On March 24, 2023, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) designated and sanctioned six entities and two individuals connected to Burma’s military “that have enabled the military regime’s continuing atrocities.” The entities have been designated for operating in the defense sector of the Burmese economy, “specifically based on their involvement in the importation, storage, and distribution of jet fuel to Burma’s military.” The sanctioned individuals are associated with or have provided equipment to Burma’s military. Additional identifying information on these entities and individuals is available here.

As a result of this action, all property and interests in property of these entities and individuals placed on OFAC’s SDN List that are in the United States or in the possession or control of U.S. persons are blocked and must be reported to OFAC. In addition, any entities that are owned, directly or indirectly, 50% or more by one or more blocked persons are also blocked. All transactions by U.S. persons or within (or transiting) the United States that involve any property or interests in property of designated or blocked persons are prohibited unless authorized by a general or specific license issued by OFAC or exempt. These prohibitions include the making of any contribution or provision of funds, goods or services by, to, or for the benefit of any blocked person and the receipt of any contribution or provision of funds, goods or services from any such person.

OFAC has also published a Burma Jet Fuel Sanctions Alert to inform individuals, businesses and other persons of the sanctions risks associated with providing jet fuel to Burma’s military regime. The alert notes that providing jet fuel to Burma’s military regime could be sanctionable under various executive orders and sanctions regulations as it could be viewed as materially assisting sanctioned entities.

For additional background on the risks of doing business in Burma, see Update of February 14, 2022.

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Anne Nygård, Unsplash

On March 23, 2023, the Department of Commerce’s Bureau of Industry and Security (BIS) published a Notice of Proposed Rulemaking implementing measures to prevent the improper use of CHIPS Act Incentives Program funding. Described as “guardrails,” the proposed rules are intended to ensure technology and innovation funded by the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act are not used for malign purposes by adversarial countries against the United States or its allies and partners. The CHIPS Act was enacted in August 2022 to incentivize the manufacture of semiconductors and semiconductor manufacturing equipment in the United States, especially amid growing national security concerns and economic competition risks posed by China’s increasing chip production in recent years. It provides appropriations to develop domestic manufacturing critical to U.S. competitiveness and national security interests. See Update of July 29, 2022.

The proposed rule provides additional details on national security measures that would be applicable to the CHIPS Incentives Program, including limiting recipients of funding from investing in the expansion of semiconductor manufacturing in foreign countries of concern (i.e., China, Russia, Iran and North Korea). According to BIS, these guardrails “will advance shared national security interests as the U.S. continues coordinating and collaborating with allies and partners to make global supply chains more resilient and diversified.” The proposed rule provides additional details on and definitions for these national security guardrails, including:

  • Establishing standards to restrict advanced facility expansion in foreign countries of concern.
  • Limiting the expansion of legacy facilities in foreign countries of concern.
  • Classifying semiconductors as critical to national security.
  • Reinforcing U.S. export controls.
  • Restricting joint research and technology licensing efforts with foreign entities of concern.

Establishing Restrictive Standards and Limiting Facility Expansion

To protect national security and the resiliency of supply chains, CHIPS Incentives Program funds may not be provided to a foreign entity of concern. The proposed rule provides a detailed explanation of what is meant by “foreign entities of concern,” as well as a definition of “owned by, controlled by, or subject to the jurisdiction or direction of.” The proposed rule defines other terms used in the CHIPS Act (including terms that will be used in required agreements with funding recipients), identifies the types of transactions that are prohibited under the Expansion Clawback and Technology Clawback sections of the CHIPS Act and provides a description of the process for notifying the Secretary of Commerce of significant transactions involving expansion of semiconductor manufacturing in a foreign country of concern.

Classifying Semiconductors as Critical to National Security

While the CHIPS Act allows companies to expand production of legacy chips in foreign countries of concern in limited circumstances, the proposed rule would classify a list of semiconductors as critical to U.S. national security. In doing so, the rule would define “legacy semiconductors” subject to tighter restrictions, which would include “current-generation and mature-node chips used for quantum computing, in radiation-intensive environments, and for other specialized military capabilities.” The proposed rule seeks to also clarify what would not be considered legacy semiconductors.

Reinforcing U.S. Export Controls

In October 2022, BIS implemented export controls to prevent China from purchasing and manufacturing advanced chips that would enhance that country’s military capabilities. See Update of October 31, 2022. The proposed rule provides definitions that are harmonious with and reinforce these export controls “by aligning prohibited technology thresholds for memory chips between export controls and CHIPS national security guardrails.” Accordingly, the proposed rule applies a more restrictive threshold for logic chips than is used for export controls.

Restricting Joint Research and Licensing

The proposed rule would prohibit during the term of a federal financial assistance award a recipient from knowingly engaging in any joint research or technology licensing with a foreign entity of concern that relates to a technology or product that raises national security concerns. In addition to any foreign entities of concern, the proposed rule would also add entities from BIS’ Entity List, the Treasury Department’s Chinese Military-Industrial Complex Companies (NS-CMIC) list, and the Federal Communications Commission’s Secure and Trusted Communications Networks Act list of equipment and services posing national security risks. 

Public Comment

BIS will accept comments from all interested parties through May 22, 2023 via the federal eRulemaking portal or via email.

This BIS proposed rule seeks to align with similar national security “guardrails” included in the Department of the Treasury’s Notice of Proposed Rulemaking, also issued on March 23, 2023, that details the Advanced Manufacturing Investment Credit (Investment Tax Credit) administered by the Internal Revenue Service; see separate update here.

On March 23, 2023, the Department of the Treasury (“Treasury”) published a Notice of Proposed Rulemaking to implement the Advanced Manufacturing Investment Credit established by the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act (“CHIPS Act”). The CHIPS Act was enacted in August 2022 to incentivize the manufacture of semiconductors and semiconductor manufacturing equipment in the United States, especially amid growing national security concerns and economic competition risks posed by China’s increasing chip production in recent years. It provides appropriations to develop domestic manufacturing critical to U.S. competitiveness and national security interests (see Update of July 29, 2022).

Generally, the investment tax credit, known as the “CHIPS ITC” or the “Section 48D Credit” – given its location in the Internal Revenue Code – extends a tax credit equal to 25% of an eligible taxpayer’s “qualified investment” in a facility built after the enactment of the CHIPS Act and in service after December 31, 2022, with the “primary purpose” of manufacturing semiconductors or semiconductor manufacturing equipment. The proposed rule clarifies that a new chip factory’s human resources, legal, accounting, sales, distribution, and non-cybersecurity operations are not “qualified investments” covered under the CHIPS ITC because these functions are not used directly in the manufacture of semiconductors or semiconductor manufacturing equipment and so are not “integral to the operation of the [] facility.”

The proposed rule also addresses the eligibility requirements of the CHIPS ITC as well as how to claim the credit. For example, the proposed rule considers allowing a qualified taxpayer to be treated as though having already made a tax payment (including an overpayment of tax), and for eligible partnerships or S corporations to receive an elective payment instead of claiming the credit.

A special 10-year credit “recapture rule” is included in the proposed rule which would allow Treasury to claw back the full value of the CHIPS ITC claimed in all prior years if, within 10 years of claiming the credit, a taxpayer (or affiliates) materially expanded the semiconductor manufacturing capacity of the taxpayer in a “foreign country of concern” – countries such as China, Russia, Iran and North Korea.

Treasury will accept comments from all interested parties through May 22, 2023 via the federal eRulemaking portal or in hard copy.

Treasury’s proposed rule seeks to align with a related Department of Commerce Notice of Proposed Rulemaking, also published on March 23, 2023, that seeks to establish certain national security “guardrails” on funding under the CHIPS Act Incentives Program; see that update here.

On March 24, 2023, the Department of Commerce’s Bureau of Industry and Security (BIS) issued a Final Rule adding 32 persons and entities to its Unverified List (UVL). The UVL contains the names and addresses of foreign persons who are or have been parties to a transaction involving the export, reexport, or transfer (in-country) of items subject to the Export Administration Regulations (EAR), and whose bona fides could not be verified via end-use checks or post-shipment verifications (i.e., BIS could not verify the legitimate end use and end user of items subject to the EAR).

The 32 newly listed persons and entities are located in the following destinations: Bulgaria, Canada, China, Germany, Indonesia, Israel, Malaysia, Saudi Arabia, Singapore, Turkey and the United Arab Emirates. BIS’ inability to confirm the bona fides of these persons and entities “raises concerns about the suitability of such persons as participants in future exports, reexports, or transfers (in-country) of items subject to the EAR; this also indicates a risk that such items may be diverted to prohibited end uses and/or end users.” Specific details on each entity, including names and addresses, are available in the Final Rule. These additions to the Unverified List are effective as of March 24, 2023. 

The use of license exceptions is suspended for transactions involving persons and entities on the UVL. Additionally, exporters, reexporters, and transferors must obtain a UVL statement from a party or parties to the transaction who are listed on the UVL before proceeding with exports, reexports, and transfers (in-country) to such persons. However, shipments to any of the new designees on the Unverified List that were en route aboard a carrier on March 24, 2023, pursuant to actual orders for export, reexport, or transfer (in-country) to or within a foreign destination, may proceed to that destination under the previous eligibility for a License Exception or export, reexport, or transfer (in-country) without a license (NLR). 

On March 17, 2023, in the  China Section 301 tariff relief litigation, the U.S. Court of International Trade (CIT) upheld in a major opinion the legality of the implementation of List 3 and List 4A tariffs by the Office of the U.S. Trade Representative (USTR) on imports of Chinese products into the United States. In April 2022, the CIT issued a remand directing the USTR to prepare an explanation clarifying its actions. In August 2022, the government defendants further explained their review and decision-making process. In September 2022, the plaintiff group filed comments in response to the remand explanation, challenging the USTR’s remand explanation on two grounds: (1) The USTR’s remand explanation constituted impermissible post hoc reasoning; and (2) the remand explanation failed to substantively provide sufficient responses and explanation in compliance with the Administrative Procedure Act (APA). The March 17 decision sustained the USTR’s implementation of the tariffs.

In response to the plaintiff group’s argument that the USTR relied upon post hoc reasoning and undertook a new review and analysis, the CIT stated that the argument seeks “to distinguish an agency’s failure to address comments, which they assert can be remedied by further explanation on remand …, from an agency’s failure to analyze or consider comments, which they assert cannot be remedied without a new rulemaking.” The opinion notes that courts have ordered remands requiring agencies to respond to significant comments, but such cases “do not distinguish between failures of explanation and failures of consideration.” The CIT found that the USTR’s remand explanation provided an —

’amplified articulation’ of the grounds for its actions. USTR further explained the removal or retention of certain tariff subheadings, its decision to set the level of duties on the specified aggregate level of trade notwithstanding the stated concerns, and its decision to proceed despite the proffered alternatives. In so doing, USTR responded to significant concerns within the context of China’s actionable conduct and the specific direction of the President.

The CIT stated that the USTR provided “a fuller explanation of [its] reasoning at the time of the agency action,” as supported by case law, and that it was not “convinced by plaintiffs’ argument to require USTR to conduct new notice-and-comment rulemakings.”

Concerning the plaintiff group’s argument that the USTR’s remand explanation failed to substantively provide sufficient responses and explanations in compliance with the APA, the CIT stated that the standard an agency’s response to comments must meet “is not particularly demanding” under existing case law. In issuing the remand order, the CIT found fault with the USTR “for relying on Presidential direction without explaining ‘the relationship between significant issues raised in the comments and the President’s direction’” and faulted the USTR “for its failure to respond to comments ‘within the context of the specific direction provided by the President.’” The CIT found that the USTR’s remand explanation “reflect[s] USTR’s conclusion that statutory language linking any modification to the specific direction of the President constrained USTR’s ability to depart from that direction and explained USTR’s position vis-à-vis the President’s direction. Nothing more was required.”

The CIT decision also found that the USTR: (i) accounted for concerns regarding the potential for economic harm and adequately explained how it did so; (ii) provided statements responsive to comments regarding the efficacy of tariffs and “was not bound to agree with commenters characterizing tariffs as an ineffective”; and (iii) explained in the remand explanation that it was pursuing other courses of action as an alternative to the tariffs.

As a result, the CIT found “that USTR has complied with the court’s remand order and has supplied the necessary explanation supporting the imposition of duties pursuant to Final List 3 and Final List 4.” The plaintiff group has indicated that it will appeal the CIT’s decision to the U.S. Court of Appeals for the Federal Circuit.

For additional details on the CIT’s remand order, see Update of April 6, 2022. For additional information on the content of the USTR’s remand explanation, see Update of August 2, 2022.  See Update of September 15, 2022 for details on the plaintiff group’s comments in response to the USTR’s remand explanation. For additional information on the oral argument in the matter, see Update of February 9, 2023.

On March 15, 2023, U.S. Customs and Border Protection (CBP) announced that it has activated two new license codes for use in the Automated Export System (AES). These new codes are related to an Interim Final Rule published by the Department of Commerce’s Bureau of Industry and Security (BIS) on October 13, 2022, that established a new Temporary General License (TGL) to avoid disruption of supply chains for the export of advanced computing integrated circuits (ICs), computer commodities that contain such ICs, and certain semiconductor manufacturing items. This TGL is intended to allow limited manufacturing activities to items destined to customers outside of China or Macau. See Update of October 13, 2022. 

Separately, BIS has issued several Supply Chain Authorization Letters describing specific authorizations it has granted in response to specific requests based on actual or potential supply chain disruptions. Given this development CBP has established a new Supply Chain Authorization Letter (SCAL) code. Recipients of such letters from BIS must comply with the specific terms issued in such letters. A SCAL code is only valid for use in AES by the original recipient of the letter or by parties authorized therein.

With these updates, when applicable, exporters and authorized agents are to report electronic export information using the following new license codes:

  • License Code C65, or the Temporary General License (TGL), allows for certain exports, reexports, in-country transfers, and exports from abroad destined to or within China or Macau by certain group of companies. The TGL covers specific items of 3A090, 4A090, 3D001, 3E001, 4D090, 4E001, or any item that is a computer, integrated circuit, “electronic assembly” or “component” and associated software and technology, specified elsewhere on Commerce Control List (Supplement no. 1 to part 774), which meets or exceeds the performance parameters of ECCN 3A090 or 4A090. This license does not authorize the export to “end-users” or “ultimate consignees” in China or Macau. TGL and License Code C65 is only valid for use through April 7, 2023.
  • License Code C66, or the Supply Chain Authorization Letter (SCAL), is issued in response to specific requests based on exigent circumstances of actual or potential supply chain disruptions. Recipients of SCAL must comply with the specific terms issued by BIS in the letter, and the letter is only valid for use by the original recipient of the letter or by parties authorized therein. SCAL covers all ECCN, including EAR99.

CPB instructs that all AES filers must adhere to the new reporting requirements for both license types to avoid errors in the AES, including: (i) report relevant license code (C65 or C66), (ii) indicate allowable ECCN, (iii) indicate allowable export information codes, (iv) indicate allowable modes of transportation.

On March 14, 2023, U.S. Customs and Border Protection (CBP) launched an interactive web page providing forced labor enforcement statistics under the Uyghur Forced Labor Prevention Act (UFLPA). CBP launched this “UFLPA statistics dashboard” to provide a single source of data on UFLPA enforcement actions. The dashboard provides information on the number of total shipments, shipments denied access, shipments released by CBP, and also allows users to select specific views for greater details of shipments by industry and by country of origin.  The dashboard includes only data related to enforcement of the UFLPA and not other forced labor enforcement by CBP, such as withhold release orders (WROs) or findings.

The start date of the data in this dashboard is June 21, 2022, the date on which CBP began UFLPA implementation. As of March 3, 2023, the dashboard indicates that 3,237 shipments, valued at $961 million, were subject by CBP to UFLPA reviews or enforcement actions. CBP denied (i.e., seized, excluded, exported or destroyed) a total of 424 shipments and released 1,090 shipments into the United States. The remaining shipments are pending a determination. To date, the bulk of shipments being examined fall into the electronics industry sector, followed by the apparel, footwear and textiles industry sector. Malaysia, Vietnam and China are the top three countries of origin, by shipment value, for shipments subject to UFLPA enforcement actions.

CBP has also prepared a helpful UFLPA Data Dictionary guide to assist in using and interpreting the dashboard.

On March 1, 2023, the Office of the United States Trade Representative (USTR) released President Biden’s 2023 Trade Policy Agenda and 2022 Annual Report. According to the report, the 2023 trade agenda will prioritize creating new opportunities for American workers and families, supporting the middle class, driving decarbonization, and creating good-paying jobs. Additionally, the agenda will focus on strengthening relationships with allies and partners and reinforcing critical supply chains to withstand shocks and defend democratic values, given the aftermath of the COVID-19 pandemic and Russia’s invasion of Ukraine.

The annual report notes that the USTR in 2022 implemented the Biden administration’s trade vision by establishing “historic trade arrangements” with the European Union and Kenya, as well as launching new trade initiatives. One such initiative is the Indo-Pacific Economic Framework for Prosperity (IPEF), a trade framework with 13 Indo-Pacific region countries that represent collectively 40% of global GDP. See Update of September 9, 2022. Another initiative is the U.S.-Taiwan 21st Century Trade Initiative, which aims to deepen economic and cultural ties between the two countries. Lastly, the Americas Partnership for Economic Prosperity (APEP) was announced in June 2022. This initiative aims to drive economic growth, promote shared prosperity and address critical issues shaping the region’s future. See Update of January 30, 2023.

The report focuses on strengthening supply chains, noting that the COVID-19 pandemic and the Russian invasion of Ukraine exposed the risks associated with concentrated supply chains, certain geopolitical sourcing decisions and an overreliance on China for critical technologies. President Biden signed Executive Order 14017 to address these supply chain challenges and conducted a 100-day review of four priority product areas: semiconductors, large capacity batteries, critical minerals and materials, and pharmaceuticals and active pharmaceutical ingredients. See Update of June 11, 2021.

The report provides a detailed review of the “complex and competitive” U.S.-China trade relationship and efforts to ensure that China competes fairly. It highlights that the United States has taken significant steps to “re-align” the relationship and address the challenges posed by China’s trade practices and policies, including the use of forced labor, intellectual property theft, forced technology transfer from U.S. companies, and unfair subsidies to Chinese companies. The report notes that the United States has imposed tariffs on hundreds of billions of dollars of Chinese goods in response to these practices, and that the USTR continues to work with allies to coordinate responses to China’s trade practices. Ultimately, the report states, the “USTR will continue a targeted tariff exclusions process to ensure that our economic interests are being served, and we will keep open the option of further tariff exclusions processes as warranted.” Overall, the report suggests that the United States will consider “all existing tools—and will potentially seek new ones as needed—to combat the harms of China’s state-led, non-market practices.”

Regarding Russia, the report does not discuss U.S.-Russia trade relations but repeatedly notes how Russia’s invasion of Ukraine negatively impacted international trade and supply chains. For example, the USTR indicates that U.S. engagement in Eurasia in 2022 was “largely shaped by Russia’s premeditated and unprovoked full-scale invasion of Ukraine in February 2022. As a result of Russia’s actions, the United States, working with its partners and allies, has imposed severe and immediate costs on Russia through sanctions, export controls, and tariff increases. In addition, the United States has ceased direct engagement with Russia on trade and investment issues.”

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

On March 2, 2023, the Departments of Commerce, Justice and the Treasury issued a joint Compliance Note cautioning financial institutions and multinational companies subject to U.S. jurisdiction to “be vigilant against efforts by individuals or entities to evade sanctions and export control laws.” The Compliance Note emphasizes the “unprecedented scope and scale” of sanctions against Russia following its invasion of Ukraine and indicates that “malign actors” continue efforts to evade Russia-related sanctions and export controls, stating that “One of the most common tactics is the use of third-party intermediaries or transshipment points to circumvent restrictions, disguise the involvement of Specially Designated Nationals and Blocked Persons (SDNs) or parties on the Entity List in transactions, and obscure the true identities of Russian end users.” The joint Compliance Note highlights some of these evasive tactics in order to assist efforts to identify warning signs and to implement appropriate compliance procedures.

The Compliance Note provides guidance on certain methods and tools to identify evasive tactics, including having an updated, risk-based compliance program involving management commitment, risk assessment, internal controls, testing, auditing and training. It also provides a list of common red flag indicators for evasion (see also BIS’s Red Flag Indicators and Know Your Customer Guidance), and recommends that companies refer to BIS and OFAC enforcement action summaries to review tactics that may be used to evade detection.

The Compliance Note concludes with a reminder that the three agencies will continue to undertake both civil and criminal enforcement actions against those entities and individuals who engage in efforts to evade Russian-related sanctions and export control laws. Finally, the Compliance Note provides examples of such actions, and describes some of the tactics that have been used and states that the U.S. government “will not hesitate to pursue criminal prosecutions, administrative enforcement actions, or additional designations where the circumstances so warrant.”

Aluminum

On the one-year anniversary of Russia’s invasion of Ukraine, President Joseph Biden on February 24, 2023, issued a Proclamation on Adjusting Imports of Aluminum Into the United States to implement: (1) effective March 10, 2023, a 200% import tariff on aluminum articles and derivative aluminum articles that are the products of Russia, and (2) effective April 10, 2023, a 200% import tariff on (a) aluminum articles from other countries that use any primary aluminum smelted in Russia in the manufacture process or aluminum articles cast in Russia, and (b) derivative aluminum articles from other countries that use primary aluminum smelted in Russia in the manufacture process or derivative aluminum articles cast in Russia. Any country imposing a 200% tariff or more on its imports of aluminum articles that are products of Russia may be exempt from the tariffs under this proclamation

The Proclamation declares that due to Russia’s war against Ukraine, the Russian aluminum industry in particular must be held responsible as “a key part of Russia’s defense industrial base [that] has played a major role in supplying Russia with weapons and ammunition used in the war.” The Proclamation, issued pursuant to section 232 of the Trade Expansion Act of 1962, also justifies the tariff increases as “a significant step toward ensuring the viability of the domestic aluminum industry.” 

This Proclamation follows the original Section 232 aluminum investigation and proclamation issued by former President Donald Trump that imposed a 10% import tariff on aluminum articles from various countries (see Update of March 8, 2018).

In a separate Proclamation, and pursuant to the Suspending Normal Trade Relations with Russia and Belarus Act enacted in April 2022 (see Update of April 11, 2022), President Biden increased tariffs on additional Russian products imported into the United States. The proclamation increases tariffs “on more than 100 Russian metals, minerals, and chemical products worth approximately $2.8 billion to Russia” according to a White House Fact Sheet. This proclamation imposes ad valorem duty rates to 35% on certain Russian products and 70% for other products. These increases will become effective on April 1, 2023 for goods entered for consumption, or withdrawn from warehouse for consumption, and will continue in effect, unless expressly reduced, modified, or terminated.

UPDATE: On March 2, 2023, the Presidential Proclamations were formally published in the Federal Register and now include the Annexes that clearly identify the scope of Russian articles and specific rates of duty covered under each proclamation:
– Proclamation 10522 of February 24, 2023, Adjusting Imports of Aluminum Into the United States
– Proclamation 10523 of February 24, 2023, Increasing Duties on Certain Articles From the Russian Federation