Canada-U.S. Blog

Trade Lawyers Cyndee Todgham Cherniak and Susan K. Ross

Happy New Year – Now Let’s Get Back to Business!

Posted in Aerospace & Defence, Controlled Goods Program, Corporate Counsel, Cross-border deals, Cryptocurrencies, Customs Law, Export Controls & Economic Sanctions, Exports, Imports Restrictions, Legal Developments, tariffs, Trade Agreeements, Trade Remedies

Originally published by the Journal of Commerce in January 2019

One of the topics that consistently makes the top 5 in just about every survey of issues of concern to companies is the cost of regulatory compliance. This is true in large measure because the complexity of the issues covered by those regulations keeps increasing and the cost of compliance moves in the same upward direction.

In looking forward into the new year, looking back is instructive as well to identify at least one consistent theme when it comes to enforcement actions – the quality of the company’s compliance program, which includes the clarity of that compliance program and also the quality of the training given to staff, but then there is also the what were you thinking factor !!!!

In 2015, PayPal paid $7.65 million to settle a series of Office of Foreign Assets Control or OFAC violations. As many will recall, PayPal had screening software in place. Whether it worked as intended or not, what came through loud and clear in the settlement agreement was regardless of how well the software worked, the staff was not properly trained.

OFAC described the situation up to 2013 as one where the company did “not appear to have implemented effective compliance procedures and processes to identify, interdict, and prevent transactions” violating various OFAC sanctions programs. For many, the saga was an old one. The system gave alerts, the staff did not understand the reason for the alerts, and initially ignored them. When there were enough of them, corrective action was taken, but it was insufficient. Eventually, PayPal realized how non-compliant were its operations and took serious remedial action. That action included a voluntary self-disclosure which acknowledged:

A) 98 violations of the Cuba sanctions, involving goods worth $19,344.89;

B) 25 violations of one set of Iran sanctions, goods worth $2,109.82;

C) 100 violations of a different set of Iran sanctions, goods worth $6,147.84;

D) 33 violations of the Sudan sanctions, goods worth $3,314.43;

E) 94 violations of the terrorism sanctions, goods worth $5,925.27; and

F) 136 transactions of the weapons of mass destruction sanctions, worth $7,091.77.

Perhaps equally devastating to PayPal’s circumstances was the violations occurred over a 9 year period! As noted, eventually PayPal resolved the matter by paying a hefty fine, but it was also required within 6 months of settlement to make a presentation to OFAC establishing it had put effective internal controls in place so the problems did not continue.

Looking further back in time and focused on cybersecurity, there is the Target breach case. Readers will remember the Target system was hacked using stolen credentials. The first successful intrusion occurred on November 15, 2013, subsequent intrusions occurred triggering alerts which were not understood or timely acted upon. Target ended up paying $10 million to settle the class action lawsuit, $16.7 million to settle the payment processor/credit card companies litigation, another $18.5 million to settle claims brought by State Attorneys General. Target also reportedly spent more than $100 million to upgrade its system. This all occurred because the internal controls in place were neither precise, tested nor upgraded over time.. Alerts were not understood, timely acted upon and others were ignored, certain functionality had been turned off, the system did not work on a need to have access basis, and worst of all, the corporate (located locally and in a third country) IT staff did not communicate well among themselves or timely agree upon the seriousness of the situation and the first steps to be taken to minimize the damage.

One can look as well at the Equifax data breach case, where the hackers had 76 days to exfiltrate data! That hack was successful because a device meant to assist with detection was misconfigured and a digital certificate had expired. It also did not help that Equifax took approximately six (6) weeks to publicly announce the breach.

Then there is the Uber 2017 breach. Uber paid $148 million to various States to settle litigation. A 2014 breach was reported but with the 2016 breach, Uber sought to conceal it. Uber settled with the Federal Trade Commission which found the Uber system lacked unique access credentials, failure to limit access to a need to know basis, failed to employ multi-factor authentication, failed to store dats in the cloud encrypted. The FTC settlement terms are numerous, but perhaps most notable is the requirement for Uber to issue a yearly compliant report under penalty of perjury.

What the Equifax and Uber cases tell us is it is not enough to have a set of internal controls. First, you have to put them in place., then make sure everyone is adequately trained on those procedures. Then you implement them and then you test them. In reality this is a circular situation. The internal controls should be regularly updated and improved, and so should the training.

All that having been said, there is also the what were you thinking factor? And we have a very recent example of that. Zoltek Corporate and its affiliates settled a case with OFAC at the end of 2018. The company paid $7.772,102 which could have been avoided if only the right questions had been asked of the right people at the right time. The settlement agreement itself can be found at: https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20181220_zoltek_settlement.pdf and is worth reading. What you find is the American management was repeatedly made aware a supplier was listed on a denied parties list associated with the Belarus sanctions. Despite repeated email exchanges and discussions among executives within the firm, Zoltek kept doing business with the sanctioned entity, going so far at one point as to pivot the business to a third party trading company. To his credit, at least one executive questioned whether the trading company was a sham, but the transactions continued. This saga starts when the Belarus oil and chemical entity was put on the sanctions list in November 2007. This listing invoked OFAC’s 50% rule for that supplier, i.e., any entity (the supplier) owned 50% or more by a sanctioned party (the Belarus oil and chemical company) is itself sanctioned. Several years later, the supplier was itself designated as a sanctioned party. However, in the meantime, it had acquired one of Zoltek’s primary suppliers of a specific raw material and the business continued uninterrupted.

While all of this is going on, there are emails exchanged within management about the supplier itself being sanctioned. There are emails about seeking legal advice, which would have been the prudent step to take, but the advice sought was from a lawyer in a third country where Zoltek’s affiliate was located. Not surprisingly, he concluded U.S. law did not apply in that third country. You also have executives within the company refusing to sign any contract with the sanctioned supplier. There are outside third parties explaining repeatedly to Zoltek’s upper management that purchases from the sanctioned supplier are barred under U.S. law. Through it all, Zoltek’s upper management kept saying it was consulting with the U.S. government and never did. In the end, Zoltek made 13 purchases from the affiliate, later sanctioned party, with a total value of $10,390,920. How much more efficient and less costly would it have been for management to call a U.S. lawyer familiar with U.S. sanctions laws?

What these cases reminder us as the new year launches is internal controls continue to be one of the most important tools companies have to manage their risk. At the same time, the best internal controls program works only if staff is properly trained, the program is regularly tested, updated and improved. Even Zoltek could have avoided its problems if it had a robust sanctions program in place. When was the last time your internal controls were tested and upgraded? It’s the new year, now is the time to start!

To GDPR or Not To GDPR – That Remains the Question !!!!

Posted in Aerospace & Defence, Agriculture, Anti-Trust/Competition Law, Constitutional Law, Corporate Counsel, Cross-border deals, Cybersecurity and Privacy, Legal Developments

Published originally by the Journal of Commerce in December 2018

When the General Data Protection Regulations (“GDPR”) took effect on May 25, 2018, American companies found themselves in a quandary. The language of the regulations was sufficiently broad to initially conclude that even if a company had no presence or operation in Europe, it would be required to comply. As a reminder, the EU member countries are: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and United Kingdom. Iceland, Lichtenstein, and Norway are also impacted by way of their domestic laws which adopted the GDPR principles. These countries are together referred to as the European Economic Area or EEA.

GDPR Article 3.2(1) addresses processing personal data by those operating with the EEA. Article 3.2(2) added the processing was to be related to the offering of goods or services, irrespective of whether a payment is required, or the monitoring of the behaviour of those within the EEA. This language led to questions such as was a company subject to the GDPR if it published a website which could be accessed by residents in an EEA country? What kind of activity was needed to constitute the offering of goods or services? What constituted monitoring?

The Information Commissioner’s Office (“ICO”) directly addressed the website question when it admonished The Washington Post about its cookie policies in response to a complaint. The ICO is: “[t]he UK’s independent authority set up to uphold information rights in the public interest, promoting openness by public bodies and data privacy for individuals.” The Register, a UK publication, broke the story on November 19, 2018. The Washington Post offers articles on its website. The options are to receive a limited number of them for free, pay $6 per month for unlimited articles or pay $9 per month and turn off tracking and cookies. The ICO found the website did not comply with the GDPR because there was no free of charge option to refuse to accept cookies or tracking. At the same time, the ICO acknowledged the difficulty of doing anything more. It is quoted by The Register as saying “[w]e hope that the Washington Post will heed our advice, but if they choose not to, there is nothing more we can do in relation to this matter.”

Additional clarification now comes from the European Data Protection Board (“EDPB”) through its “Guidelines 3/2018 on the territorial scope of the GDPR (Article 3) (the “Guidelines”), see https://edpb.europa.eu/sites/edpb/files/files/file1/edpb_guidelines_3_2018_territorial_scope_en.pdf for the full publication. There are a number of fact patterns presented as a way to illustrate the conclusions of the EDPB: “an independent European body, which contributes to the consistent application of data protection rules throughout the European Union, and promotes cooperation between the EU’s data protection authorities.”

There is little doubt about GDPR’s application if a company operates in the EEA and processes personal data within the territory. If the company is in the EEA and the processing occurs outside the EEA, the company continues to be required to comply and is expected to take steps to make sure its data processor meets the GDPR requirements. Similarly, if the company which controls the data is outside the EEA, but the data is processed within the EEA, the data processor must comply with the GDPR, even if the company is not subject to its requirements. It was also clear from the outset the GDPR applies to anyone who is within the EEA, even if a resident elsewhere, and does not apply if an EEA resident is outside the territory. What the guidance did was reinforce those points and clarify a few others.

The EEA’s broad definition of personal data is found at Article 4(1) and defines personal data as “any information relating to an identified or identifiable natural person” and includes name, identification number, location data, online identifier or to one or more “factors specific to the physical, physiological, genetic, mental, economic, cultural or social identity of that natural person.”

Again by way of a reminder, a data controller is the party which determines the purposes and means of the processing of the personal data. The data processor is the party that actually conducts the processing on behalf of the data controller. Where things get more complicated is when goods and services are offered by a company outside the EEA. The EDPB makes clear that offering a website alone does not equate to having a presence in the EEA. On the other hand, having one agent or employee in an EEA country may be sufficient to make the company subject to the GDPR. At the same time, just because a company has a presence in an EEA country does not mean the GDPR applies to its activities. In short, as is often the case, this all comes down to the facts and circumstances. The recommended thought process is first determine whether personal data is being processed. Then identify links between the activity for which the data is being processed and the activities of the organization. If such a link exists, then look even further. One example provided reads as follows: “A hotel and resort chain in South Africa offers package deals through its website, available in English, German, French and Spanish. The company does not have [a presence] in the [EEA]. In this case, in the absence of any [presence] within the territory… , it appears that no entity linked to this data controller in South Africa can qualify as an [operation] in the [EEA] within the meaning of the GDPR. Therefore the processing at stake cannot be subject to the provisions of the GDPR…”

Coming out the other way: “A start-up established in the USA, without any business presence … in the [EEA], provides a city-mapping application for tourists. The application processes personal data concerning the location of customers using the app… once they start using [it] in the city they visit, in order to offer targeted advertisement for places to visit, restaurants, bars and hotels. The application is available for tourists while they visit New York, San Francisco, Toronto, London, Paris and Rome. The US start-up, via its city mapping application, is offering services to individuals in the [EEA] .. The processing of the [EEA]-located data subjects’ personal data in connection with the offering of the service falls within the scope of the GDPR …”

Another relevant illustration: “A U.S. citizen is travelling through Europe during his holidays. While in Europe, he downloads and uses a news app that is offered by a U.S. company. The app is exclusively directed at the U.S. market. The collection of the U.S. tourist’s personal data via the app by the U.S. company is not subject to the GDPR.”

These seemingly contradictory outcomes are easily reconciled by the Guidelines. First, one needs to figure out if the company is offering any goods or services directed to EEA residents, whether or not a payment is made for those services. If not, the GDPR does not apply. If yes, then the relevant criteria to making the determination (which should be considered together) include

  • The [EEA] or at least one State is designated by name with reference to the good or service offered;
  • The data controller or processor pays a search engine operator for an internet referencing service in order to facilitate access to its site by consumers in the [EEA]; or the controller or processor has launched marketing and advertisement campaigns directed at an [EEA] country audience.
  • The international nature of the activity at issue, such as certain tourist activities;
  • The mention of dedicated addresses or phone numbers to be reached from an [EEA] country;
  • The use of a top-level domain name other than that of the third country in which the controller or processor is established, for example “.de”, or the use of neutral top-level domain names such as “.eu”;
  • The description of travel instructions from one or more other [EEA] States to the place where the service is provided;
  • The mention of an international clientele composed of customers domiciled in various [EEA] States, in particular by presentation of accounts written by such customers;
  • The use of a language or a currency other than that generally used in the trader’s country, especially a language or currency of one or more [EEA] States;
  • The data controller offers the delivery of goods in [EEA] States.

Illustrating two more possible outcomes are additional examples. In the first, the GDPR applies: “[a] website, based and managed in Turkey, offers services for the creation, edition, printing and shipping of personalised family photo albums. The website is available in English, French, Dutch and German and payments can be made in Euros or Sterling. The website indicates that photo albums can only be delivered by post mail in the UK, France, Benelux countries and Germany. In this case, it is clear that the creation, editing and printing of personalised family photo albums constitute a service within the meaning of [EEA] law. The fact that the website is available in four languages of the [EEA] and that photo albums can be delivered by post in six [EEA] States demonstrates that there is an intention on the part of the Turkish website to offer its services to individuals in the [EEA]. As a consequence, it is clear that the processing carried out by the Turkish website, as a data controller, relates to the offering of a service to data subjects in the [EEA] and is therefore subject to the obligations and provisions of the GDPR …”

The opposite result derives from these facts: “A private company based in Monaco processes personal data of its employees for the purposes of salary payment. A large number of the company’s employees are French and Italian residents. In this case, while the processing carried out by the company relates to data subjects in France and Italy, it does not takes place in the context of an offer of goods or services. Indeed human resources management, including salary payment by a third-country company, cannot be considered as an offer of service … The processing at stake does not relate to the offer of goods or services to data subjects in the [EEA] (nor to the monitoring of behaviour) and, as a consequence, is not subject to the provisions of the GDPR …”

These Guidelines serve as a reminder to American companies with no presence in any EEA country that if you are engaging with any person (even at a company) who resides in an EEA country, you should have in place a GDPR compliance policy. Given the high priority placed on GDPR compliance, you will want to make sure that your GDPR policy is adequate for your circumstances, that you have appropriately documented your conclusions about how you are compliant, and you have updated your Terms of Use and Privacy Policy accordingly. While the Washington Post letter and the Guidelines give comfort to companies that do you not have a presence in the EEA, your business partners there will have their own compliance concerns. It is wise to know those compliance challenges going into the negotiations. Otherwise, you could end up taking on unnecessary legal obligations that could come back to haunt you!  Also, be aware that local laws apply and are equally important in protecting yourself!

Customers Now Jointly Liable With Port Truckers For Certain Labor Violations

Posted in Aerospace & Defence, Agriculture, Corporate Counsel, Cross-border deals, Cross-border trade, Customs Law, Exports, Legal Developments, Transportation

One of the bills signed into law by California Governor Edmund G. Brown from the most recent legislative session aims to hold customers accountable when hiring trucking companies that have a record of Labor Code violations. Under SB 1402, customers who utilize trucking companies to deliver goods from California’s ports may be held jointly and severally liable for certain Labor Code violations committed by those trucking companies. Here is the explanation for the need for this new law: “Holding customers of trucking companies jointly liable for future labor law violations by port drayage motor carriers who they engage, where the customer has received advance notice of their record of unsatisfied judgments for labor law violations, will exert pressure across the supply chain to protect drayage drivers from further exploitation.” And “Customers have the market power to exert meaningful change in the port drayage industry that has eluded California drivers for more than a decade.”

The new law adds section 2810.4 to the California Labor Code, and gives California’s Division of Labor Standards Enforcement (“DLSE”) authorization to create a list of port trucking companies that have failed to pay final judgments, tax assessments or tax liens for certain Labor Code violations (e.g., for failing to pay truck drivers’ wages, imposing unlawful expenses on employees, failing to remit payroll taxes or to provide worker’s compensation insurance, and misclassifying employees as independent contractors) and will post that list to a website. The DLSE is to update the website by the fifth of each month. The agency will also remove any trucking company from the website within 15 business days after it determines there has been full payment of any unsatisfied judgment or that the trucking company has entered into an approved settlement dispensing with the judgment.

Significantly, each and every customer that engages or uses a port trucking company listed on the DLSE’s website during a given workweek will be held jointly and severally liable with that trucking company for the full amount of all unpaid wages, unreimbursed expenses, damages, and penalties, including applicable interest, which are found owed by the trucking company to its employees for that workweek. Customers’ liability under this law is determined by the Labor Commissioner following a hearing, or by the court in a civil action brought by the Labor Commissioner or the trucking company’s employees.

Customer is defined as: “a business entity, regardless of its form, that engages or uses a port drayage motor carrier to perform port drayage services on the customer’s behalf, whether the customer directly engages or uses a port drayage motor carrier or indirectly engages or uses a port drayage motor carrier through the use of an agent, including, but not limited to, a freight forwarder, motor transportation broker, ocean carrier, or other motor carrier.”

Customer does not include any business entity with a workforce of less than 25 workers, the state or any political subdivision of the state, and any business entity (marine terminal operators are specifically mentioned) whose business is “incidental to the transportation of the freight for the customer, receives, makes available, or exchanges intermodal equipment, loaded or unloaded, or conducts any other transaction of equipment subject to an equipment interchange agreement with a motor carrier who is a signatory to an equipment interchange agreement.”

Port drayage or trucking services are defined as: “the movement within California of cargo or intermodal equipment by a commercial motor vehicle whose point-to-point movement has either its origin or destination at a port, including any interchange of power units, chassis, or intermodal containers, or the switching of port drayage drivers that occurs during the movement of that freight. It shall not include employees performing the intra-port or inter-port movement of cargo or cargo handling equipment under the control of their employers.”

The new law specifies four instances when joint and several liability does not apply:

  • A trucking company’s employees are covered by a bona fide collective bargaining agreement (as long as the agreement expressly provides for wages, hours of work, working conditions, a process to resolve disputes concerning nonpayment of wages, expenses, damages, and penalties, and a waiver of the joint and several liability provided by this new law);
  • A customer and the port trucking company had an existing contract for services at the time the trucking company was listed on the DLSE’s website and the customer terminates the agreement within 90 days following the trucking company’s listing;
  • A port trucking company is not listed on the DLSE’s website at all; and
  • A port trucking company has satisfied the conditions for removal from the DLSE’s website prior to the time period for which the joint and several liability is alleged.

SB 1402 goes into effect on January 1, 2019, and is a wake-up call to all California companies that hire port trucking companies. Truckers subject to Labor Code violations which could cause their customers to become jointly and severally liable are obligated to timely report those obligations to their customers, but failure to do so is not a defense by the customer to joint and several liability. Companies must now add another provision to their business partner due diligence process and make sure their truckers are fully compliant with California’s labor laws — or risk substantial liability for their failures.

U.S.-China Deal

Posted in Border Security, Corporate Counsel, Cross-border deals, Cross-border trade, Customs Law, Exports, Government Procurement, Imports Restrictions, Intellectual Property, Legal Developments, Politics, tariffs, Trade Agreeements, Trade Remedies, World Trade Organization

Over the weekend, President Trump announced a deal with China. The result is the 10% tariff imposed on goods on List 3 of Chinese made goods will remain in place for an additional 90 days rather than increase to 25% on January 1, 2019. The challenge is there was no joint communique issued by the parties. As a result, the actual parameters of the deal are open to doubt.

China supposedly agreed to buy large quantities of American soybeans, but President Xi’s speech regarding that portion of the deal conditioned those purchases on “domestic needs.”

Another key consideration is what is viewed as China’s on-going efforts to take American technology by whatever means available.   Mr. Trump (and industry) wants that stopped, but since no specifics were announced, how will success on this topic be measured?

There was also supposedly a deal reached wherein China will purchase American energy and industrial goods, but again, nothing concrete was documented, so how success in this area , too, is to be measured is also an open question.

While any decrease in the trade tensions between the two countries is a good sign, the latest results can only be viewed as a temporary ceasefire which could go horribly wrong later if the two sides were not clear between them as to what deal was made.

President Trump announced that he would impose the 25% tariff on the List 3 goods if “sufficient” progress had not been made within 90 days, but President Xi’s own announcement made no mention of any deadline or the possible 25% rate increase. Admittedly both leaders put their own spin on the outcome for domestic consumption. What this situation establishes once again is that without a joint statement, too much is left open to chance, and predictability is the best framework to allow business to flourish.

Maybe and Maybe Not – IOR Challenges

Posted in Aerospace & Defence, Agriculture, Antidumping, Border Security, Controlled Goods Program, Corporate Counsel, Cross-border deals, Cross-border trade, Customs Law, Export Controls & Economic Sanctions, Exports, Government Procurement, Imports Restrictions, Legal Developments, NAFTA, Trade Agreeements, Trade Remedies, USMCA

Originally published by the Journal of Commerce in November 2018

One of the many frustrations facing international traders trying to import goods into the U.S. is whether or not they will be accepted as importer of record by Customs and Border Protection (“CBP”).   CBP established a program to deal with what it views as the irregularities frequently associated with shipments originating in China (among other countries) – the New Importer Task Force.  This effort is focused in specific industries, especially those where antidumping and/or countervailing duty is assessed on imported goods.

As a starting point, to qualify as importer of record, the party must either own the goods or have a financial interest in them (e.g., lien rights). See 19 U.S.C. 1484. This would seem to be a straightforward analysis. If you made and sold the goods or purchased goods from one party and sold them to another, that should qualify you as importer of record.  When in doubt, to test the role of the party claiming to be the importer, CBP rejects the entry and demands a list of supporting documentation which typically includes, but it not limited to, an original endorsed bill of lading; a copy of the arrival notice; a copy of the delivery order (including the name of the company to whom the goods will be shipped upon cargo release); verification of the point of contact and the company that takes control of the merchandise upon cargo release; if a broker is involved, a valid power of attorney (to include a scanned copy of a verifiable form of personal identification from the importer or corporate officer who signed the power of attorney, i.e., a driver’s license, government identification or passport (if a non-resident foreign person); a copy of the CBP Form 301 bond;  proof of payment from the importer to the seller and from the ultimate consignee to the importer; proof of payment for the ocean freight charges and insurance, and, if not paid, documentation evidencing the billing information as to the amounts owed, who is being paid and who is paying;  a letter from the importer’s financial institution directly to CBP (not through the importer) attesting to the existence of the importer’s account at that financial institution to include the importer’s EIN/IRS number and contact details for the bank officer issuing the letter; proof the importer is legally registered to do business in its state or country of formation, to include articles of incorporation identifying the corporate officers; any contract between the manufacturer and importer (to include the product description, quantity, price, delivery date, place of delivery and the date or condition that causes the contract to expire); a confirmation of the sale, including the purchaser’s signature; an explanation about the role of any third parties (whose existence is evident from the commercial documents) in the importation or sale of the merchandise and the relationship between that party and the importer; and a copy of the contract between the importer and the ultimate consignee. Sometimes that document list also includes a cost breakdown for the finished goods, the relevant term of sale and how prices are determined (meaning document your price negotiations). We have also seen instances in which Chinese export documents are demanded (in the original Chinese and translated into English).  Also, in the case of a non-resident importer (typically in the DDP context), written evidence of the identity of the U.S. agent for service of process.

Importers respond with the relevant documentation and the vast majority of the time, the response from CBP is that documentation is not sufficient, leaving the importer to either export the goods or identify an acceptable importer who will make entry in his own name. First, this is crafty on CBP’s part because no reason is given, only the conclusion. If one inquires further, and assuming the person who signed the decision can actually be reached, typically one ends up in a very confusing conversation because the question of qualifying as the importer and CBP accepting the value declared seem to get jumbled.  While it is accurate to say that CBP may question whether the value stated at time of entry is appropriate, that does not automatically equate to the importer does not own the goods, which is the key fact to determine whether or not the company qualifies as importer of record.

This process is crafty on the part of CBP for a second reason.  By framing the decision as providing the option to export the goods or identify another party who qualifies and will make entry in its own name, CBP avoids giving grounds for the original importer to be able to protest and so seek court review of the decision made.

In the Trade Enforcement and Trade Facilitate Act (“TFTEA”) effective in 2016, Section 114 called for the establishment of an Importer of Record Program. Section 116 required minimum standards be set that brokers are to meet in identifying all importers.

The Importer of Record Program requires CBP to develop criteria so that sufficient information is submitted to allow CBP to verify the existence of the importer, to identify linkages and affiliations between importers and to identify address and corporate structure changes between importers. CBP was also mandated to maintain a centralized database of importer numbers.

Regarding customs brokers, CBP is to identify the information a broker is to collect, establish reasonable procedures a broker is to follow to verify the authenticity of the information provided, and require the broker to maintain those records, subject to a $10,000 penalty for each failure to comply.

June 2017 saw publication of a new CBP Form 5106, the form used to create and update any importer identity.  Among the new bits of information required are the number of entries the company expects to file yearly; company information, such as a brief business description, a NAICS code, a DUNS number, and any self-filer code.  Additionally, the company is to report when it was established, the name and IRS number for any related current or former businesses, the contact details for its primary bank, any unique identifier on its formation documents and where formed, its business structure, along with the identity of any beneficial owners and officers (to include the Social Security or Passport No. of the individuals).

The last word from CBP about how brokers validate importers is dated May 2018 and reads as follows: “Here are some ways the broker can validate a Power of Attorney:

  • To the greatest extent possible, have POA’s completed in person so the grantor’s unexpired government issued photo identification (driver’s license, passport, etc.) can be reviewed.
  • Check applicable web sites to verify the POA grantor’s business and registration with the State authority.
  • If the principal uses a trade or fictitious name in doing business, confirm that the name appears on the POA.
  • Verify that the importer’s name, importer’s number and Employer Identification Number (also known as the Federal Tax Identification Number) on the POA match what is in ACE.
  • Verify the importer’s address is a “brick and mortar” location on a public mapping program, and not simply a “postal box” or undeveloped parcel of land.
  • Dial the provided phone landline number for authentication.
  • Cross-check the provided information through a third party entity, [i.e.]: credit report, DUN’s number, or similar business identifying entity.
  • Access the client’s website for depth of content versus only a surface containing a landing page.
  • Check whether the POA grantor is named as a sanctioned or restricted person or entity by the U.S. Government.  See the Bureau of Industry and Security’s Export Enforcement (https://www.bis.doc.gov/index.php/oee).”

See https://www.cbp.gov/trade/programs-administration/customs-brokers/validating-power-attorney to read the full posting.

The New Importer Task Force would seem to serve very different purposes from Section 114 and 116 of TFTEA.  What these topics have in common is companies had better be prepared with documentation beyond just the commercial invoice, packing list and transportation document when filing entry.

TFTEA also identified the following priority trade issues: agriculture programs; antidumping and countervailing duties; import safety; intellectual priority rights; revenue; textiles and wearing apparel; and trade agreements and preference programs. Where do your shipments fit among these priorities?

Are you prepared to document your role and why you qualify as importer of record? If not, best to get ready now. Questions are no doubt coming!

Trading Goods: Ever More Complicated

Posted in Border Security, Corporate Counsel, Cross-border deals, Cross-border trade, Customs Law, Legal Developments, Trade Agreeements, Trade Remedies, USMCA

Originally published by the Journal of Commerce in October 2018

While a lot of well-deserved attention is being paid to the steel, aluminum and China tariffs, and the new U.S.-Mexico-Canada Agreement, change is afoot in many other ways. For example, in July 2018, the Office of Foreign Assets Control (“OFAC”) issued an advisory about risks to the supply chain through links to North Korea. In October 2018, OFAC issued a reminder through the Financial Crimes Enforcement Network about the risks to the financial network (which have broader application) from “mischief” caused by Iran’s shenanigans in trying to circumvent U.S. sanctions, in the face of the Joint Comprehensive Plan of Action withdrawal taking full effect. These reminders should be read in concert with the actions of Customs and Border Protection (“CBP”) and its changing how importers report their identity to the agency. What all of these activities have in common is the need for all parties in the supply chain to conduct due diligence and be vigilant in those efforts.

The overarching point to all of these reminders is the possibility of legitimate parties being inadvertently lured into what they think are routine business matters, only to find out they are involved with ill-willed parties seeking an improper outcome or advantage.

Regarding North Korea, parties were reminded to carefully consider the provisions in contracts and sub-contracts, as well as how goods, services and technology are labeled, e.g., product descriptions and origin; artificially low pricing;  I.T. services and other sales of goods or services through front or sham companies, aliases, and third country nationals. The lack of transparency being one key factor consistently mentioned.

Some of these very same factors are mentioned in OFAC’s recent advisory about Iran. OFAC describes the publication as intended to assist financial institutions to “better detect” potentially illicit transactions.  Again, reference is made to front and shell companies, the exploitation of financial institution worldwide, the obligation of financial institutes under the Bank Secrecy Act and other know your customer laws and regulations, the misuse of banks and exchange houses, forged documents in the context of commercial shipping, trading of precious metals (especially gold), the masking of transactions (by use of third parties and other misidentification) and the expanding use of virtual currency.

The message from OFAC in both contexts is know with whom you are dealing, make sure you are comfortable you have all the needed details, and if you do not, request additional information; conduct account and transaction reviews to better spot anomalies; correspond with business partners, especially when third parties are involved.  The front companies mentioned were located in China, Ukraine, Iraq, Kyrgyzstan, the UAE, Thailand, Turkey, Malaysia and the U.K.

In considering one’s actions, it is well worth keeping in mind the “red flag” indicators long ago published by the Bureau of Industry and Security, Dept. of Commerce, see https://www.bis.doc.gov/index.php/compliance-a-training/export-management-a-compliance/freight-forwarder-guidance/23-compliance-a-training/51-red-flag-indicators. They consist of the following keys:

  • The customer or its address is similar to one of the parties found on the Commerce Department’s [BIS’] list of denied persons.
  • The customer or purchasing agent is reluctant to offer information about the end-use of the item.
  • The product’s capabilities do not fit the buyer’s line of business, such as an order for sophisticated computers for a small bakery.
  • The item ordered is incompatible with the technical level of the country to which it is being shipped, such as semiconductor manufacturing equipment being shipped to a country that has no electronics industry.
  • The customer is willing to pay cash for a very expensive item when the terms of sale would normally call for financing.
  • The customer has little or no business background.
  • The customer is unfamiliar with the product’s performance characteristics but still wants the product.
  • Routine installation, training, or maintenance services are declined by the customer.
  • Delivery dates are vague, or deliveries are planned for out of the way destinations.
  • A freight forwarding firm is listed as the product’s final destination.
  • The shipping route is abnormal for the product and destination.
  • Packaging is inconsistent with the stated method of shipment or destination.
  • When questioned, the buyer is evasive and especially unclear about whether the purchased product is for domestic use, for export, or for reexport.

CBP has added to this list by outlining steps customs brokers can take to vet importers when signing powers of attorney. Those steps can be found here – https://www.cbp.gov/trade/programs-administration/customs-brokers/validating-power-attorney – and consist of:

  • To the greatest extent possible, have POA’s completed in person so the grantor’s unexpired government issued photo identification (driver’s license, passport, etc.) can be reviewed.
  • Check applicable web sites to verify the POA grantor’s business and registration with the State authority.
  • If the principal uses a trade or fictitious name in doing business, confirm that the name appears on the POA.
  • Verify that the importer’s name, importer’s number and Employer Identification Number (also known as the Federal Tax Identification Number) on the POA match what is in ACE.
  • Verify the importer’s address is a “brick and mortar” location on a public mapping program, and not simply a “postal box” or undeveloped parcel of land.
  • Dial the provided phone landline number for authentication.
  • Cross-check the provided information through a third party entity, i.e.: credit report, DUN’s number, or similar business identifying entity.
  • Access the client’s website for depth of content versus only a surface containing a landing page.
  • Check whether the POA grantor is named as a sanctioned or restricted person or entity by the U.S. Government.  See the Bureau of Industry and Security’s Export Enforcement (https://www.bis.doc.gov/index.php/oee).

The last modified date is stated to be May 25, 2018, but some form of this list has been on CBP’s website for the last several years. Other suspicious factors according to CBP include the use of cell phone numbers and the failure to have an email address associated with the firm’s domain name.  The use of personal checks for business matters has long been questionable. Wire transfers making payment from third parties, incomplete, questionable or contradictory documents, shipments to known transshipment ports may also present suspicious actions.

Now, to this, gets added the data required for the CBP Form 5106 which took effect in June 2017. While the form has limited application, meaning it is submitted only for new importers or if changes are required (doesn’t that seem to cover just about everyone?), the required data elements are clearly designed to tell CBP much more about the importer than ever before, including such factors as business description, any predecessor business entities, bank data, a copy of the Articles of Incorporation, and personal identification details for officers and those with financial knowledge about the company, including Social Security or Passport Numbers.

The bad guys are out there looking to take advantage. Are you reasonably well prepared?

Canada Is Imposing Emergency Steel Safeguards on 7 Steel Products and Conducting an Injury Inquiry

Posted in Canada's Steel Safeguard

On October 11, 2018, Canada’s Department of Finance announced that effective October 25, 2018, Canada will be imposing emergency tariff rate quotas on 7 categories of steel products.  The Department of Finance has prepared a report and there will be an Order in Council under section 55 of the Customs Tariff to implement the emergency steel safeguard tariff rate quotas before the Canadian International Trade Tribunal determines if the protection is warranted. The Report indicates that certain steel goods are being imported into Canada in increased quantities. The Report further finds that:

“…the importation in increased quantities of steel goods is the result of the effect of the obligations, including tariff concessions, incurred by Canada under WTO agreements and of unforeseen developments, including global overcapacity in steel production and the fact that a number of WTO members have taken or are considering taking measures to restrict importation of steel into their markets, which appears to have caused or threaten to cause significant trade diversion into Canada.”

What products are covered by Canada’s steel safeguard?

Canada is imposing emergency tariff rate quotas of 7 categories of steel products:

  1. Heavy Plate
  2. Concrete Reinforcing Bar;
  3. Energy Tubular Products;
  4. Hot-Rolled Steel;
  5. Painted Steel;
  6. Stainless Steel Wire; and
  7. Wire Rod.

For more information as to the goods covered by these general headings, please refer to the Backgrounder.  Also, refer to Customs Notice 18-17.  Also refer to the Canadian International Trade Tribunal Notice of Commencement of Safeguard Inquiry – Certain Steel Products.

Are any countries excluded?

Yes. The following countries are excluded:

  1. The United States (U.S steel is covered by existing countermeasures introduced on July 1, 2018);
  2. Mexico (partial exclusion covers heavy plate, rebar, hot-rolled steel, painted steel and stainless steel wire rod; energy tubular products and wire rod is subject to the steel safeguard measures);
  3. Chile
  4. Israel;
  5. Developing Countries (such as Vietnam, except that rebar from Vietnam is subject to the steel safeguard measures) -the list of the developing countries is set out in Customs Notice 18-17.

What will be the Tariff Rate Quota?

Canada is imposing a surtax of 25% on imports above certain volume levels.  But, the quotas are not simple.  The quotas are based on:

  1. the type of steel product (7 categories);
  2. 50 day time periods; and
  3. the country of export.

The quotas during the 220 day safeguard inquiry are as follows:

Product Quota for 220 day period (MTs)
Heavy Plate 51,672
Concrete Reinforcing Bar 141,328
Energy Tubular Products 257,392
Hot-Rolled Sheet 61,196
Pre-Painted Steel 46,540
Stainless Steel Wire 1,868
Wire Rod 46,052

The quotas will be applied on 50 days cycles as follows:

 

Product First 50 days Second 50 Days Third 50 Days Final 50 days
Heavy Plate 12,918 12,918 12,918 12,918
Concrete Reinforcing Bar 35,332 35,332 35,332 35,332
Energy Tubular Products 64,348 64,348 64,348 64,348
Hot-Rolled Sheet 15,299 15,299 15,299 15,299
Pre-Painted Steel 11,635 11,635 11,635 11,635
Stainless Steel Wire 467 467 467 467
Wire Rod 11,513 11,513 11,513 11,513

 

Canada will impose a quantitative limit on countries (one country cannot fill the entire quota).  For each steel product category, a limit is imposed on the share of the total quota that may be filled by a single country. This limit is equal to the highest import share from a single country based on historical import volumes for that product. If the volume of imports of a product category from a single country reaches the limit, then all subsequent imports of that product category from the country will be subject to the surtax for the remainder of the 200-day provisional safeguard period.

Who Is Affected?

Importers will have to pay the surtaxes on import volumes above the 50 days quota limit.  The quotas will be applied on a first come first served basis.  As a result, any importer will not know if there is quota available.  According to Customs Notice 18-17, paragraph 6:

“Importers may request shipment-specific import permits (specific permits) from Global Affairs Canada, which will be valid for 14 days. Goods for which an importer obtained a specific permit, valid at the time of accounting, are exempt from the applicable safeguard surtax. Imports of goods that do not have a specific permit, or are in excess of the quantity of an import permit at the time of accounting, are subject to the safeguard surtax.”

What this means is that overseas shipments may be on the water when the import permit is applied for.  The 14 day limit means that the goods must land within 14 days of the shipment specific import permit.

What Happens at the Canadian International Trade Tribunal (CITT)?

On October 10, 2018, the Governor-in-Council issued Order in Council 2018-1275 and made An Order Referring to the Canadian International Trade Tribunal, for Inquiry into and Reporting on, the Matter of the Importation of Certain Steel Goods directing the CITT to commence a safeguard inquiry.

The CITT is an independent, Canadian quasi-judicial administrative tribunal that adjudicates a variety of international trade cases and matters. The CITT is the place to go to receive a fair, timely, transparent and effective resolution of a trade-related dispute and/or government-mandated inquiry/dispute, provided that the trade-related dispute is within an area of the Tribunal’s jurisdiction.

On October 11, 2018, the CITT has commenced a safeguard inquiry (GC-2018-001).  The CITT will look into whether the safeguard measures are warranted.  The CITT will determine whether any of the 7 categories of steel products are being imported into Canada in such increased quantities and under such conditions as to be the principle cause of serious injury or threat thereof to Canadian producers of like or directly competitive goods.

The CITT’s proposed schedule is as follows:

  • October 11, 2018 – Notice of Commencement of inquiry.questionnaires posted online;
  • October 29, 2018 – Notices of participation are due;
  • October 31, 2018 – Replies to questionnaires are due and a case management conference will be held;
  • November 26, 2018 – The CITT will distribute the record;
  • December 6, 2018 (noon) – case briefs are due from all parties (there will be page limits imposed);
  • December 13, 2018 (noon) – reply briefs are due from all parties;
  • December 17, 2018 – The CITT will decide which witnesses will testify;
  • December 27, 2018 – Deadline for procedural and preliminary matters;
  • January 3-22, 2019 – Public Hearings in Ottawa.

Who should participate?

Importers of the 7 steel products, users of the 7 steel products, foreign producers of the 7 steel products and foreign governments should participate in the CITT proceedings.

For more information, please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com. Alternatively, visit www.lexsage.com.

Canada’s Process to Ratify USMCA

Posted in Canada's Federal Government, NAFTA, NAFTA Renegotiations, Provincial Governments, Trade Agreeements, U.S. Federal Government, USMCA

On September, 2018, the United States, Canada, and Mexico announced that a new NAFTA was agreed and would be called the United States-Mexico-Canada Agreement (“USMCA”) (also known as NAFTA 2.0).  The text of the USMCA was posted on the United States Trade Representative website. LexSage has published an USMCA Resource Guide with USMCA Chapters, NAFTA Chapters and TPP (not CPTPP) Chapters and comparison tables.

The USMCA is not yet law in any of the United States, Canada or Mexico.  The text of the agreement needs to be scrubbed by the government lawyers.  The USMCA needs to be signed.  Then each country must takes the necessary steps to ratify and implement that trade agreement.  None of this is guaranted.

Canada, must take domestic procedures to implement the USMCA into domestic law.  Canada takes the following steps to implement a free trade agreement (or any treaty) in Canadian law:

Step 1: Signing Order (Instrument of Full Powers): This step should be taken before the signing ceremony. A signing order (that is, an Instrument of Full Powers) will designate one or more persons who have the authority to sign the treaty on behalf of Canada.  This is expected to take place in late November 2018 as it is expected that the USMCA will be formally signed at the end of November.

Step 2: Tabling the Treaty in the Parliament: The signed treaty is tabled in the House of Commons for discussion (not for a vote).  Before 2008, treaties were not brought to all members of Parliament.  In January 2008, Prime Minister Harper changed the procedures of ratifying treaties and added this step in order to improve transparency and the democratic process.  Global Affairs Canada has the 2008 Policy on its website. However, there is no vote on the treaty. There may be a full discussion about the treaty, but no opportunity to vote, undo the signature or change the text of the negotiated treaty.

The Clerk of the House of Commons distributes to all MPs (Members of Parliament) the full text of the treaty along with an Explanatory Memorandum about the treaty (often prepared by the negotiating team with input from the Minister responsible for the treaty).  The Explanatory Memorandum covers the following points:

  • Subject Matter: a description of the treaty;
  • Main Obligations: a description of the main obligations that will be imposed upon Canada by the treaty, should it be brought into force;
  • National Interest Summary: a description of the reasons why Canada should become a party;
  • Ministerial Responsibility: a listing of Ministers whose spheres of responsibility are implicated by the contents of the treaty;
  • Policy Considerations: an analyze as how the obligations contained in the treaty, as well as how the treaty’s implementation by Government departments are or will be consistent with the Government’s policies;
  • Federal-Provincial-Territorial implications: a determination of whether the obligations in the treaty relate in whole or in part to matters under provincial constitutional jurisdiction;
  • Time Considerations: details of any upcoming dates or events that make the ratification a matter of priority;
  • Implementation: a brief description of how the treaty will be implemented in Canadian law, including a description of the legislative or other authority under which it will fall (which will have already been determined by the Department of Justice);
  • Associated Instruments: information on any international instruments of any kind that are related to this treaty;
  • Reservations and Declarations: a description of any reservations or declarations;
  • Withdrawal or denunciation: a description of how the treaty could be terminated; and
  • Consultations: a description of the consultations undertaken with the House of Commons, self-governing Aboriginal Governments, other government departments and non-governmental organizations prior to the conclusion of the treaty, as appropriate.

The House of Commons then has 21 sitting days to consider the treaty before the Executive may take necessary steps to ratify the treaty (Step 4). The MPs often debate the treaty.

Step 3: Motion in House of Commons: When there is a majority government or sufficient support in the House of Commons, a motion will be tabled to recommend action, including ratification of the treaty.  The vote is not required.  The vote does not have legal effect.  If the vote fails, the government cannot be toppled.

Step 4: Order-in-Council (Instrument of Ratification): After the treaty has been in the House of Commons for 21 sitting days, the ratification of the treaty may occur.  The ratification process is controlled by Cabinet.  There is no requirement to pass legislation in the Parliament to ratify a signed treaty. The Governor-in-Council (Cabinet) prepares an Order-in-Council authorizing the Minister of Foreign Affairs to sign an Instrument of Ratification or Accession.

Step 5: Federal Implementing Legislation: Treaties must be implemented in Canadian law in order to have legal effect.  An implementing bill is tabled in the House of Commons.  The implementing bill contains the changes required to Canadian law at the national level to implement the provisions of the treaty.  The MPs debate the implementing bill and may suggest changes to the implementing laws.  The MPs cannot require changes to the substance of the treaty.  However, the MPs may ask questions of the Government and the questions must be answered.

After the implementing bill passes in the House of Commons, the implementing bill is sent to the Canadian Senate.  The implementing bill is debated in the Senate.  It is possible that the Senate will not pass the implementing bill.  This happened in 1988 when the Senate would not pass the Canada-United States Free Trade Agreement Implementation Act, which triggered a federal election.

Step 6: Provincial/Territorial Implementing Legislation: It may be possible that implementing legislation is also required at the provincial level.

Step 7: Regulatory Changes: Often new regulations and/or changes to existing regulations are required to implement treaty provisions. The passing/changing of regulations is controlled by Cabinet.

Step 8: Taking Effect: The date that a treaty comes into force, or the terms and conditions necessary for the treaty to come into force, are established in the treaty itself.  CPTPP will be different than typical treaties in terms of when it will take effect.  We will comment on how the CPTPP will take effect after reviewing the text.

Step 9: Other Changes to Policies, Guides, Procedures of Government: Government departments will make necessary changes to government policies, guides, procedures, etc.  These changes take place over time and are not completed at the time the treaty takes effect.

For more information, please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com. Alternatively, visit www.lexsage.com.

The USMCA Rules of Origin: Changes Affecting Auto Manufacturers and Auto Parts Makers

Posted in Buy America, Canada's Federal Government, Cross-border trade, NAFTA, NAFTA Renegotiations, origin, Politics, Trade Agreeements, Transportation, U.S. Federal Government

Late in the evening on September 30, 2018, the United States, Canada and Mexico announced the conclusion of negotiations of the United States – Mexico – Canada Agreement (”USMCA”) (also known as NAFTA 2.0). While the text of USMCA remains to be finalized, formally signed and ratified by each of the three countries, a preliminary text of the new requirements has been published on the USTR website. LexSage has published an USMCA Resource Guide with USMCA Chapters, NAFTA Chapters and TPP (not CPTPP) Chapters and comparison tables.

Now is the time for auto manufacturers and auto parts makers to strategize how their organizations can optimize their position within a newly framed North American auto industry.

Canadian auto manufacturers will now need to ensure that the parts that they purchase meet new and complex requirements set out in the USMCA.  If they do not, their vehicles may not qualify as “originating”.  Vehicles produced that are not “originating”, will not enjoy duty free treatment under the USMCA when they are exported to one of USMCA countries (i.e, Canada, U.S., Mexico).

This means that Canadian auto parts makers selling their parts to auto manufactures in any of the three countries will need to ensure that their parts meet these new requirements. Doing so will permit continuing sales and arguably, present new business opportunities, replacing other parts suppliers who are not prepared or cannot fulfill the requirements of the new rules.

As published on October 1, the USMCA provides the following content rules that must be met for vehicles and/or auto parts to qualify as “originating” for use in the auto industry.

1. Vehicles

The USMCA requires higher levels of North American Content (Regional Value Content) requirements starting in 2020. North American (U.S./Canada/Mexico) content requirements will increase from their current NAFTA content requirements, starting in 2020.  Depending on the type of vehicle, the content requirements will differ.

(a) Passenger Vehicles and Light Trucks:

(i) North American Content requirements: Starting in 2020, passenger vehicles and light trucks must meet a 66% North American content requirement to qualify as “originating” under the USMCA.  That requirement will then increase each year until 2023 when the content required will be 75%; and

(ii) Certain parts must be “originating”: a vehicle produced in North America will qualify as “originating” and, thereby, enjoy duty free treatment under the USMCA, only if each of the engine, transmission, body and chassis, axle, suspension system, steering system and advanced battery is “originating”.  Further details on this requirement will be provided by each country.

(b) Heavy Trucks: 

Starting in 2020, heavy trucks must meet a 60% North American content requirement to qualify as “originating”.  That requirement will rise to 70% in 2027.

2. Parts for use in passenger vehicles and light trucks

Higher levels of North American content/Regional Value will be required starting in 2020. Depending on the part, different content requirements will apply.  Parts for use in passenger vehicles and light trucks have been broken down into three categories: core parts; principal parts and complementary parts.  Different content requirements apply, depending on the category of the part:

(i) Core Parts for use in passenger vehicles and light trucks: North American Content (Regional Value Content) required will rise to 73%/85% by 2023: The list of core parts for use in passenger vehicles and light trucks includes certain: engines, engine parts, vehicle bodies, gear boxes, drive axles, shock absorbers, lithium ion batteries and steering wheels.   Depending on which method is used to calculate the North American content, in 2020, these parts will need to have 66% (net cost method)/76% (transaction method) North American content to qualify as “originating”.  Thereafter the content requirement will rise incrementally to 75% (net cost method)/85% (transaction method) North American content in 2023. There are some exceptions to these requirements;

(ii) Principal Parts for use in passenger vehicles and light trucks: North American Content (Regional Value Content) required will rise to 70%/80% by 2023: Similar requirements will apply to listed principal parts for use in passenger vehicles and light trucks.  The list of principal parts is long and includes certain: tires, rear-view mirrors, hydraulic fluid pumps, compressors, air conditions, electronic brake systems, clutches and shaft couplings, and airbags. Starting in 2020, principal parts will need to have 62.5% (net cost method)/72.5% (transaction value method) North American content to qualify as “originating”.  The required North American content will rise to 70% (net cost method)/80% (transaction value method) by 2023; and

(iii) Complementary Parts for use in passenger vehicles and light trucks: North American Content (Regional Value Content) required will rise to 65%/75% by 2023:  The list of complementary parts includes certain: pipes, locks, catalytic converters, valves, electric motors, batteries, distributors and windshield wipers, defrosters & demisters.  To qualify as “originating”, complimentary parts will need to have 62% (net cost method)/72% (transaction value method) North American content starting in 2020.  The required North American content will rise to 65% (net cost method)/75% (transaction value method) by 2023.

3. Parts for use in heavy trucks

North American content/Regional Value content will increase starting in 2020. Depending on the part, different content requirements will apply:  Parts for use in heavy trucks have been broken down into two categories: principal parts and complementary parts.  Different content requirements apply, depending on the category of the part:

(i) Principal Parts for use in heavy trucks: North American Content (Regional Value Content) required will rise to 70%/80% by 2027: The list of principal parts includes certain: engines, engine parts, air/gas pumps, compressors, fans, air conditioners, seat belts, brakes, gear boxes, drive axles, mufflers and radiators.  For principal parts to be “originating”, they will need to have 60% (net cost method)/70% (transaction value method) North American content starting in 2020.  The required North American content will rise to 70% (net cost method)/80% (transaction value method) by 2027.

(ii) Complementary Parts for use in heavy trucks: North American Content (Regional Value Content) required will rise to 60%/70% by 2027:  The list of complementary parts includes certain: pumps, brake systems, bearings, electromagnetic couplings, clutches, and ignition/start equipment.  Starting in 2020, complimentary parts will need to have 54% (net cost method)/64% (transaction value method) North American content to qualify as “originating”.  The required North American content will rise to 60% (net cost method)/70% (transaction value method) by 2027.

4. 70% North American Steel and Aluminum Content Requirements

Adding further complexity, the USMCA will introduce new requirements relating to the steel and aluminum purchases made by the vehicle producer. A passenger vehicle, light truck or heavy truck will qualify as “originating” only if at least 70% of the vehicle producer’s purchases of steel and aluminum is “originating”.

5. Labour Value Content Requirements

In addition to each of the above requirements, vehicles will qualify as “originating” only if the vehicle producer certifies that 40-45% (depending on the type of vehicle) of its production activities such as costs of manufacturing, assembly, R&D and information technology, are carried out by workers who earn at least US $16/hours. There are detailed restrictions on which costs can be used and to what extent they may be used as part of the calculation.

6. Partial Exemption from US 232 duties on Canadian produced autos exported to the U.S.

Canada and the U.S. signed a side letter that provides that the U.S. will provide at least a 60-day exemption from any future measures under Section 232. During that 60-day exemption period, the U.S. and Canada would seek to negotiate an appropriate outcome. In the event that, following the 60-day exemption period, the U.S. applies Section 232 measures, Canada has secured an exemption from those measures for: (i) 2.6 million passenger vehicles/year; (ii) light trucks; and (iii) U.S.$32.4 billion/year of auto parts.

The published text of the USMCA currently is undergoing a full legal review to ensure that it accurately reflects the agreement of the three countries.  Once completed, the leaders of each of the U.S., Canada and Mexico will formally sign the agreement which then will be submitted for ratification by each country.  While the ratification process in Canada and Mexico may proceed relatively quickly, the ratification process in the U.S. could take some time.  This means that the USMCA is not likely to come into effect until 2019.

This is the time for auto manufacturers and auto parts makers to carefully review their sourcing, manufacturing operations and labor content.  The new rules are complex but achieving “originating” status for your products will help to preserve existing customer demand and generate new sales opportunities.

Should you require any assistance, please do not hesitate to contact Heather Innes at 416-350-1234 or heather@lexsage.com.