United States must ensure that production shortages, trade disruptions, natural disasters and potential actions by foreign competitors and adversaries never leave the United States vulnerable again.” The executive order directs federal government departments and agencies to initiate a review of U.S. supply chains and identify ways to secure U.S. supply chains against a range of risks and vulnerabilities.

The executive order directs an immediate 100-day review across all federal agencies to address vulnerabilities in the supply chains of four key products:

  • Active pharmaceutical ingredients (APIs), which are the part of a pharmaceutical product containing the active drug.
  • Critical minerals, which are part of defense, high-tech, and other products used for national defense and emergencies.
  • Semiconductors and advanced packaging, which are necessary for innovation and technological advances.
  • Large capacity batteries, which are necessary for new energy technologies like electric vehicle batteries.

The 100-day review “will identify near term steps the administration can take, including with Congress, to address vulnerabilities in the supply chains for these critical goods.”

The executive order also directs a one-year review of a broader set of U.S. supply chains, including: (1) the defense industrial base; (2) the public health and biological preparedness industrial base; (3) the information and communications technology (ICT) industrial base; (4) the energy sector industrial base; (5) the transportation industrial base; and (6) supply chains for agricultural commodities and food production. Under this more in-depth review, federal departments and agencies are instructed to review a variety of risks to supply chains and industrial bases, including identifying critical goods and materials within supply chains, the manufacturing or other capabilities needed to produce those materials, and any vulnerabilities created by failure to develop domestic capabilities. This assessment will also include identifying locations of key manufacturing and production assets, the availability of substitutes or alternative sources for critical goods, the state of workforce skills and gaps for all sectors, and the role of transportation systems in supporting supply chains and industrial bases. At the conclusion of the review, each department and agency must make specific policy recommendations to address risks.

The Assistant to the President for National Security Affairs (APNSA) and the Assistant to the President for Economic Policy (APEP) have been tasked with coordinating these reviews and any actions necessary to implement this executive order. At the conclusion of the one-year review, the APNSA and the APEP must provide President Biden reports reviewing the actions and making recommendations. They will also establish and oversee a quadrennial supply chain review, including processes and timelines regarding ongoing data gathering and supply chain monitoring.

On February 18, 2021, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) entered into a $507, 375 settlement with BitPay, Inc. (“BitPay”) for 2,102 apparent violations of multiple sanctions programs. BitPay, a cryptocurrency company offering payment processing solutions for merchants to accept digital currency as payment for goods and services, agreed to settle its potential civil liability for allowing persons who appear to have been located in the Crimea region of Ukraine, Cuba, North Korea, Iran, Sudan, and Syria to transact with merchants in the United States and elsewhere.

According to the settlement announcement, BitPay had location information, including Internet Protocol (IP) addresses and other location data, about those persons prior to effecting the transactions. BitPay “received digital currency payments on behalf of its merchant customers from those merchants’ buyers who were located in sanctioned jurisdictions, converted the digital currency to fiat currency, and then relayed that currency to its merchants.” While BitPay would screen its direct customers (i.e., the merchants) against OFAC’s Specially Designated Nationals (SDN) List to ensure they were not located in a sanctioned country, BitPay did not screen the location data concerning the merchants’ buyers. As a result, persons in these sanctioned jurisdictions were able to engage in approximately $129,000 worth of digital currency-related transactions.

The statutory maximum civil monetary penalty that could have been applied for these apparent violations was $619,689,816. OFAC, while stating that BitPay did not voluntarily self-disclose the apparent violations, noted several mitigating factors and determined that the violations were non-egregious under its enforcement guidelines. This settlement highlights that crypto-currency companies offering digital currency payment services face significant sanctions compliance risk. Like more traditional banking and financial institutions, crypto-currency companies that facilitate or engage in online commerce or process transactions using digital currency are expected to implement robust screening procedures to ensure that they do not engage in unauthorized transactions prohibited by OFAC sanctions.

On February 18, 2021, the Department of Commerce’s Bureau of Industry and Security (BIS) issued a notice in the Federal Register announcing formal actions to limit exports and reexports of sensitive goods to Burma’s military and security services as previously announced by press release. See Update of February 12, 2021. In response to the military coup of February 1, the notice states that “the United States Government is reviewing all available actions to hold the perpetrators of the coup responsible.” As previously announced in its press release, BIS has adopted a more restrictive export license review policy of presumption of denial of items requiring a license for export and reexport to Burma’s (i) Ministry of Defense, (ii) Ministry of Home Affairs, (iii) armed forces, and (iv) security services.

Also as previously announced, BIS has suspended license exceptions that were previously available to Burma. The following license exceptions are suspended for exports or reexports to Burma, or transfers (in-country) within Burma, either in whole or in part: (i) Shipments of Limited Value (LVS), (ii) Shipments to Group B Countries (GBS), (iii) Technology and Software under Restriction (TSR), and (iv) Computers (APP).

The three-judge panel established by the Court of International Trade (CIT) to manage the China Section 301 tariff refund litigation has issued two procedural orders in the recently-established master case (Court No. 21-cv-00052-3JP) (see Update of February 8, 2021), setting a path forward for this massive litigation.

In a February 10, 2021 order, the panel announced:

  • All filings in the master case will be deemed to have been docketed and filed in each individual case and need not be separately filed in each case;
  • All filings relating to a specific case only that are not of interest except to the parties directly affected by them should use the original assigned case number — and not the master case number — and be filed in the original case;
  • To receive notices of filings in the master case, counsel for each Section 301 plaintiff must file a notice of appearance in the master case; and
  • The defendants must file their answer and affirmative defenses by March 12, 2021, which will constitute an answer in each of the Section 301 cases unless a later answer is filed separately in a specific case.

In a February 16, 2021 order, the panel announced:

  • It will proceed with a “representative sample of cases” under consolidated briefing. The plaintiffs must propose a sample of cases to be considered and submit such a proposal no later than March 19, 2021. No later than March 26, 2021, any plaintiff whose case was not included but that believes it should have been may submit a request and argument to the CIT for consideration. Once the sample cases are selected, the CIT anticipates staying all other Section 301 cases.
  • It will select counsel to serve as part of a plaintiffs’ steering committee. This counsel group will work with the three-judge panel to adopt further case management procedures and to coordinate with each other in the filing of consolidated briefs and other submissions. The plaintiffs must propose a list of steering committee members no later than March 19, 2021. No later than March 26, 2021, any attorneys who are not included in the proposed steering committee but believe that they should be may submit a request and argument to the CIT for consideration.
  • Once the representative sample cases and the members of the steering committee are selected, the panel will meet with the steering committee and counsel for the defendants to identify and discuss additional issues and establish a deadline for submitting a proposed briefing schedule. Any briefing schedule will allow for briefing by amicus curiae, including allowing the plaintiffs not selected in the sample cases to file as necessary.

The February 16, 2021 order notes that both the plaintiffs and the defendants have raised the issue of “interim relief” in prior filings and states that the parties should further confer on this issue. The panel anticipates requiring the submission of a joint status report at a later date, in which any terms regarding the stipulation of available relief will need to be addressed.

Thompson Hine attorneys and trade professionals will continue to monitor and report on significant developments in this litigation.

The Department of Justice (DOJ) has filed motions in federal court seeking a pause in litigation involving TikTok and WeChat until the new administration of President Joseph Biden has time to consider former President Trump’s August 6, 2020 Executive Orders declaring that these Chinese social media apps are a national security threat and prohibiting certain transactions with these entities.  Federal judges previously halted Trump’s ban from taking effect, and the apps are currently still permitted to be downloaded and used in the United States.

In each case, DOJ has asked the courts to “hold this case in abeyance, with status reports due at 60-day intervals.”  The motions, unopposed by counsel for TikTok and WeChat, note that the Department of Commerce plans to evaluate the underlying record justifying those prohibitions.  After such a review, the government will be “better positioned to determine whether the national security threat described in the President’s August 6, 2020 Executive Order, and the regulatory purpose of protecting the security of Americans and their data, continue to warrant the identified prohibitions.”  Each motion states that a review of the prohibitions at issue “may narrow the issues presented or eliminate the need for this Court’s review entirely.”

For previous information on the litigation, see Update of October 5, 2020.  For more details on the Executive Orders prohibiting transactions with TikTok and WeChat, see Update of August 7, 2020.

On February 12, 2021, the Department of Commerce’s Bureau of Industry and Security (BIS) announced that was implementing restrictions on the export of “sensitive items” to Burma’s Ministry of Defense, the Ministry of Home Affairs, armed forces, and security services in response to the Burmese military’s February 1 coup to overthrow the civilian government of Burma.  Effective immediately, BIS “will apply a presumption of denial for items requiring a license for export and reexport to these select Burmese government departments and agencies. In addition, BIS is revoking certain previously issued licenses to these departments and agencies which have not been fully utilized. BIS also will suspend certain license exceptions previously available to Burma as a result of its current Country Group placement under the Export Administration Regulations (EAR), including Shipments to Country Group B countries (GBS) and Technology and Software under restriction (TSR).”

BIS is considering further actions, including: (i) possible Entity List additions, (ii) adding Burma to the list of countries subject to the EAR’s military end use and end user (MEU) and military intelligence end use and end user (MIEU) restrictions, and (iii) downgrading Burma’s Country Group status in the EAR.  These actions are directly related to the issuance of an Executive Order on February 10, 2021, by President Joseph Biden; see Update of February 11, 2021.

On February 11, 2021, in a unanimous 5-0 vote, the U.S. International Trade Commission (USITC) terminated its Section 201 global safeguard investigation of U.S. blueberry imports, determining that increased imports of fresh, chilled, or frozen blueberries are not a substantial cause of serious injury, or threat of serious injury, to the domestic industry producing an article like or directly competitive with these imports.  The USITC will submit its report containing its injury determination to President Joseph Biden by March 29, 2021, at which time a public version will also be released.

This Section 201 investigation was initiated in October 2020, after the U.S. Trade Representative requested the investigation.  For additional details, see Update October 7, 2020.

President Biden Issues Executive Order Regarding Military Coup in Burma and Sanctioning Military Leaders

On February 10, 2021, President Joe Biden issued an Executive Order concerning the military coup in Burma on February 1, 2021, in which the military overthrew the democratically elected civilian government and arrested numerous government leaders, politicians, human rights defenders, journalists, and religious leaders.  In brief remarks, President Biden stated that the Burmese “military must relinquish the power it seized and demonstrate respect for the will of the people of Burma as expressed in their November 8th election.”  In announcing the Executive Order (the “order”) he noted that the United States will take steps “to prevent the generals from improperly having access to the $1 billion in Burmese government funds held in the United States,” and will “sanction the military leaders who directed the coup, their business interests, as well as close family members.”

The order declares a national emergency “with respect to the unusual and extraordinary threat to the national security and foreign policy of the United States posed by the situation in Burma.”  The order authorizes the blocking of property and interests in property of any foreign person determined by the Secretary of the Treasury (via the Office of Foreign Assets Control (OFAC)):

  • to operate in the defense sector of the Burmese economy or any other sector of the Burmese economy;
  • to be responsible for or complicit in, or to have directly or indirectly engaged or attempted to engage in, any of the following:
  • actions or policies that undermine democratic processes or institutions in Burma;
  • actions or policies that threaten the peace, security, or stability of Burma;
  • actions or policies that prohibit, limit, or penalize the exercise of freedom of expression or assembly by people in Burma, or that limit access to print, online, or broadcast media in Burma; or
  • the arbitrary detention or torture of any person in Burma or other serious human rights abuse in Burma;
  • to be or have been a leader or official of:
  • the military or security forces of Burma, or any successor entity to any of the foregoing;
  • the Government of Burma on or after February 2, 2021;
  • an entity that has, or whose members have, engaged in any activity described in the order;
  • to be a political subdivision, agency, or instrumentality of the Government of Burma;
  • to be a spouse or adult child of any person whose property and interests in property are blocked pursuant to the order;
  • to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of any person whose property and interests in property are blocked pursuant to the order; or
  • to be owned or controlled by, or to have acted or purported to act for or on behalf of, directly or indirectly, the military or security forces of Burma or any person whose property and interests in property are blocked pursuant to the order.

On February 11, 2021, OFAC announced that it has placed ten individuals and three entities connected to the military apparatus responsible for the coup on the Specially Designated Nationals (SDN) List.  In addition, the order suspends entry into the United States of any noncitizen determined to meet one or more of the above criteria.  President Biden has also indicated that strong export controls will be imposed and that his administration will coordinate with allies and partners around the world, “particularly in the Indo-Pacific region”, to coordinate an international response to coup.