Global Supply Chain Law Blog | Squire Patton Boggs Law Firm
The Global Supply Chain Law Blog discusses legal supply chain issues that often lead to litigation in the supply chain across industries. We discuss current cases, important nuances in the law that can affect supply chain relationships, and ways to make supply chain legal practices more robust, particularly in light of today’s global supply chains.
The UK Environment Secretary Michael Gove announced on June 25, 2019 that food labeling laws will be changed to introduce full ingredient labelling (including allergens) for foods which are packed for direct sale. The new requirements will come fully into force in 2021. Our colleague Nicola Smith prepared an article last August which details the options the UK government was considering and the background to the current proposals, including the categories of products the law intends to cover. That article may be read here.
A series of Allergies Awareness in Foodservice workshops are scheduled from July to October that will cover the impacts of the new full ingredient labelling law, as well as addressing how food safety law and supply chain awareness are critical to allergen awareness. These workshops are designed to provide the practical legal knowledge necessary to protect your business and customers. You can learn more about the workshops, and register to attend, at Food Matters Training.
Developments in product liability regimes around the world should be of interest to any company with a global supply chain. In particular, as companies continue to source ever more materials from Asia, it is important to be aware of the product liability legal landscape in those countries. Our colleagues, David Goh and Bindu Janardhanan, have written a chapter on product liability in Asia for the International Comparative Legal Guide’s Product Liability 2019. The chapter, which provides a concise summary of the current state of product liability law in Asia, may be read here.
A bipartisan bill, introduced in the Senate on May 2, seeks to reduce the United States’ dependence on foreign minerals and develop a national electric vehicle supply chain policy. The American Minerals Security Act (S. 1317), which embraces part of a 2017 executive order by President Trump, would “facilitate the availability, development, and environmentally responsible production of domestic resources to meet national material or critical mineral needs[.]” The Act would require identification of critical minerals that are essential to the economic and national security of the U.S. and vulnerable to supply chain disruptions. Further, the Act would require a nationwide assessment of the reserves of these critical mineral reserves. Perhaps most importantly, the Act would also create a more efficient process to obtain a permit for mining of critical minerals used in electric vehicle production.
The U.S. lags significantly behind China in the production of electric vehicle batteries, as the U.S. is heavily dependent on foreign processed minerals. According to the U.S. Geological Survey, the U.S. is reliant on other countries for at least 50 percent of its supply of 48 minerals, and 100 percent of its supply of 18 minerals. Some of these minerals are domestically available, but underutilized. The U.S. has 13 percent of the world’s lithium reserves but last year the U.S. produced only 2 percent of the global lithium supply. Senator Murkowski (R-Alaska), a sponsor of the Act and chair of the Senate Energy and Natural Resources Committee stated, “[t]his is our Achilles’ heel that serves to empower and enrich other nations, while costing us jobs and international competitiveness.” Indeed, of the $300 billion automakers are expected to spend in the electric vehicle sector over the next decade, the U.S. is positioned to receive $34 billion while China is projected to receive over $146 billion. The Act is a step towards addressing this disparity and strengthening the United States’ position in the electric vehicle supply chain.
Since taking office in January 2017, President Trump has made use of several provisions of US law – including Section 301, targeting unfair trade practices, and Section 232, targeting threats to national security – to bring trading partners to the negotiating table. Major developments over the last two weeks could impact global supply chains across a wide range of industries, including the automotive and manufacturing sectors. Our colleagues at the Trade Practitioner Blog explain what you need to know below.
Section 301 Tariffs: Escalating Tensions with China
Last year, using the authority granted to the US President under Section 301 of the Trade Act of 1974, the Trump Administration announced three lists of tariffs on Chinese imports. List 1 and List 2 imposed 25% tariffs on US$34 billion and US$16 billion worth of products from China, respectively. List 3 imposed 10% tariffs on US$200 billion worth of products from China. In return, China responded with its own tit-for-tat tariffs on US products. The List 3 tariffs were scheduled to increase to 25% at the end of 2018, but President Trump and Chinese President Xi Jinping struck a deal in early December 2018 to pause the planned increase and begin work on a broader trade deal.
Just a few weeks ago, observers were optimistic that a deal between the two countries was imminent. However, since then, the two sides have taken a series of escalating trade actions against each other that could impact your business.
In early May 2019, President Trump unexpectedly announced that he would increase the List 3 tariffs from 10% to 25%, effective May 10, 2019 (note: boats on the water before May 10, 2019 that arrive in the US before June 1, 2019 will still face the lower 10% duty). The Trump Administration also released a draft List 4, which could lead to tariffs of up to 25% on US$300 billion worth of products from China, potentially affecting nearly 4,000 tariff lines that constitute nearly all remaining trade between the two countries. China followed suit by announcing retaliatory tariffs on US$60 billion (or 5,140 tariff lines) worth of US imports.
What Is Next – What You Can Do
Given the sheer volume of the recent tariff actions, virtually any company that imports from or exports to China will be impacted. Fortunately, there are a number of ways you can weigh in to potentially mitigate the costs to your business:
List 3 Tariffs Increase Exclusion Process. The Trump Administration plans to announce a product exclusion process for List 3, which will allow companies to request relief from the increased tariffs. Details remain sparse, but we expect the process to be similar to those used for Lists 1 and 2.
List 4 Tariffs Public Comments. The Trump Administration is accepting public comments to the proposed List 4, especially how tariffs on these products may impact US businesses and consumers. You can weigh in:
By June 10, 2019 – You can request to appear at a hearing on List 4 that is scheduled for June 17, 2019.
By June 17, 2019 – Regardless of whether you want to participate in the hearing, you can submit comments on how this action could impact your business.
Chinese Tariffs Exclusion Process. China’s Ministry of Finance plans to set up exclusion processes for its retaliatory tariffs. The Chinese Government will accept exclusion requests in two rounds, depending on the tariff line in question. The first round will run from June 3 to July 9, 2019 and the second round will run from September 2 to October 18, 2019.
Section 232 Auto Tariffs: Postponed…For Now
On May 23, 2018, the US Department of Commerce initiated an investigation into the threat of automotive imports to US national security under Section 232 of the Trade Expansion Act of 1962, as amended. This trade action faced significant opposition from all fronts, on Capitol Hill, across domestic and international auto manufacturers, and among the countless small- and medium-sized US businesses that rely on international inputs for their business operations. The Commerce Department transmitted its report to the President in February 2019, but its contents – including the agency’s recommendations – were kept secret.
On May 17, 2019, President Trump signed a Proclamation “Adjusting Imports of Automobiles and Automobile Parts Into the United States.” It confirms that the President concurs with a finding by the Secretary of Commerce that auto/auto parts “are being imported into the United States in such quantities and under such circumstances as to threaten to impair the national security of the United States.” However, the President decided not to implement any import restrictions in the immediate future.
What Is Next
Tariffs are not off the table. In the proclamation, President Trump directed US Trade Representative Robert Lighthizer to lead negotiations with the EU, Japan and “any other country the Trade Representative deems appropriate” to address the threatened impairment of national security with respect to imported autos/auto parts. Ambassador Lighthizer has been directed to update the President on the status of these negotiations within 180 days (by November 13, 2019).
The Trump Administration is beginning talks with the EU and with Japan for new bilateral agreements suggesting this 180-day deadline will put significant pressure on those negotiations. Businesses in auto supply chains must closely monitor these talks and engage with US negotiators on how any limits to trade in autos and auto parts could impact their operations.
Section 232 Steel and Aluminum Tariffs: Canada and Mexico Exempted
On March 8, 2018, President Trump signed proclamations establishing Section 232 tariffs on certain steel and aluminum imports. President Trump enacted a 25% tariff on covered steel imports and a 10% tariff on covered aluminum imports. The Commerce Department subsequently established an exclusion process, under which steel users can request their imports be excluded from the tariffs and through which domestic steel producers can file objections setting out their capacity to manufacture the requested product. Tens of thousands of exclusions have been filed to date and new petitions are submitted daily.
In order to pave the way for ratification of the United States-Mexico-Canada Agreement (USMCA), the Administration lifted the Section 232 steel and aluminum tariffs against Canada and Mexico. Canada and Mexico agreed to lift their respective retaliatory tariffs as well, clearing the air for North American businesses that rely on these products. In a separate action, President Trump also signed a proclamation lowering the 232 tariffs on Turkish steel products from 50% back to the original 25% level. In August 2018, President Trump increased Section 232 tariffs on Turkish steel products from the original 25% to 50%, due to bilateral tensions.
What Is Next
Just as the Canada/Mexico tariffs are lifted, pressure is only increasing on companies importing covered goods from the rest of the world. Companies will continue to participate in the 232 tariff and quota exclusion process, especially as some of the earliest granted exclusions are reaching or will soon reach their one-year expiration date.
Our multipractice, cross-jurisdictional team covering all facets of international business and commerce, including international trade, automotive and global supply chain, have the legal expertise and experience to support you as you analyze how potential impacts to your supply chains could ultimately affect your bottom line. Coupled with our policy acumen and political understanding, we have filed a significant number of Section 232 and 301 exclusion requests, effectively helping clients seek relief from the burdensome tariffs. We have achieved exceptional success as compared to industry average in securing product removals/exclusions from tariff lists. We are on the pulse of international trade negotiations and critical developments, and can help you navigate how proposals may impact your business operations.
On May 2, 2019, the US Department of Treasury’s Office of Foreign Assets Control (OFAC) released guidance on effective sanctions compliance programs. This guidance is useful for any company with an international supply chain, as both U.S. and foreign companies may be subject to, and at risk for violating, U.S. sanctions law. As a recent example, e.l.f. Cosmetics settled with OFAC in January of 2019 for $996,080 resulting from apparent violations of the North Korea Sanctions Regulations by two of e.l.f.’s Chinese suppliers. One of the aggravating factors that OFAC considered in that case was that e.l.f.’s OFAC compliance program was “either non-existent or inadequate.” The new OFAC guidance now provides a roadmap for companies to follow in building a compliance program, and the guidance specifies that OFAC “will consider favorably [companies] that had effective [compliance programs] at the time of an apparent violation.”
Our colleague, Kristina Arianina, recently posted a comprehensive summary of the new OFAC guidance, as well as an analysis of the significance of the guidance and how it relates to similar guidance documents released by the US Department of Justice (DOJ) and the Securities and Exchange Commission (SEC). That post may be read here.
Voluntary recalls are a key tool that the Food and Drug Administration (“FDA”), and FDA-regulated companies, use to protect public health. Voluntary recalls are also a corporate nightmare, and can be extremely taxing on supply chain relationships. For industries and products where recalls are common – such as food and drugs – supply chain partners should negotiate responsibility for recalls at the start of their relationship and be prepared to act quickly if a recall is initiated.
The Draft Guidance on Initiation of Voluntary Recalls Under 21 CFR Part 7, Subpart C (“Draft Guidance”) is the FDA’s most recent move towards updating the FDA recall process. In the FDA Statement announcing the Draft Guidance, the FDA explained that, once finalized, it “will provide industry with clear information on ways to prepare, plan, and work with the FDA to ensure voluntary recalls are initiated properly and promptly.”
The Draft Guidance provides recommendations related to training, record keeping, and recall procedures, and outlines specific steps that companies should take to be “recall ready.” These recommendations are structured as a Q & A, addressing four questions:
How should a firm in a product distribution chain prepare to facilitate timely initiation of a voluntary recall?
What should a firm do if there is an indication of a problem with a distributed product?
How should a firm initiate a voluntary recall?
How does FDA work with a recalling firm to initiate a voluntary recall in a timely manner?
Public comments will be accepted until June 24, 2019. The Draft Guidance, including information for submitting comments, is located here.
The FDA recently issued another Statement “on steps to usher the U.S. into a new era of smarter food safety.” Pursuant to the 2011 FDA Food Safety Modernization Act (FMSA), the FDA has proposed and finalized regulations establishing “science- and risk-based standards for the production and transportation of domestic and imported foods.” Recognizing the new opportunities and risks presented by innovation and increasingly global distribution networks, the FDA has announced a “New Era of Smarter Food Safety” with a goal to augment FDA “efforts implementing important FSMA requirements while also leveraging . . . the use of new and emerging technologies.” As a first step, the FDA intends to create a “Blueprint for a New Era of Smarter Food Safety” that will include issues related to traceability, digital technologies, and evolving food business models.
This week, the US Department of Justice (DOJ) announced an update to its 2017 guidance on how the DOJ will evaluate the effectiveness of a company’s corporate compliance program. The updated compliance guideline (Updated Guidance) is twice the length of the original and utilizes a more instructive approach, serving as a roadmap to prosecutors, and prudent companies.
Our colleagues Colin Jennings, Ayako Hobbs, and Elizabeth Weil Shaw have prepared a summary and analysis of the DOJ’s 18-page Updated Guidance, focusing on the important lessons a company can learn about the key elements necessary for a robust and effective compliance program. You can read and download their summary and analysis here.
In a series of tweets posted on May 5, President Trump threatened to raise tariffs on $200 billion of Chinese goods from 10% to 25%, effective this Friday, May 10. He further threatened a 25% tariff on an additional $325 billion of Chinese goods that are currently untaxed, stating it could happen “shortly.” It is unclear whether U.S. officials will actually impose the substantial tariff change this coming Friday, or if it is simply a tactic to apply pressure in trade talks. Trump has previously proposed raising tariffs on Chinese goods to 25% but postponed implementation due to progress in trade talks between the two countries (https://www.businessinsider.com/trump-china-tariff-increase-delayed-past-march-1-deadline-2019-2).
Trump stated in his tweets, “The Trade Deal with China continues, but too slowly, as they attempt to renegotiate.” According to a recent WSJ report (https://www.wsj.com/articles/u-s-china-conclude-productive-trade-talks-but-sticking-points-remain-11556718515), the two countries have made significant headway towards a trade deal, but several issues remain including the use of tariffs as an enforcement measure, China’s industrial policy of granting subsidies to certain companies, and intellectual property protection. Chinese negotiators were scheduled to travel to Washington D.C. on May 8 to continue negotiations, but as of Monday, commentators are unsure if Chinese negotiators will keep their plans. It remains to be seen how President Trump’s latest threats will affect the course of negotiations.
As a tactic in the ongoing civilian aircraft subsidies dispute between the US and the EU at the World Trade Organization, the US government has proposed a preliminary list to tax about US$11 billion worth of products exported to the US from the EU. The product list includes two sections, one focusing specifically on products from France, Germany, Spain and the UK, and the other includes a wide-range of consumer goods (foods, drinks, textiles, handbags, etc.) from all 28 EU member states. On April 17, 2019, the EU launched a public consultation period on a preliminary list of products from the US to be considered for countermeasures. The proposed list includes a variety of agri-food products, aircrafts and chemicals, among others, that represent about US$20 billion in US exports to the EU.
According to recent WSJ reporting , immigration issues at the Mexico-US border are disrupting commercial trade, as US Customs and Border Patrol agents who typically handle trade traffic have been redirected to migrant issues. This redistribution of resources has reportedly caused a pile up of truck traffic and delay of inspections for agricultural and automotive components. This has reportedly resulted in an estimated tens of millions of dollars in losses for supply chain partners. Who is saddled with the risk of loss when politics impacts the flow of goods at international borders?
This complicated question involves the convergence of trade policy, supply chain contract rights, and insurance coverage, such that each instance of loss must be determined on a case-by-case basis. If trade partners have force majeure provisions in their contracts – and even if they don’t! – suppliers may be excused temporarily or permanently by border actions beyond their control. (In the US, courts do not take a uniform view as to whether political risk constitutes a force majeure event.) On the other hand, carriers may be looped into the equation, if their carrier agreements broadly assign them risk of loss during transit. In addition, smart shippers will require carriers to have insurance coverage for situations such as this – so in some instances, insurance companies (and their reinsurers) may bear the ultimate risk.
As border tensions heat up, we expect more impacts to North American supply chains. Supply chain partners should develop multi-tiered strategies to minimize loss, allocate risk, and cover potential liabilities.