Yesterday, the Iowa caucuses began in earnest, kicking off the voting for a Democratic challenger this November. The Senate is expected to formally vote tomorrow to bring an end to the impeachment trial of President Trump. With impeachment proceedings complete, and primary voting in full swing, the 2020 campaign is likely to consume all the oxygen in your nation’s capital until November. That means there is unlikely to be significant changes in trade or any other front before the end of the year. Even so, the President’s recent expansion of Section 232 tariffs on derivative steel and aluminum products means it is possible we will continue to see an impact on trade through moves where Congressional approval is not required.
The International Longshore and Warehouse Union (ILWU) that handles every shipping container imported through the West Coast may soon be forced to file for bankruptcy.
While a bankruptcy might only directly impact operations in Portland, Oregon, the prospect may influence upcoming negotiations with the Pacific Maritime Association, the collection of west coast shipping lines and terminal operators.
Founded in 1934, the ILWU and its Portland local are threatened by a jury award after a feud over just two dockside jobs. The $94-million federal jury award Nov. 4 to ICTSI Oregon Inc., a cargo terminal operator, forced a warning by union leaders that a Chapter 11 filing may be ahead.
ILWU attorneys will ask the trial judge to reduce the award this month, which would otherwise overwhelm the union’s $20 million in assets. The award was made by a jury, not the Judge, and he may be reticent to set aside the award based on the facts of the case.
The ILWU is liable for 55% of the jury award — less than $3,500 per longshore member, but so far members have opposed individual assessments. The Portland chapter, which lists $150,000 in assets, is on the hook for the rest.
Since the ILWU is funded by dues, union members would need to pay for any replenishment of union reserves. If members’ wages then rise to rebuild the reserves, the increase could ultimately be passed along to consumers.
A Chapter 11 filing would force the union to disclose details of its finances and operations. Debtors must give sworn testimony in response to questions from a bankruptcy judge and creditors and provide full accounts of operations, capital structure and events leading to bankruptcy, said Diane Lourdes Dick, a Seattle University School of Law professor.
“Submission of false or misleading information could provide grounds for dismissing or converting the case to a Chapter 7 liquidation, or appointing an examiner or independent trustee,” she said. “We think of bankruptcy as a kind of fishbowl.”
If forced into an assessment of its members to avoid such a disclosure, the union may look to subsequent negotiations to make up any forfeited wages. That could lead to difficult discussions in the next round of talks with the PMA.
Now is time to submit your annual report to the Foreign-Trade Zone Board at the U.S. Department of Commerce. While it is due to the FTZ Board on March 31, many Grantees ask that zones submit earlier than that so they can review prior to final submission. If you haven’t gotten a deadline from your Grantee yet, it’s a good time to reach out and see what is planned.
If your zone year is based on the calendar year, it is also a good time to take care of the other annual reports for zone operators – annual reconciliation and system review.
Since submitting the FTZ Annual Board Report is an activity we do only once a year, it can be hard to remember how to get the data collected and organized. ISCM’s FTZ Annual Board Report Tutorial can help! And, unlike the free webinars, this tutorial describes not only what data is needed but explains where to look for that data and how to calculate the trickier elements needed. Have other training needs? Let us know about them by sending an email to Info@iscm.co.
FTZs Brace For New Round of Steel Tariffs
While the Section 301 additional tariffs that have been dogging FTZs were reduced slightly at the end of last year, President Trump has just signed a proclamation increasing tariffs on steel products by an additional 25 percent and on aluminum products by an additional 10 percent. The President exempted Argentina, Australia, Brazil, Canada, Mexico and South Korea from the new levies on derivative steel products, and Argentina, Australia, Canada and Mexico are exempt from the added duties on derivative aluminum articles.
Since the imposition of the original Section 232 tariffs on steel and aluminum, imports of steel and aluminum have declined but imports of derivative products, like steel nails and aluminum cables, have increased according to the President.
President Trump said "foreign producers of these derivative articles have increased shipments of such articles to the United States to circumvent the duties on aluminum articles and steel articles." The increased tariffs take effect next week on Feb. 8 and then such products will need to be admitted in privileged foreign (PF) status in FTZs.
“The Secretary has informed me that domestic steel producers’ capacity utilization has not stabilized for an extended period of time at or above the 80 percent capacity utilization level identified in his report as necessary to remove the threatened impairment of the national security,” a White House statement said. “Stabilizing at that level is important to provide the industry with a reasonable expectation that market conditions will prevail long enough to justify the investment necessary to ramp up production to a sustainable and profitable level.”
For example, import volumes of steel nails, tacks, drawing pins, corrugated nails, staples, and similar derivative articles for the June 2018-May 2019 period rose 33% compared with the previous 12-month period.
Meanwhile, import volumes of aluminum derivatives increased by 152% during the same period. In addition, import volumes of “bumper and body stampings of aluminum and steel for motor vehicles and tractors” increased by 38%, according to the White House.
It remains to be seen if this is a start to a trend pushing trade remedies up the supply chain to manufactured products instead of just raw materials.
Border Patrol agents in San Diego recently exposed the longest cross-border tunnel ever discovered in the U.S.
The tunnel is around five and a half feet tall and two feet wide and 4,309 feet long, averaging 70-feet deep and had a ventilation system, electricity and a rail system designed to move large packs of drugs. Agents required oxygen canisters while mapping out the tunnel.
The tunnel originates in Tijuana, Mexico west of the Otay Mesa Port of Entry. Concealed by a small industrial building, the tunnel travels north into the U.S. bending slightly west and extending an astonishing 4,068 ft. from the border, with a total length of 4,309 ft.; over three-quarters of a mile. The next longest smuggling tunnel into the U.S., discovered in San Diego in 2014, was 2,966 feet long.
The Phase One trade agreement signed by the U.S. with China last December included a provision to reduce the current 15% duty rate applicable to imported Chinese merchandise on List 4a of the Section 301 tariffs, to 7.5% beginning on February 14th.
CBP did not issue a new HTS code to differentiate merchandise required to pay 15% from merchandise required to pay 7.5%. Just as the FTZine was going to press, CBP issued CSMS #41538917 confirming that duties payable on FTZ inventory placed in Privileged Foreign (PF) status before the Valentine’s Day rate reduction would be collected at the rate in effect at the time PF status was elected.
This is the first time one of the recent trade remedy tariffs has been reduced or eliminated, and it appears CBP intends to add the ACE programming required to continue to collect the higher rate. There is no new action at this time for FTZ operators, and List 4a merchandise must still be admitted in PF status by all FTZ operators.
The US has signaled a crackdown on counterfeit goods sold online. A measure promoted by the FTZ industry, but not yet adopted by Congress, might assist in these efforts.
Under current US Customs rules, de minimus import entries require the filing of almost no documentation with respect to the merchandise in shipments under $800 in value, making it an easy way to avoid counterfeit defenses. Allowing the same tax incentives from an FTZ could at least give CBP the opportunity to inspect merchandise prior to retail sale, slowing the proliferation of counterfeits.
As part of the enforcement effort to combat counterfeit products, the report says customs agents will treat domestic U.S. warehouses and fulfillment centers, such as those operated by Amazon and others, as the “ultimate consignee” for goods that haven’t been sold to consumers, giving officials power to scrutinize shipments even after they have cleared the border and moved to a regional warehouse.
The new measures follow a memorandum signed last April by President Donald Trump in which he pledged to rein in the sale of counterfeit products on sites such as Amazon, eBay and Chinese e-commerce leader Alibaba.
Unfortunately, such moves will only accelerate the move to overseas distribution and de minimus entries, as such scrutiny is not possible in foreign warehouses, and the shear volume of small package imports makes screening individual shipments by CBP almost impossible.
The size of the problem—and any likely solution—is growing. The incidence of infringing goods at U.S. borders has increased from 3,244 seizures in 2000 to 33,810 in 2018, according to DHS data.
The new initiative, led by U.S. Customs and Border Protection and the White House coordinates with the Phase One trade agreement that requires Beijing to take steps against counterfeiters or risk new tariffs.
The Trump administration is seeking to pressure e-commerce to help stem the rising tide of counterfeits and pirated goods.
A Walmart Inc. spokesman said the company only uses “select sellers in our marketplace, all of which we’ve carefully vetted” and that the items reported as counterfeit make up “a very small fraction of less than 1% of total items available for sale on Walmart.com.”
“We already have programs and processes that go well beyond our obligations under U.S. law,” an Amazon spokeswoman said. “This year we will begin reporting all confirmed counterfeiters blocked from our stores to law enforcement entities so they can build cases against these bad actors.” EBay spokeswoman Ashley Settle said, “We welcome and support this multi-stakeholder dialogue and look forward to continuing to work collaboratively with the administration, Congress, law enforcement and our industry partners to combat counterfeits and bad actors.”
A spokeswoman for Shopify Inc. said the companies’ employees “take concerns around the goods and services made available by merchants on our platform very seriously” and that it has “multiple teams who handle potential violations.”
The Phase One trade agreement signed late last year by U.S. and Chinese officials requires Beijing to boost the number of personnel trained to seize pirated good, with requirements to destroy fake goods. Passing legislation to allow de minimus entries of foreign-trade zones would slow the spread of counterfeit distribution and promote easier access to CBP inspection of suspect merchandise.
President Trump formally signed the new trade agreement with Mexico and Canada into U.S. law last Wednesday. On the same day, Canada’s Deputy Prime Minister Chrystia Freeland, who led Canada’s negotiating team, formally introduced the necessary legislation to the Canadian Parliament.
Canada will be the last country to enact the requirements of the agreement, and passage is still expected even though Prime Minister Justin Trudeau’s party no longer controls a majority in the Canadian Parliament.
What is less certain is what might happen after the November presidential election in the U.S. While candidates Sen. Elizabeth Warren of Massachusetts, Sen. Amy Klobuchar of Minnesota and former Vice President Joe Biden generally accept USMCA as a modest improvement over NAFTA, Sen. Bernie Sanders of Vermont, leading in many of the Iowa polls, voted against USMCA and has taken a stand against the agreement with Canada and Mexico.
"If this is passed, I think it will set us back a number of years," Sanders said, suggesting previously negotiated trade deals with similar terms have "cost us some 4 million jobs as part of the race to the bottom." What actions might a President Sanders take to modify the USMCA?
Critics of USMCA have dubbed the agreement "NAFTA 2.0" and say it doesn't go far enough to protect workers and address environmental concerns. Sanders highlighted these issues in a statement, suggesting "hundreds of thousands of well-paying jobs" will be lost if the deal is passed. Sanders is likely alluding to job losses in manufacturing, in particular, which has seen U.S. employment decline considerably in recent years. A USAFacts analysis of government data suggests 13.5 million Americans were employed full-time or part-time in manufacturing in 2018, representing 6.7% of all jobs and accounting for $2.3 trillion (11%) of U.S. gross domestic product.
Senator Sanders released a video explaining his no vote, saying USMCA included "not a single damn mention" of climate change.
"There is not one reference to the words climate change," Sanders said. "Here you have a major trade agreement which in fact will make it easier for the large oil companies to destroy our planet."
He also repeated his concerns that it could result in U.S. jobs being outsourced to "low-wage" countries.
Sanders was one of only 10 senators to oppose the deal that overwhelmingly passed the Senate with 90 yes votes.
"Every major environmental organization has said no to this new trade agreement because it does not even have the phrase 'climate change' in it," he said during the debates. "And given the fact that climate change is right now the greatest threat facing this planet, I will not vote for a trade agreement that does not incorporate very, very strong principles to significantly lower fossil fuel emissions in the world."
The Democratic senators who joined Sanders in opposing USMCA in the Senate included Minority Leader Charles Schumer (N.Y.), Kirsten Gillibrand (N.Y.), Kamala Harris (Calif.), Ed Markey (Mass.), Sheldon Whitehouse (R.I.), Jack Reed (R.I), Brian Schatz (Hawaii). Also voting "no" was GOP Sen. Pat Toomey (Pa.).
So while few Senators supported Sanders’ view on USMCA, a President Sanders would have a lot more leverage to effect changes to the agreement. After 25 years with few changes to NAFTA, there is the possibility that two election cycles in a row would bring changes to trading terms with our northern and southern neighbors.
– Yesterday, the Iowa caucuses began in earnest, kicking off the voting for a Democratic challenger this November. The Senate is expected to formally vote tomorrow to bring an end to the impeachment trial of President Trump. With impeachment proceedings complete, and primary voting in full swing, the 2020 campaign is likely to consume all the oxygen in your nation’s capital until November. That means there is unlikely to be significant changes in trade or any other front before the end of the year. Even so, the President’s recent expansion of Section 232 tariffs on derivative steel and aluminum products means it is possible we will continue to see an impact on trade through moves where Congressional approval is not required.