Trade and Manufacturing Monitor https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor News and insight from our international trade practice group Tue, 03 Dec 2024 09:21:06 -0500 60 hourly 1 USITC Releases First Biennial Report on Economic Impact and Operation of USMCA Automotive Rules of Origin https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/usitc-releases-first-biennial-report-on-economic-impact-and-operation-of-usmca-automotive-rules-of-origin https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/usitc-releases-first-biennial-report-on-economic-impact-and-operation-of-usmca-automotive-rules-of-origin Thu, 20 Jul 2023 00:00:00 -0400 On June 30, 2023, the U.S. International Trade Commission (ITC) released its first report on the economic impact of the United States-Mexico-Canada (USMCA) automotive rules of origin. Rules of origin (ROOs) are used to determine the national origin of a product and whether it qualifies for preferential treatment pursuant to a trade agreement between (or among) member countries. The ITC’s report addresses the impact of the USMCA’s automotive ROOs on the U.S. economy, particularly the U.S. automotive industry and other pertinent industries, as well as the impact of the rules on U.S. competitiveness, and whether the rules remain relevant in light of recent technological advances in the United States.

The key findings of the report are as follows: (1) notwithstanding some noticeable impact of the USMCA on the U.S. economy and U.S. competitiveness, it is too early to understand the full extent of the effect of the agreement; (2) the automotive ROOs appear to have increased costs as well as the U.S. share of USMCA production; (3) there is a sharp increase in investment in electric vehicles (EVs) and the industry shift to EV production will likely require changes to, or the continued monitoring of, the USMCA automotive ROOs to ensure they remain relevant; and (4) additional technological changes may also impact the relevancy of the USMCA automotive ROOs.

Background

The USMCA entered into force on July 1, 2020, and replaced the North American Free Trade Agreement (NAFTA). Over the past three years, the agreement has presented some opportunities and challenges for the United States and its main trading partners. Some of the biggest challenges pertain to the treatment of automotive goods under the agreement.

Under the USMCA, an originating good is one that meets the rules of origin set forth in General Note 11 of the Harmonized Tariff Schedule of the United States (HTSUS) and all other requirements of the agreement. An additional set of rules applies to automotive goods (specifically, passenger motor vehicles, light and heavy trucks, and certain automotive parts). Specifically, automotive goods must meet four additional ROOs: (1) regional value content (RVC) requirements; (2) North American steel and aluminum procurement requirements; (3) labor value content requirements; and (4) core parts requirements.

Pursuant to section 202A(g)(2) of the USMCA Implementation Act, the ITC is required to provide five biennial reports to the President, the House Committee on Ways and Means, and the Senate Committee on Finance, regarding (1) the economic impact of the automotive ROOs; (2) the operation of the automotive ROOs and their effects on the competitiveness of the United States; (3) whether the automotive ROOs are relevant in light of technological changes in the United States; and (4) any other matters the ITC considers relevant to the economic impact of the rules.

This is the first of five biennial reports on the economic impact of the USMCA automotive ROOs. The next report, due in 2025, has the same reporting requirements but will present updated data and information about the industries through December 31, 2024. Each subsequent report will report on the same topics and two new years of data and information.

ITC Findings

Economic Impact of the USMCA Automotive ROOs and Their Effects on U.S. Competitiveness

While the full impact of the USMCA will not be apparent until the agreement is fully implemented, in 2027 or later, the ITC has found that the economy-wide effects of the ROOs were marginal in the first two and a half years after the USMCA entered into force. According to the report, vehicle manufacturers and suppliers explain that the ROOs have increased costs at multiple stages of the supply chain, but that they have also increased the U.S. share of USMCA vehicle and parts production. The COVID-19 pandemic and global supply chain disruptions had a major impact on U.S. automotive production and trade. Consequently, there is no clear picture of the effect of the USMCA’s entry into force on U.S. competitiveness.

One potential indication of increased U.S. competitiveness is that the United States’ share of USMCA light vehicle production, as well as light vehicle and parts exports as a share of global exports, increased slightly after the agreement’s entry into force. U.S. light vehicle production as a share of USMCA production increased from 64.8 percent in 2018 to 68.1 percent in 2022. U.S. light vehicle exports as a share of global light vehicle exports increased from 6.6 percent in 2018 to 7.7 percent in 2022. U.S. automotive parts exports as a share of global parts exports also increased from 8.1 percent of global exports in 2018 to 8.4 percent in 2022.

Employment and investment data also indicate some changes in competitiveness. Investments in Canada and the United States have reportedly increased sharply, with most of the new investments going into EVs and EV batteries. The surge in investment in EVs is thought be in response to an increase in consumer demand, therefore, the extent to which these changes can be attributed to the ROOs remains unclear.

Technological Changes Impacting the Relevance of the USMCA Automotive ROOs

Because the agreement is in its early years of implementation, the overall impact of any technological changes is limited. According to the report, two recent technological changes in the U.S. automotive industry have created divergences in the tariff treatment of similar goods in the USMCA automotive ROOs. The first change pertains to the growth in production of electric and hybrid pickup trucks. Currently, the USMCA automotive ROOs do not categorize EV and hybrid pickup trucks as light trucks. Unlike other trucks, EV and hybrid pickup trucks are classified under HTSUS subheading 8704.90, which covers all trucks not classified elsewhere in heading 8704. Vehicles under 8704.90 are categorized as “heavy trucks” under the USMCA automotive ROOs. This difference in classification means that a different set of product-specific ROOs applies to EV and hybrid trucks. Until recently, sales of EV and hybrid trucks were really low or nonexistent. However, the increasing demand for EV and hybrid trucks means that the disparate treatment of these vehicles will have important practical implications. The report addresses several other instances of classification divergence that do not result in different tariff treatment for similar goods to demonstrate where Harmonized System (HS) classifications have changed since the USMCA entered into force.

The second technological change involves a new production process for aluminum vehicle bodies. Currently, the USMCA automotive ROOs do not allow for cast aluminum bodies to qualify as originating via the same product-specific ROOs as stamped aluminum bodies. The difference in treatment between stamped and cast aluminum body parts is due to the tariff shift rules for aluminum components. Under the USMCA, non-originating aluminum may be considered originating if the aluminum is subjected to a manufacturing process in a USMCA country that results in certain tariff shifts. For example, an aluminum product, such as an ingot, may be deemed originating if it is subjected to a manufacturing process such that it transforms into another intermediary aluminum product (classified under a different HS heading from the original product). However, the process of casting aluminum products, unlike the stamping process, does not produce an intermediary aluminum product. This allows for stamped body parts to qualify as originating more easily than cast body parts.

In addition to tariff classifications, the report addresses input from various stakeholders on proposed changes to the automotive ROOs. According to the report, some stakeholders believe that the industry-wide shift to EVs and hybrid vehicles merits changes to, or the continued monitoring of, the USMCA automotive ROOs to ensure that they remain relevant. Some stakeholders have proposed additions to the ROOs parts lists that they believe would better account for the increasing share of EVs in the U.S. market. The International Union, United Automobile, and Aerospace and Agricultural Implement Workers of America (UAW) have proposed adding EV components and EV battery components to the core parts list of the USMCA automotive ROOs. The list proposed by the UAW includes automotive-grade semiconductors, electric motors and electric drivetrains, non-lithium-ion batteries, charge ports and charging stations, various battery components (cathodes, anodes, separators, casings), and various critical minerals (cobalt, nickel, manganese, graphite, silicone). Other stakeholders stated that EV technologies are already addressed by the ROOs and that because the technology is still evolving and industry investments and changes are ongoing, any proposed changes are premature.

Finally, the report addresses additional ongoing technological changes in the U.S. automotive industry that may impact the relevancy of the USMCA automotive ROOs. One such change is with respect to the increasing value of nontraditional automotive inputs relative to the value of the final vehicle and how this might impact the RVC calculations for the larger vehicle components being produced with a growing share of nontraditional parts. The value of nontraditional automotive inputs (i.e., semiconductors and sensors) is rising both in an absolute sense as well as relative to traditional automotive inputs. Some in the automotive industry believe the rising value of nontraditional automotive inputs merits changes to the ROOs because electronic components typically originate from Asia. One industry proposal addressing this issue involves adding certain electronic components, such as automotive-grade semiconductors and sensors, to the USMCA automotive core parts list to incentivize USMCA-originating electronic supply chains. Core parts must satisfy the higher 75 percent originating content requirement to qualify for preferential treatment.

Another technological change relates to the lack of recycling-specific automotive ROOs. According to the report, the “current treatment of recycled battery materials under the USMCA automotive ROOs may pose challenges to emerging supply chains because of a lack of recycling-specific provisions in the ROOs.” Currently, for example, the determination of whether a battery made using recycled materials qualifies as originating under the USMCA relies on the same ROOs applied to the original battery, i.e., whether the recycled cells were created within the USMCA region.

Tags: ITC, Rules of Origin, USMCA

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Regulatory Issues When Acquiring U.S. Pump Companies https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/regulatory-issues-when-acquiring-u-s-pump-companies https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/regulatory-issues-when-acquiring-u-s-pump-companies Wed, 03 May 2023 13:59:21 -0400 Partner Eric McClafferty and trade analyst, Wyatt Mince, co-authored the World Pumps Magazine article “Regulatory Issues When Acquiring U.S. Pump Companies.” When a non-U.S. pump company is buying a U.S. pump company, the proposed acquisition may need to be reviewed by the Committee on Foreign Investment in the United States (CFIUS). In this article, Eric and Wyatt explain some new rules surrounding foreign acquisition of U.S. companies producing “critical technologies,” including pumps, valves and other industrial manufacturers, as well as the CFIUS review process and best practices for due diligence.


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U.S. and Japan Reach Agreement on Critical Minerals and Treasury Releases Guidance on EVs https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/u-s-and-japan-reach-agreement-on-critical-minerals-and-treasury-releases-guidance-on-evs https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/u-s-and-japan-reach-agreement-on-critical-minerals-and-treasury-releases-guidance-on-evs Fri, 07 Apr 2023 20:03:18 -0400 On March 28, 2023, the United States and Japan signed an agreement on trade in critical minerals used in electric vehicle (“EV”) batteries (“Agreement Between the Government of Japan and the Government of the United States of America on Strengthening Critical Minerals Supply Chains”). The agreement builds on the United States’ limited trade accord with Japan reached in 2019 and the goal is to address China’s dominance of the global supply of critical minerals that are necessary for the production of EVs, as well as to address the U.S. government’s recent restrictions on new subsidies for EVs.

The Inflation Reduction Act of 2022 (“IRA”) overhauled a tax credit for purchasing EVs and introduced certain sourcing requirements for EV components. The goal of the IRA is to encourage companies to develop new supply chains for critical minerals such as lithium, graphite, cobalt, and nickel outside of China. Currently, the majority of lithium is produced in China, Australia, and Chile. China is also the world’s largest producer of graphite.

Under the IRA, consumers can get a tax credit of up to $7,500 for qualifying vehicles. In order to qualify, a certain percentage of the EV battery needs to be built in North America, and much of the critical minerals in a vehicle’s battery must be sourced from the United States or a country that has a “free trade agreement” with the United States.

Because the United States does not have traditional free trade agreements with many of its allies, including Japan, the European Union, and the United Kingdom, the Biden Administration is pursuing limited trade deals such as the one signed with Japan. Among other things, the United States and Japan have agreed not to levy export duties on critical minerals and to coordinate labor standards in producing minerals. The United States is currently negotiating similar agreements with the European Union and the United Kingdom.

Efforts to reach these deals with U.S. allies has raised the question of whether such narrow agreements will meet the definition of “free trade agreement” under the IRA. While the provision of the IRA that requires vehicles to be assembled in North America went into effect immediately when the IRA was signed in August 2022, the battery sourcing provisions were left to be decided by the Treasury Department. On March 31, 2023,Treasury issued long-awaited proposed guidance on the critical mineral sourcing requirements for the EV tax credit under the IRA. According to the guidance, to meet the critical mineral requirement, the applicable percentage of the value of the critical minerals contained in the battery must be extracted or processed in the United States or with a country with which the United States has a “free trade agreement,” or be recycled in North America. The qualifying critical minerals sourcing requirement will increase from 40 percent in 2023 to 80 percent by 2027.

Importantly, the guidance includes a set of principles to identify countries with which the United States has a free trade agreement in place, since the term is not defined in statute. According to the Treasury Department’s proposed definition, “free trade agreement” as used in the IRA could include newly negotiated limited agreements, such as the deal reached with Japan, to ensure that minerals from these trading partners will meet the sourcing requirement for the tax credit. Treasury’s guidance also specifically lists the following countries as already having a free trade agreement with the United States: Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, and Singapore.

The guidance also sets forth applicable percentages for the value of the battery components that must be manufactured or assembled in North America for the vehicle to qualify for tax credits under the IRA, ranging from 50 percent in 2023 to 100 percent by 2029. The four-step process for determining the value of the battery components includes: (1) identifying the batter components that are manufactured or assembled in North America; (2) determining the incremental value of each battery component, including North American battery components; (3) determining the total incremental value of battery components; and (4) calculating the qualifying battery component content by dividing the total incremental value of North American battery components by the total incremental value of all battery components.

Further, beginning in 2024, an eligible vehicle may not contain battery components that are manufactured by a foreign entity of concern, and beginning in 2025, an eligible vehicle may not contain any critical minerals that were extracted, processed, or recycled by a foreign entity of concern. Treasury intends toprovide further guidance on this particular provision.

The guidance will be published in the Federal Register on April 17, 2023, and vehicles placed in service on or after April 18, 2023, will be subject to the critical mineral and battery component requirements in the rule. The Treasury Department and the Internal Revenue Service (“IRS”) will consider public comments, due by June 16, 2023, before issuing a final rule.

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First Round of CHIPS Funding Announced https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/first-round-of-chips-funding-announced https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/first-round-of-chips-funding-announced Tue, 04 Apr 2023 15:17:54 -0400 On February 28, 2023, the U.S. Department of Commerce announced the first funding opportunity under the CHIPS and Science Act (“CHIPS Act”), bipartisan legislation signed into law in 2022. The funding opportunity provides “manufacturing incentives to restore U.S. leadership in semiconductor manufacturing, support good-paying jobs across the semiconductor supply chain, and advance U.S. economic and national security.”

The CHIPS Act can be thought of as the “carrot” – designed to bolster American semiconductor manufacturing – to the “stick” of recent export controls that the United States (and the Netherlands and Japan) have implemented targeting China’s ability to both purchase and manufacture certain high-end chips used in military and AI applications. In particular, the strategic objectives of the CHIPS Act are to “(1) make the U.S. home to at least two, new large-scale clusters of leading-edge chip fabs, (2) make the U.S. home to multiple, high-volume advanced packaging facilities, (3) produce high-volume leading-edge memory chips, and (4) increase production capacity for current-generation and mature-node chips, especially for critical domestic industries” by the end of the decade.

The CHIPS Act provides “$50 billion to revitalize the U.S. semiconductor industry, including $39 billion in semiconductor incentives.” The funding provided will be distributed across several programs, each targeting a specific area of need. Eligible applicants for the first round of funding are those seeking funds to “construct, expand, or modernize commercial facilities for the production of leading-edge, current-generation, and mature-note semiconductors. This includes both front-end wafer fabrication and back-end packaging.”

The first round of funding will focus on how projects will advance U.S. economic and national security. Candidates will also “be evaluated for commercial viability, financial strength, technical feasibility and readiness, workforce development, and efforts to spur inclusive economic growth.”

Parties interested in applying must first submit a statement of interest to Commerce. Afterwards, applicants may submit a pre-application (recommended) before submitting a full application. Commerce began accepting pre-applications for leading-edge facilities on March 31, 2023, and will be accepting full applications for those facilities on a rolling basis. On May 1, 2023, Commerce will begin accepting pre-applications for current-generation, mature-node, and back-end production facilities on a rolling basis and full applications for these categories will be accepted on a rolling basis beginning June 26, 2023.

Recipients will receive funds in the form of direct funding, federal loans, and/or federal guarantees of third-party loans. For additional information on the application process, visit: CHIPS Act Fact Sheet.

The next round of funding will be announced in late spring for semiconductor materials and equipment facilities and Commerce will release one more round in the fall for research and development facilities.

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Biden Administration Invokes DPA to Advance Clean Energy Goals https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/biden-administration-invokes-dpa-to-advance-clean-energy-goals https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/biden-administration-invokes-dpa-to-advance-clean-energy-goals Wed, 15 Jun 2022 11:58:58 -0400 On Monday, June 6, 2022, President Biden invoked the Defense Production Act of 1950 (“DPA”) with the intent to accelerate domestic manufacturing in the renewable energy sector. In addition to furthering the Administration’s clean energy agenda, Deputy Secretary of Defense Dr. Kathleen Hicks explained this action will strengthen U.S. national security, noting the vulnerability of fossil fuel supply lines during conflict and the military capability gains expected to flow from the Defense Department’s transition toward clean energy technologies. Title III of the DPA empowers the President to mitigate industrial base shortfalls and supply chain risks and expand U.S. production capabilities to promote national defense. Recently, Presidents Biden and Trump have invoked this emergency authority to address COVID-19 pandemic related vaccination and supply chain issues. This executive action has the potential to impact contractors and their supply chains in the domestic renewable energy sector and the energy industry writ large.

Invoking the DPA, President Biden authorized the Department of Energy (“DOE”) to take action to accelerate domestic production of clean energy technologies. President Biden’s exercise of DPA authority includes five presidential determinations targeted toward key areas in the renewable energy industry:

  • Solar panel inputs, including photovoltaic modules and components thereof;
  • Building insulation, especially for older, less efficiently retrofitted buildings;
  • Heat pumps used to efficiently heat and cool buildings;
  • Equipment used to make and use clean electricity-generated fuels, such as electrolyzers, fuel cells, and related platinum group metals; and
  • Transformers and other critical power grid infrastructure.
In its DPA-supported projects, the Biden administration will “strongly encourage” observance of “strong labor standards,” such as project labor agreements and community benefits agreements offering competitive wages and employment terms.[1] The Administration will also “strongly encourage” projects involving environmental justice outcomes tailored to low-income communities and areas affected by historic “legacy pollution.”

In five memoranda addressed to the Secretary of Energy issued on June 6, 2022, and published in the Federal Register on June 9, 2022, President Biden invoked Title III of the DPA, which authorizes the President to direct certain activities in order to “create, maintain, protect, expand, or restore” domestic industry capabilities essential to national defense. 50 U.S.C. § 4533(a)(1) (2022). To achieve this, Title III authorizes the President to order government purchases of or commitments to purchase critical resources or technology, subsidize domestically-produced materials to ensure its availability, or order installation and purchasing of supplies for government and privately owned industrial facilities to expand their production capacity in order to aid the national defense.[2] In issuing each memorandum, President Biden waived certain DPA statutory requirements after determining that action is necessary to avoid a shortage in the subject critical resource or technology that would severely impair national defense capability. See 50 U.S.C. § 4533(7)(B) (2022). Nonetheless, each memorandum addresses the three-pronged determination required by section 303(a)(5) of the DPA and discussed further below.

The stated purpose in each memorandum is to ensure a “robust, resilient, and sustainable domestic industrial base” necessary for a clean energy economy, which President Biden determined is essential to “national security, a resilient energy sector, and the preservation of domestic critical infrastructure.”[3] According to the DOE, this DPA action will advance the Administration’s goals to reduce U.S. reliance on foreign energy supply—specifically, imports from Russia and China—and promote energy independence, reduce energy use, lessen reliance on fossil fuels and address climate change, create jobs, and decrease energy costs for American families. The DOE also notes high levels of U.S. and global demand for renewable energy technology and the expectation that this demand will continue to increase. Without this DPA action, the DOE predicts domestic supply capabilities would be insufficient, vulnerable to supply chain disruptions, and overly reliant on imports. Consequently, per section 303(a)(5) of the DPA, each memorandum asserts President Biden’s determination with regard to each of the five targeted areas:

  • (1) the stated sector of the domestic energy industry is essential to national defense;
  • (2) President Biden’s exercise of section 303 authority is necessary to ensure that the domestic industry can timely supply and satisfy the domestic need for the stated technology; and
  • (3) purchases, purchase commitments, or other action under section 303 of the DPA are the most cost effective, expedient, and practical means of achieving the stated purpose for each measure.
The Administration also announced its plan, in collaboration with the DOE, to convene industry, labor, environmental justice, and other stakeholders to discuss means to maximize the impacts of this action. In February 2022, the DOE also issued a comprehensive assessment (“America’s Strategy to Secure the Supply Chain for a Robust Clean Energy Transition”) and reports and fact sheets addressing thirteen key areas in the domestic renewable energy industry, which further explain the Administration’s strategies and recommendations to advance its clean energy goals. For additional information on and links to the DOE’s assessments, please consult our advisory here.


[1] In a separate section of the statute, the DPA notably excludes from the President’s scope of authority the ability to control employment contracts. See 50 U.S.C. § 4511(c)(1) (2022).

[2] For additional information on the DPA, please consult our advisory here.

[3] 87 Fed. Reg. 35,071; 87 Fed. Reg. 35,073; 87 Fed. Reg. 35,075; 87 Fed. Reg. 35,077; 87 Fed. Reg. 35,079.

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Biden Administration Releases Six American Manufacturing and Supply Chain Reports https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/biden-administration-releases-six-american-manufacturing-and-supply-chain-reports https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/biden-administration-releases-six-american-manufacturing-and-supply-chain-reports Tue, 08 Mar 2022 16:05:41 -0500 On February 24, 2022, the Biden Administration announced the release of six executive-branch reports and a White House “capstone” report pursuant to Executive Order (EO) 14017 on America’s Supply Chains (February 24, 2021), which established a policy of pursuing more resilient, diverse, and secure American supply chains. These reports culminated year-long sectoral assessments of the supply chains underlying the U.S. industrial base from seven cabinet-level agencies – the Departments of Commerce, Defense, Energy, Homeland Security, Transportation, Health and Human Services, and Agriculture, following an initial phase of reviews issued in June 2021. The sectoral assessments reflect a stock-taking of vulnerabilities, an envisioning of fundamental developments necessary for supply chain security, and short- and long-term proposals that rely heavily on industry participation.
Phase One: 100-Day Supply Chain Reviews
In the first initial work phase established by EO 14017, the Departments of Commerce, Energy, Defense, and Health and Human Services were instructed to assess supply chain vulnerabilities across four key products: semiconductors, large-capacity batteries, critical minerals and materials, and pharmaceutical and active pharmaceutical ingredients. These assessments culminated in a report of “100-Day Reviews” published by the White House in June 2021. The report containing reviews from all four agencies identified insufficient U.S. manufacturing capacity, misaligned markets, foreign nations’ industrial polices, geographic (global) concentration of key supply chains, and limited international coordination as drivers of the challenges faced in those four sectors.

The 100-day report also provided recommendations ranging from investing or promoting investment in manufacturing and R&D, to deploying procurement, technical assistance, grants, and financing to support supplier diversification, to using market tools to support sustainability and workforce standards, to expanding multilateral engagement with global allies and strengthening international trade rules. For additional information and analysis on the Executive order and the administration’s 100-day report, please visit our blog here and here.

Phase Two: One-Year Sectoral Assessments
The reports issued last month represent the second phase of work under EO 14017, instructing the agencies to provide specific policy recommendations and proposals for strengthening and ensuring resilient supply chains. Links to the full reports with areas of focus for each are highlighted below.
Key Takeaways
  1. Like the 100-day reports, the one-year and capstone reports acknowledge the need to work with “allies and partners” in securing supply chains, in particular where domestic sources may not exist. The elevation of “near-shoring” or “ally-shoring” as reasonable alternatives to on-shoring or building up domestic production capacity is an acknowledgment by the Administration that not every link in every supply chain can be reasonably located in the United States. But the identification of global trusted partners as opposed to adversarial or unaligned nations is a critical element of the Administration’s approach to supply chain security.
The events of recent weeks place this policy objective into extreme focus. Russia’s invasion of Ukraine (and its loose alliance with China) could invoke a reckoning for some countries that have been deeply entrenched in certain supply chains, but that are unlikely to be viewed as trusted partners going forward. Industry should be prepared for longer-term business impacts.
  1. Supply-chain policy is here to stay and U.S. industry has a critical role in the development and implementation of that policy. These sectoral assessments are the result of what the report’s describe as a “whole-of-government” effort that is supported, in turn, by U.S. industry. In addition to the headlined agencies, many other agencies and sub-agencies have been gathering data from industry over the past year. By participating in these supply chain analyses, industry has shaped these initial outcomes.
But the work outlined in EO 14017 has only begun and the next stages offer both opportunities and risks for industry. “As soon as practicable,” the Assistants to the President for National Security Affairs and Economic Policy must make specific recommendations to the President regarding the sectoral assessments, focusing on making supply chains and the domestic industrial base more resilient and effective through reforms to domestic and international trade rules and agreements; education and workforce reforms; policies that promote small business; and procurement and incentive programs that attract and retain investment in critical goods.

The EO also requires quadrennial reviews involving ongoing data gathering and supply chain monitoring, with the next set of reports to be released in 2025. In addition, many of the sectoral reports note the creation of new interdisciplinary task forces that will continue to grapple with supply chain policy issues. As a result, industry members should continue to remain engaged and look for opportunities to collaborate with the government.

  1. A critical pathway toward more resilient supply chains is through promotion of targeted investment and market development, both domestically and abroad. The reports collectively identify several recent investments the government has undertaken to support increased domestic production. For example, the Department of Energy will invest $7 billion from Bipartisan Infrastructure Bill in large-capacity battery supply chain, including material refining and production, battery cell and pack manufacturing, and recycling. Additionally, the Department of Defense has invested to re-shore production of rare earth metals. Investments in U.S. production of semiconductors by leading foreign corporations in allied nations are also touted.
Equally important to the U.S. government’s directing federal dollars to developing markets and capacity in support of critical supply chains is the need to partner with and/or promote industry and foreign allies in strengthening industrial bases through private, public-private, or cross-government collaborative mechanisms. At the same time, the reports collectively acknowledge the need to mitigate risk of “adversarial” foreign ownership, control, or influence (FOCI) in supply chains. Thematically, these dual goals – fostering market and capacity growth while seeking to avoid harmful foreign influence in supply chains – depend heavily on identifying and developing a trusted global supply chain network.
A Larger Framework to Promote Domestic Manufacturing
EO 14017 is just one piece of a larger policy framework through which the Administration seeks to promote the American economy and domestic manufacturing. For example, in June 2021, the Administration launched a rapid-response, interagency Supply Chain Disruptions Task Force (SCDTF) to address the immediate supply chain challenges arising from the COVID-19 pandemic in the areas of transportation logistics and labor shortages, semiconductor availability, food, and agriculture.

In July 2021, President Biden issued EO 14036 on Promoting Competition in the American Economy. The EO recognized the importance of robust and diverse agriculture, information technology, telecommunications, and healthcare sectors to the long-term resilience of competition, supply chains, U.S. workers, and consumers. Through EO 14036, President Biden pledged a whole-of-government approach to defending against “the monopolization of the American economy.”

President Biden has advocated for comprehensive competitiveness legislation, including the America Creating Opportunities for Manufacturing, Pre-Eminence in Technology, and Economic Strength (COMPETES) Act (which passed in the House of Representatives) and the United States Innovation and Competition Act (USICA) (which passed in the Senate). These legislative vehicles include numerous, wide-ranging provisions aimed at promoting investment in the domestic industrial base and domestic manufacturing (including to expand supply of semiconductors through the Creating Helpful Incentives for Production of Semiconductors (CHIPS) for America Act), shoring up supply chains, and combatting unfair trade practices.

And most recently, consistent with the policy of leveraging the government’s purchasing power to strengthen the resilience of supply chains, the Federal Acquisition Regulatory (FAR) Council published a final rule amending the Federal Acquisition Regulation (FAR) to strengthen Buy American Act (BAA) requirements in accordance with President Biden’s January 25, 2021 Executive Order (E.O.) 14005, Ensuring the Future is Made in All of America by All of America’s Workers. This new rule increases the BAA’s domestic content threshold for certain end products and construction materials.

As the Administration works toward institutionalizing domestic competitiveness and supply chain resilience, policy recommendations will translate into programs, guidance, and directives. This may create opportunities or areas of risk for U.S. companies, particularly domestic manufacturers, as the key agencies navigate the complexities of implementing proposals and distributing funds. We are available to help you understand and evaluate how your company’s business strategy and planning may interact with these broad-reaching, cross-government policies.

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Update on Biden Administration's Supply Chain Resiliency Evaluation - Public Comment Period and Virtual Forum Announced https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/update-on-biden-administrations-supply-chain-resiliency-evaluation-public-comment-period-and-virtual-forum-announced https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/update-on-biden-administrations-supply-chain-resiliency-evaluation-public-comment-period-and-virtual-forum-announced Tue, 30 Mar 2021 11:33:33 -0400 As discussed earlier this month here, President Biden issued Executive Order 14017 (“EO 14017”) establishing a wide-ranging evaluation of America’s supply chains that will take place over the next twelve months. This post provides updates with respect to two of the 100-day supply-chain specific reviews.

As previously reported, the Commerce Department’s Bureau of Industry and Security (“BIS”) published a federal register notice establishing a formal notice and comment period for industry participants to provide information on semiconductor manufacturing and advanced packaging supply chains. BIS has also now announced that it will conduct a virtual forum that will allow industry participants to provide their views orally. The forum will take place on Thursday, April 8, 2021 from 2:00 pm EST to 5:00 pm EST, but interested parties must submit a request to appear at the forum by Thursday, April 1, 2021 at 5:00 pm EST. The virtual forum is in addition to (not a substitution) for public comments.

The Department of Energy’s (“DOE”) Office of Energy Efficiency and Renewable Energy has also now published a federal register notice requesting information from industry participants on the high-capacity batteries (including electrical vehicle batteries) supply chain. Critical materials identified by the DOE include battery grade nickel, cobalt, and lithium. Industry participants throughout the supply chain should consider expressing their views to the DOE but the agency’s notice specifically calls out extraction of raw materials, refining, separators, collectors and recyclers, among other supply-chain participants. Responses to the agency’s request for information are due on April 14, 2021.

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Recent OFAC Settlement Highlights Due Diligence Expectations When Selling to Intermediaries https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/recent-ofac-settlement-due-diligence-expectations-when-selling-to-intermediaries https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/recent-ofac-settlement-due-diligence-expectations-when-selling-to-intermediaries Mon, 22 Mar 2021 10:16:53 -0400 Last week, the Office of Foreign Assets Control (OFAC) announced a settlement agreement with UniControl, Inc. (UniControl or "the company”) for shipping goods to European trading partners when UniControl knew or should have known that some of its products would ultimately be re-exported to Iran. The enforcement action is a reminder that OFAC expects U.S. companies to perform appropriate due diligence when exporting products to intermediary parties like resellers and distributors.

According to OFAC, the Cleveland, Ohio-based manufacturer of process control products made 21 shipments of airflow pressure switches with a total value of $687,189 to European trading partners that were ultimately reexported to Iran in violation of U.S. law. OFAC indicated that UniControl ignored or failed to respond to several red flags that its switches could be diverted to Iran by its European partners:

  • Intermediaries conveyed interest from Iran: UniControl’s European trading partners inquired whether the company would supply products into the Iranian market, given the significant market opportunity there. Although UniControl declined the inquiry, the company did not later ensure that products sold to the European customers were not diverted to Iran.
  • Sales agreement included Iran: Despite early warnings that its partners were interested in the Iranian market, UniControl and one of its European partners entered into a “Sales Representative Agreement” that listed Iran as a country where that trading partner could resell UniControl goods. (This is a reminder for all U.S. companies that distribution and sales agreements should exclude Iran and other sanctioned jurisdictions from the authorized sales territory specified in any agreement.)
  • Obscured end user identity: A European trading partner rebuffed UniContol’s offer to drop ship products directly to a purported European end user when the trading partner was facing shipment delays. OFAC chided UniControl for failing to question the trading partner on its refusal to allow drop shipments or otherwise reach out directly to the end user, which presumably would have revealed that the end user was located in Iran, not Europe.
  • Meeting with prospective Iranian customers at trade show: Between 2012 and 2017, UniControl management and employees attended trade shows in Europe. At a 2016 trade conference, UniControl managers met with Iranian visitors at a European trade partner’s booth. According to OFAC, UniControl did not question why Iranians were interested in the company’s products.
  • Removal of a “Made in USA” label: In one instance, a European trade partner requested that UniControl remove its “Made in USA” label so that, as the European trade partner explained, an Iranian end user could avoid problems with the stated origin of the product. Although UniControl sought guidance from outside counsel, UniControl subsequently shipped switches to the same European trade partner that were ultimately re-exported to Iran.
Since UniControl voluntarily self-disclosed the apparent violations of OFAC’s regulations and the agency considered this to be a “non-egregious” case (e.g., the transactions did not involve willful or reckless conduct and did not present serious harm to sanctions program objectives), OFAC assessed a maximum civil penalty of one half the transaction value for each violation (i.e., each shipment). OFAC further found several mitigating factors, such as ceasing trade with its European trading partners and strengthening its compliance program, that decreased the penalty amount to $216,464. OFAC specifically cited UniControl’s adoption of end user certificates from secondary and tertiary buyers of its reexported products as well as the addition of a “Destination Control Statement” to documents like sales orders and invoices to remind end users of trade restrictions.

This case is a reminder that U.S. companies need to be vigilant for red flags of possible diversion to Iran or other sanctioned territories by intermediary parties. Furthermore, once red flags are identified, U.S. companies must take action to investigate and remediate the issue through enhanced compliance checks and due diligence requirements on intermediary parties.

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U.S. Importers Should Reevaluate “First Sale” Customs Programs https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/u-s-importers-should-reevaluate-first-sale-customs-programs https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/u-s-importers-should-reevaluate-first-sale-customs-programs Thu, 11 Mar 2021 10:19:11 -0500 On March 1, 2021, the U.S. Court of International Trade (CIT) issued a decision with important ramifications for any company that uses “first sale” to reduce customs duty liability for goods imported into the United States. The CIT’s ruling in Meyer Corp., U.S. v. United States calls into question the continued viability of first sale for suppliers located in non-market economies. This development has meaningfully altered the risk profile associated with using first sale for transactions in China and Vietnam. All companies relying on first sale should review their first sale programs to evaluate the impact of this ruling and take adequate precautions.

The First Sale Rule

The first sale rule permits importers to declare a lower customs value—and by extension, to lower the customs duty liability—for certain types of qualifying importations. To be eligible, an importation must involve a multi-tiered transaction (i.e., there must be three or more parties involved in the sequence of sales leading to the importer). Under U.S. law, the earliest sale in such a sequence of transactions may be declared as the customs value provided that the goods are clearly destined for the United States at the time of such sale and the first sale value otherwise satisfies the requirements applicable to any transaction value (i.e., it must be a bona fide sale that has been conducted at arm’s length).

First sale is thus commonly described as having “three elements”: the first sale in a multi-tiered transaction may be used as a customs value provided (1) it is a bona fide sale, (2) the goods are clearly destined for the United States at the time of the transaction, and (3) the value is an arm’s length price.

Meyer v. United States

The CIT’s decision in Meyer hinges on additional language from the seminal 30-year-old case that established first sale as a viable basis for customs valuation—language that has frequently been quoted, but seldom, if ever, scrutinized for meaning. The CIT interpreted that language to impose an overlooked requirement, namely that any legitimate first sale must be (4) absent any distortive non-market influences. While the first three requirements for the use of first sale are frequently assessed and litigated, the fourth requirement, the CIT notes, “has generally been neglected.”

In Meyer, the plaintiff failed to establish that it was entitled to use the “first sale” transaction value because it failed to produce sufficient evidence to satisfy both the (well-established) arm’s length and (newly in focus) distortive non-market influence requirements. The importer’s failure to produce sufficient information on these elements was decisive.

Significantly, the CIT also expressed doubt that the first sale rule was ever intended to be applied to transactions involving non-market economy participants and inputs, inviting the U.S. Court of Appeals for the Federal Circuit to provide further clarification.

Heightened Risk to First Sale Programs

While Meyer is not directly binding on other importers or fact patterns, and does not invalidate the use of first sale in all cases, the opinion does increase the risk associated with using first sale with suppliers in non-market economies (e.g., China and Vietnam). While it remains to be seen whether the importer in Meyer will appeal the final decision of the CIT, the Meyer decision creates a clear path for U.S. Customs and Border Protection to begin dismantling the use of first sale in transactions involving non-market economies, should it choose to do so.

Companies Should Reevaluate First Sale Programs

Any company currently relying on first sale to lower customs duty liability should evaluate its program to consider the ramifications of the Meyer decision, and to assess the overall health of the first sale program. Regardless of whether the Meyer decision is appealed, exercising reasonable care—and reducing the risk of customs penalties—requires importers to take account of court decisions relevant to customs value.

Even where all parties in a multi-tiered transaction are unaffiliated, and thus presumptively at arm’s length, companies may now have to establish the absence of any distortive non-market influences in order to maintain first sale programs. In light of the Meyer decision, companies should take affirmative steps to demonstrate the lack of non-market economy influence throughout these programs.

We are happy to help review your first sale program and to advise on strategies for preserving this important duty saving mechanism. Please contact us with any questions.

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Implications for Suppliers - Chevron Ordered to Wind Down Venezuela Business By December 1, 2020 (with Limited Wind-Down Activities) https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/implications-for-suppliers-chevron-ordered-to-wind-down-venezuela-business-by-december-1-2020-with-limited-wind-down-activities https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/implications-for-suppliers-chevron-ordered-to-wind-down-venezuela-business-by-december-1-2020-with-limited-wind-down-activities Wed, 22 Apr 2020 17:18:10 -0400 On April 22, 2020, President Trump ordered Chevron to "wind down" its business in Venezuela by December 1, 2020. This will have a significant impact on companies that supply Chevron with equipment used for oil and gas projects in Venezuela that were previously licensed.

Effective April 21, 2020, the Department of Treasury’s Office of Foreign Assets Control (OFAC) issued General License (GL) 8F, which, significantly limits the activities in which Chevron and other covered entities are authorized to engage while winding down their operations through December 1, 2020.

Chevron is the only covered entity significantly impacted by the new GL 8F as it is the last major U.S. oil company permitted under an OFAC general license to do business in Venezuela. Companies that supply or otherwise do business with Chevron related to Venezuela should immediately review this significantly limited GL 8F carefully to determine whether their existing and planned business would be authorized pursuant to the new GL or whether they may need to alter their plans, review force majeure clauses, apply for a specific OFAC license or other authorization from OFAC, or take other steps.

Specifically, GL 8F authorizes Chevron, and other covered entities, to engage in certain transactions and activities, otherwise prohibited by the Venezuela Sanctions Regulations (VSR), that are ordinarily incident and necessary to the limited maintenance of essential operations, contracts, or other agreements. However, these wind-down transactions/activities must now be for the preservation of assets or safety in Venezuela, involve PdVSA or any entity in which they own 50% or greater interest, and have been in effect prior to July 26, 2019.

Additionally, regarding Chevron and the other covered entities, GL 8F no longer authorizes:

  • The drilling, lifting, or processing of, purchase or sale of, or transport, or shipping of any Venezuelan-origin petroleum or petroleum products;
  • The provision or receipt of insurance or reinsurance regarding the above activities;
  • The design, construction, installation, improvement, or repair of any wells, facilities, or other infrastructure in Venezuela or the purchasing or provision of any goods or services, except as required for safety;
  • Contracting for additional services or personnel, except as required for safety;
  • The payment of any dividend, including in kind, to PdVSA, or any entity in which PdVSA owns, directly or indirectly, a 50% or greater interest; or
  • Any loans to, accrual of additional debt by, or subsidization of PdVSA, or any entity in which PdVSA owns, directly or indirectly, a 50% or greater interest, including in kind, as prohibited by Venezuelan Sanctions Regulations.

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COVID-19 – Four Key International Trade Compliance Considerations https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/covid-19-four-key-international-trade-compliance-considerations https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/covid-19-four-key-international-trade-compliance-considerations Fri, 10 Apr 2020 12:39:15 -0400 Even as companies make rapid changes to respond to business challenges posed by the COVID-19 pandemic, executives and compliance team leaders must protect their company and employees by continuing to comply with critical U.S. international trade laws and regulations (including those addressing customs, anti-corruption, export controls, and economic sanctions). Trade regulations are not suspended, and it is important to not make assumptions or conclude that the law does not apply during this difficult time with all of the issues competing for attention, not least family and employee health and company survival. With the need to move so quickly, we have seen clients inadvertently come close to trade compliance violations that would not pose a problem for them in normal times. The following suggestions are intended to help companies reduce the risk of certain significant federal international trade law violations and avoid inbound and outbound shipment delays – while continuing to operate.

Trade rules and surrounding circumstances are changing quickly. For example, the Administration very recently appeared to be seriously considering suspending or lowering certain import tariffs, but backed away from that approach given the complexity of administering a revised system on short notice, among other problems. You are likely also seeing reports about various countries’ restrictions on exports of medicine, medical equipment (including protective equipment and ventilators), and food, among other products. How do you keep up with what is actually happening that may affect your company and what is just rumor that you do not need to react to?

One step companies are taking is to include key personnel from their trade compliance and legal teams in the decision processes related to changing international transactions. You need to move quickly, but including a team member who knows trade rules can help keep things on track and help avoid clear compliance errors.

Here are four substantive areas of U.S. trade regulation that should continue to be part of international transaction diligence: U.S. anti-corruption, export controls, and sanctions laws (that permit most exports of medicines, medical devices, and food to sanctioned locations), and U.S. Customs rules on personal protective equipment and medical devices (among other imported items).

  1. Foreign Corrupt Practices Act (FCPA):
Due to the pandemic and disruptions in supply chains, companies should be on high alert regarding potentially illegal and/or unethical activities by brokers, freight forwarders, and other agents who may be suggesting or paying bribes or taking other similar steps to move products in the face of delays caused by the pandemic. Payments to or otherwise providing anything of value to a government official outside the United States in order to receive an improper commercial advantage could result in a violation of the federal FCPA[1] and/or other applicable anti-bribery laws. For example, companies need to watch for unusual requests for fees, surcharges, extra commissions, unusually large discounts, or other payments – particularly to third parties - that could be shared with foreign officials, including Customs personnel in the form of a side payment or bribe intended to preferentially move product. It can be tempting to authorize such payments in this context. Consult with counsel for guidance if this comes up.
  1. Importation, Exportation or Re-exportation of Controlled Pathogens and Medical Equipment
Although the U.S. Commerce Department’s Bureau of Industry and Security (BIS) has stated that COVID-19, including virus samples, is not generally controlled for export and re-export under the Export Administration Regulations (EAR),[2] a license for a variety of associated activities could be required depending on the end-user, end-use, and destination country. For example, exporting a virus sample from the United States to Iran would require a license, as would any export creating potential biological weapons proliferation concerns. Additionally, U.S. persons are prohibited from exporting a virus sample to an individual or company on BIS’s Entity List.

Moreover, certain “equipment capable of use in handling biological materials” (e.g., those used for manufacturing vaccines) and “protective and detection equipment and components” related to biological threats may also require a license for export or re-export. [3] There are also potential licensing requirements for software specially designed or modified to enable such biological detection systems.

Next, companies should be aware of potential licensing requirements to export “technology” related to controlled items. Controlled technology includes information related to the production, development or use of controlled items, such as vaccines. For example, technology related to the production of certain protective gear to prevent against controlled pathogens or for manufacturing a vaccine might also require a license. Additionally, releasing controlled technology to a foreign person (e.g., foreign person working in a U.S. laboratory on a vaccine) would be considered a “deemed export” under the EAR and may require a license. There might be a license exception or license available, but, even in an emergency, it is necessary to check to ensure compliance with applicable laws.

Finally, many countries, like the European Union countries,[4] have imposed stringent export control restrictions on certain medical supplies due to COVID-19.[5] While the United States has not yet imposed similar measures on such items as respirators and face masks, they may do so in the future so it is necessary to monitor U.S. policy as the response to the pandemic evolves.

  1. Office of Foreign Assets Control (OFAC) Sanctions Concerns, including humanitarian exports of food, medicine and medical devices
It is important to comply not only with export control laws but also the laws and regulations administered by the Office of Foreign Assets Control (OFAC). Most of the comprehensive sanctions programs have a general license (GL) or other authorization for exporting certain medicines or medical supplies, but each license is different and must be reviewed in its entirety to ensure compliance.[6] Additionally, many of the general licenses have exclusions as well as reporting requirements that must be followed.

Note that there are certain medicines and medical devices that are not covered by the GLs, and would require a specific license.[7] Before exporting to a sanctioned country, companies need to evaluate whether a particular general license is applicable in its entirety or whether they need to request a specific license.

Finally, transactions with, including exports to, any individual or entity on OFAC’s Specially Designated National List remain generally prohibited, so it is important for companies to continue their general denied party screening processes.

  1. Remote Work Arrangements
As companies have moved toward increased remote work arrangements, they should also consider potential export and deemed export issues in light of these changes. As noted above, the export or re-export of controlled technology is subject to export controls. Because many employees are now working from home, the places from which controlled technology may be accessed, or to which controlled technology may be sent, may change. This situation may arise with respect to U.S. persons who are temporarily abroad, or for individuals who typically work inside the United States but are now working from a place outside of the United States, such as individuals who live near the Mexican or Canadian border. Non-U.S. persons may have been granted access to databases that they require a license to access. In assessing compliance risk, companies should seek to ensure that working at alternative locations, use of technology and software, and access to information comport with all regulatory requirements and that companies continue to adhere to their Technology Control Plan, even in this environment.

As companies are struggling to maintain normal business operations due to the numerous disruptions created by the COVID-19 pandemic, it is important to ensure that any necessary adjustments do not compound these difficulties by creating violations with strict liability U.S. international trade compliance laws and regulations. Because of the constantly changing circumstances, companies could very easily commit inadvertent violations in an attempt to solve business challenges as they arise. As companies develop strategies to cope with the disruptions caused by the pandemic, international trade compliance must be an element of those discussions. Should any of the above considerations apply to your company, we are happy to discuss.


[1] 15 U.S.C. §§ 78dd-1, et seq.

[2] https://www.bis.doc.gov/index.php/documents/pdfs/2532-severe-acute-respiratory-syndrome-coronavirus-2-sars-cov-2-faq/file

[3] Examples include fermenters, centrifugal separators, freeze-drying equipment, aerosol challenge chambers, cross-flow filtration equipment and components, among others. These items can be subject to very restrictive controls, such as “Chemical and Biological Weapons” (CB) controls, and require an authorization for export to most destinations. Note that some related items could be controlled for export under the International Traffic in Arms Regulations, see, e.g., Category XIV of the U.S. Munitions List at 22 C.F.R. § 121.1.

[4] https://eur-lex.europa.eu/legal-content/GA/TXT/?uri=CELEX:32020R0402

[5] https://www.marketplace.org/2020/03/30/countries-race-to-limit-ban-exports-of-masks-ventilators-other-gear/

[6] For example, see our March 11, 2020 post on Iran General License 8, which authorizes transactions involving the Central Bank of Iran where such transactions involve the authorized export of food, medicine, and medical devices to Iran.

[7] See, e.g. https://www.treasury.gov/resource-center/sanctions/programs/documents/iran_gl_med_supplies.pdf

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On Made in America Day, Trump Continues Buy America Push https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/on-made-in-america-day-trump-continues-buy-america-push https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/on-made-in-america-day-trump-continues-buy-america-push Tue, 16 Jul 2019 15:02:37 -0400 On Monday, July 15, President Donald J. Trump signed his latest Executive Order aimed at maximizing the use of American-made goods, products, and materials in federal procurement. Executive Order 13881 directs the Federal Acquisition Regulatory (FAR) Council to consider strengthening standards applied to the 1933 Buy American Act (BAA)[1], which covers direct federal procurement of construction materials and supplies. Monday’s action came on the Presidentially-proclaimed “Made in America Day” and in conjunction with the third annual White House “Made in America Showcase.”

Potential Changes by FAR Council

The new order directs the FAR Council to “consider proposing for notice and public comment” several changes to existing BAA standards:

  • A higher domestic content threshold for federal agency procurements subject to the 1933 BAA. Currently under the BAA, an end product is considered domestic if: (1) it is mined, produced or manufactured in the United States; and (2) the cost of its components mined, produced or manufactured in the United States exceed 50 percent of the cost of all components. President Trump’s new order aims to increase the domestic component content threshold for American-made iron and steel from 50 to 95 percent and the threshold for all other products from 50 to 55 percent (and potentially to as high as 75 percent).
  • A modification to the formula executive agencies must use when determining whether a bid or offered price of materials of domestic origin is unreasonable or inconsistent with the public interest. Currently under the BAA, a domestic bid will not be accepted if the lowest foreign bid is more than 6 percent less expensive than the domestic bid. The President’s order contemplates a differential formula based on 30 percent (for small businesses) or 20 percent (for other than small businesses).
The new order directs the Secretary of Commerce and the Director of the Office of Management and Budget to work with the FAR Council, the Council of Economic Advisers and the Assistant to the President for Trade and Manufacturing Policy to submit a report to the President on other changes to the federal acquisition regulations that could better effectuate the Buy American Act. Among the input solicited by the President is whether to proceed with a graduated domestic content requirement for domestic products and construction materials (other than iron and steel) and the timing for such adjustments.

The existing standards described above were applied to the terms of the BAA via a 1954 Executive Order issued by President Dwight D. Eisenhower and subsequently implemented through the federal acquisition regulations. While Monday's Executive Order does not immediately amend the domestic component content and unreasonable price differential of the Eisenhower-era executive order, E.O. 10582, it sets the stage for potentially doing so.

Timing for Reforms

The order directs the FAR Council to contemplate, within 180 days, whether to propose regulatory changes to implement the President's proposed modifications to the BAA standards through notice and comment rulemaking. But the order is deferential to the FAR Council, stopping short of mandating that it proceed with the rulemaking to modify existing Buy American Act regulations and contract clauses.

While the order prescribes the time period during which the FAR Council can contemplate whether to proceed with a rulemaking to implement the President's recommendations, it does not appear to set deadlines for the publication of a proposed rule or the promulgation of a final rule. If a new rule is adopted, executive agencies would then be responsible for issuing new regulations to ensure that their procurement practices conform to any new standards.

Finally, it should be observed that a number of other federal statutes impact the application of the BAA and the federal acquisition regulations that implement it. For example, certain of these laws currently waive the BAA's domestic component content requirement for procurements of certain commercially-available items and procurements subject to U.S. trade agreement obligations. Those statutes will remain unchanged in the absence of Congressional action to amend those laws.

Next Steps

Monday’s Executive Order reaffirms President Trump’s commitment to improving and expanding the Buy American rules applicable to taxpayer-financed government procurement. Should the FAR Council proceed with a rulemaking to modify the federal acquisition regulations in accordance with the President’s directives, it would portend the most far reaching changes to the 1933 BAA in its 86 year history.

Manufacturers, federal contractors, subcontractors, suppliers and other interested parties should pay careful consideration to the FAR Council’s deliberations over the next 180 days and be prepared to engage in a notice and comment rulemaking process in anticipation that regulatory changes will be proposed. In light of President Trump’s clear support for Buy American policies, market participants should be prepared for additional presidential actions that could have an impact on capital investment decisions, supply chain management and marketing operations.

Previous Buy America Executive Orders

Monday’s action follows two previous Buy America-specific Executive Orders from the Trump Administration. The President’s April 2017 “Buy American, Hire American” Executive Order (E.O. 13788) was aimed at reducing the use of Buy American waivers by federal agencies. A subsequent order issued in January of this year (E.O. 13858) aimed to encourage federal–assistance recipients (such as state transportation agencies) to apply Buy America requirements on the public works infrastructure projects funded and financed by their federal financial assistance awards.


[1] The FAR Council consists of the Administrator for Federal Procurement Policy as well as the Secretary of Defense, the Administrator of the National Aeronautics and Space Administration and the Administrator of the General Services Administration.

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Trump Signs Executive Order to Strengthen Buy American Preferences for Infrastructure Projects https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/trump-signs-executive-order-to-strengthen-buy-american-preferences-for-infrastructure-projects https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/trump-signs-executive-order-to-strengthen-buy-american-preferences-for-infrastructure-projects Wed, 06 Feb 2019 09:49:04 -0500 On January 31, President Donald J. Trump signed Executive Order 13858 entitled Strengthening Buy American Preferences for Infrastructure Projects. The Order is designed to strengthen the “Buy American principle” for Federal infrastructure spending by encouraging Federal funding recipients to use more American-made products in their infrastructure projects. “By signing this order today, we renew our commitment to an essential truth: It matters where something is made, and it matters very greatly,” said President Trump.

Specifically, the order directs the head of each executive department and agency administering a covered infrastructure program to “encourage recipients of new Federal financial assistance awards to use, to the greatest extent practicable, iron and aluminum as well as, steel, cement, and other manufactured products produced in the United States in every contract, subcontract, purchase order, or sub award that is chargeable against such Federal financial assistance award.” Covered programs include Federal financial assistance for a wide variety of U.S. infrastructure projects, from surface transportation and water infrastructure to broadband and cyber-security.

In addition to encouraging funding recipients to use domestic products in their projects, the new order also requires the head of each agency administering a covered program to identify in a report to the President opportunities to maximize the use of Buy American principles. The reports are due no later than May 31, 2019.

Thursday’s action is an attempt to close potential coverage gaps by extending Buy American principles to more taxpayer-financed federal infrastructure assistance programs. The executive order similarly seeks to expand the application of the Buy America procurement preferences to items not typically subject to existing Buy America laws, which are often limited to iron and steel products and materials. The "manufactured products" specifically identified in the executive order include non-ferrous metals, plastic and polymer materials like pipe, aggregates, glass and lumber.

The White House indicated this strengthened focus could result in billions of U.S. taxpayer dollars being redirected to American manufacturers.

The new Executive Order follows President Trump’s April 2017 “Buy American, Hire American” Executive Order. In touting the benefits of that Executive Order, the White House pointed to a 16 percent reduction in the use of Buy American waivers in 2018 as well as a $24 billion increase in government spending on U.S.-made products in the President’s first two years in office.

What Should Manufacturers and Suppliers Expect from EO 13858?

Although the Executive Order directs federal agencies to encourage federal assistance recipients to use – to the greatest extent possible – iron, steel and manufactured products in projects receiving the federal assistance, it does not mandate they do so. Agencies have been given 120 days to develop plans, strategies and programs to satisfy the President's goal of encouraging assistance recipients to buy American construction materials. Whether and to what extent agencies devise plans and strategies that do more than merely "encourage" assistance recipients to apply Buy America preferences on federally-aided infrastructure spending remains to be seen.

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United States and South Korea Sign Updated FTA https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/united-states-and-south-korea-sign-updated-fta https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/united-states-and-south-korea-sign-updated-fta Wed, 26 Sep 2018 14:53:11 -0400 On Monday, President Trump and President Moon Jae-in of South Korea signed a revised U.S.-Korea (known as “KORUS”) free trade agreement on the sidelines of the United National General Assembly meeting this week in New York. In April 2017, President Trump indicated that he wanted to either renegotiate or terminate the then-five year old agreement. Since then, the parties have engaged in trade talks, under the auspices of the existing KORUS review procedures and otherwise, to update key provisions. Early on, the United States appeared to be primarily focused on changes to help reduce the United States’ bilateral trade deficit. In March 2018, the Office of the United States Trade Representative issued a summary of the agreed-upon outcomes of the negotiations, and released the draft text earlier this month, with emphasis on how the revisions will “rebalanc{e} our trade” and “reduce the trade deficit.”

The changes to KORUS focus on the auto sector, customs procedures, and pharmaceutical reimbursement. With respect to autos, the largest change is a 20-year extended phase-out period for the current 25% U.S. tariff on imports of light trucks from Korea. That tariff will now expire in 2041, instead of 2021, which, according to the U.S. International Trade Commission, will delay the anticipated increase of 59,000 Korean truck imports. Korea has also agreed to increasing the quota of U.S.-origin autos that meet U.S. safety standards (but not Korean safety standard) from 25,000 to 50,000 per manufacturer, per year. Korea further agreed to recognizing U.S. standards for auto parts exports necessary to service U.S. vehicles in Korea and a harmonized testing system for emissions standards. With respect to improving customs procedures, Korea will address onerous and costly customs verification procedures for U.S. exports, which have been particularly taxing for U.S. agricultural exports. Finally, Korea has promised to address its pricing and reimbursement policy for pharmaceuticals to align with existing KORUS commitments and ensure fair treatment for U.S. exports.

For Korea, successful renegotiation has earned it a break from the United States’ Section 232 tariffs on steel imports. Instead of being subjected to a 25% tariff, steel imports from Korea are subject to an absolute quota based on 70% of the average annual import volume of such products during the 2015-2017 period. Korea had initially been exempt from the tariffs pending further KORUS discussions. The final quota-based exclusion was announced on April 30, 2018, and on August 29, 2018, President Trump announced a review process for individuals to request tariff exclusions for imports beyond the quota.

While the White House is touting the updated agreement as a major do-over, the changes are understood to be fairly moderate. Notably, the new pact does not include any provisions on currency manipulation and does not allow for increased U.S. rice exports, which was a U.S. priority during the original talks 12 years ago. The changes being made will, however, improve predictability without major disruption to existing trade flows between the two countries.

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Commerce Initiates 232 Investigation of Auto Imports https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/commerce-initiates-232-investigation-of-auto-imports https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/commerce-initiates-232-investigation-of-auto-imports Fri, 01 Jun 2018 13:21:25 -0400 On May 23, 2018, Commerce Secretary Ross initiated an investigation into whether imports into the United States of automobiles and auto parts threaten to impair the national security. A link to the press release announcing the initiation of the investigation is available here.

As it did during its recent 232 investigations concerning U.S. imports of steel and aluminum, the Commerce Department is seeking participation from the public in the form of written comments and public testimony. The following are the key dates for interested parties who would like to participate in the investigation:

  • June 22, 2018 – Deadline to submit affirmative comments, request to appear at the public hearing, and submit a summary of expected testimony
  • July 6, 2018 – Deadline to submit rebuttal comments
  • July 19-20, 2018 – Public hearings held at 8:30 a.m. to 5:00 p.m. ET
For additional information concerning the specific issues for which the Commerce Department is seeking comments and information as well as the process for submitting such comments and information interested parties should consult the agency’s May 30, 2018 Federal Register notice.

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CIT Overturns CBP: Pets are not “Items or Personal Effects” https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/cit-overturns-cbp-fabric-pet-carriers-are-not-bags https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/cit-overturns-cbp-fabric-pet-carriers-are-not-bags Thu, 17 May 2018 09:29:41 -0400 The United States Court of International Trade recently overturned a U.S. Customs and Border Protection (CBP) denial of a protest, in which Quaker Pet Group, LLC contested CBP’s classification of its pet carriers. The five pet carriers at issue in Quaker Pet Group, LLC v. United States, Slip Op. 18-9 (Ct’ Intl. Trade 2018) are used to carry cats, dogs or other pets and are made of mesh and cloth. CBP classified the carriers under Harmonized Tariff Schedule of the United States (HTSUS) subheading 4202.92.30, a provision which covers “travel, sport and similar bags” made of textile material that are designed for “carrying clothing and other personal effects during travel.”

In a decision that cited, among other sources, former President Harry Truman’s remark “{i}f you want a friend in Washington, get a dog,” the Court found that because pets are not clothing, the ability for the carriers to fall under the HTSUS heading 4202 rested on whether pets are “personal effects.” Relying on precedent from the U.S. Court of Appeals for the Federal Circuit in Avenues In Leather Inc. v. United States, 423 F.3d 1326, 1332 (Fed. Cir. 2005), which stated that “the common characteristic or unifying purposes of goods in heading 4202 consist{s} of organizing, storing, protecting, and carrying various items,” the Court determined that pets are not “personal effects” because “pets are living beings, and thus not things or items.” Further, that the distinction between animate and inanimate objects was critical to the classification of the pet carriers at issue, as all “goods listed in heading 4202 are designed to contain inanimate objects and not living beings.” Accordingly, the Court held that the pet carriers were excluded from heading 4202 as a matter of law, because the primary purpose of the pet carriers’ is to carry pets and not items.

The Court also refrained from ruling on the proper classification for the pet carriers, finding that the record was not sufficiently developed for such a determination. Reflecting this absence of evidence, the Court scheduled further proceedings to address the issue in the upcoming months.

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In Rare Move, Trump’s Commerce Secretary Self-Initiates Chinese Aluminum Trade Remedy Cases https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/in-rare-move-trumps-commerce-secretary-self-initiates-chinese-aluminum-trade-remedy-cases https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/in-rare-move-trumps-commerce-secretary-self-initiates-chinese-aluminum-trade-remedy-cases Thu, 30 Nov 2017 09:21:41 -0500 The U.S. Department of Commerce self-initiated antidumping and countervailing investigations of common alloy aluminum sheet from China on November 28. An accompanying fact sheet estimates dumping margins on the subject merchandise to be between 56.54 and 59.72 percent, and estimates a subsidy rate above de minimis. Trade cases are typically initiated in response to petitions filed by a domestic industry alleging that dumped or unfairly subsidized goods are being exported to the U.S. market. Self-initiation authority, however, can be exercised whenever the Secretary determines that a formal trade remedy investigation is warranted based on available information.

The Department’s use of self-initiation authority has been judicious and rare. In an agency-issued press release Secretary Wilbur Ross stated, “{w}e are self-initiating the first trade case in over a quarter century, showing once again that we stand in constant vigilance in support of free, fair, and reciprocal trade.” The Department further noted that it last self-initiated a countervailing duty investigation in 1991 on softwood lumber from Canada, and last self-initiated an antidumping duty investigation in 1985 on semiconductors from Japan.

Use of U.S. AD/CVD laws have increased by 65 percent under the Trump Administration, according to the press release, and appear to be a key instrument of choice to combat unfairly traded exports and protect injured and vulnerable domestic industries. The agency notes, apart from the self-initiated cases, that it has initiated 77 combined AD and CVD cases in response to domestic industry petitions in 2017 – in contrast to 48 combined AD/CVD cases initiated in 2016. In addition to these self-initiated dumping and subsidy cases focusing on aluminum from China, the Commerce Department has also initiated a broader Section 232 investigation to determine whether aluminum imports overall threaten to impair the national security. If the Commerce Department issues an affirmative finding, the President has broad power to impose trade remedies – including tariffs and quotas – to “adjust” the imports so that they will not threaten to impair the national security. The Commerce Department’s Section 232 aluminum determination is due in January 2018.

In terms of next steps for the aluminum sheet AD and CVD cases, International Trade Commission preliminary determinations are due on or before January 16, 2018. If the ITC issues an affirmative preliminarily determination that there is injury or threat of injury, then the Commerce Department investigations will continue with deadlines of February 2018 to issue a preliminary CVD determination, and April 2018 to issues a preliminary AD determination. Affirmative preliminary Commerce determinations would allow Customs and Border Protection to begin collecting cash deposits from all U.S. companies importing the subject aluminum sheet from China. If the investigations proceed without any extensions in the preliminary phase, the Commerce Department’s final determinations would be due in April 2018 and July 2018 for the CVD and AD investigations, respectively.

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Congress Presses-On for Temporary Tariff Relief on Non-U.S. Made Goods by Year's End https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/congress-presses-on-for-temporary-tariff-relief-on-non-u-s-made-goods-by-years-end https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/congress-presses-on-for-temporary-tariff-relief-on-non-u-s-made-goods-by-years-end Mon, 06 Nov 2017 10:21:39 -0500 The House Ways and Means Trade Subcommittee held a hearing on October 25th to discuss the new Miscellaneous Tariff Bill Process – overseen by the U.S. International Trade Commission with input from other federal agencies – to reduce temporarily tariffs on products not made in the United States. The largely non-controversial hearing was a first step toward paving the way for Congressional consideration of a bill by the end of the year to implement recommendations made by the ITC in its final MTB report issued in August. Action on the bill in the Senate Finance Committee is anticipated next.

The new MTB process and prospect for a bill received bipartisan support from members attending the hearing, where they discussed the potential economic benefits to U.S. manufacturers and consumers of providing temporary tariff relief on imported products not produced or available in the United States. Trade Subcommittee Chairman David Reichert (R-WA) stated that passing an MTB was a priority this year, and suggested the bill may be included in a trade package that also renews the Generalized System of Preferences program for developing countries, which expires on December 31.

If successful, this will be the first omnibus duty relief bill to pass Congress in seven years. The National Association for Manufacturers estimates beneficiary companies have faced an estimated annual $748 million in duty related costs since the expiration of the last MTB on December 31, 2012, which has also resulted in an overall $1.8 billion loss to the U.S. economy.

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Importers Beware: U.S. Customs Targets Imports Made in China by North Korean Workers https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/importers-beware-u-s-customs-targets-imports-made-in-china-by-north-korean-workers https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/importers-beware-u-s-customs-targets-imports-made-in-china-by-north-korean-workers Thu, 12 Oct 2017 09:31:36 -0400 The AP recently reported that North Koreans are working in China as forced labor and their products are being imported into the U.S. The AP followed the production of seafood from Chinese facilities to U.S. retailers, but stated that there other affected product categories, including apparel and wood flooring.

While it has been known that North Korea sends workers abroad, this report is the first time the supply chain has been documented to show North Korean forced labor products entering the U.S., which is a federal crime. It has been reported that North Korea sends tens of thousands abroad, bringing in revenue estimated at $200-$500 million per year as Kim Jong Un keeps a large percentage of the salaries. According to the AP, the North Korean workers in China remain under constant surveillance and live in forced labor conditions.

In August, 2017 President Trump signed legislation which makes it a crime to import products made by North Korean workers anywhere in the world and authorizes new economic sanctions against North Korea on goods produced by North Korean forced labor. The new U.S. law labels all North Korean workers, both in North Korea and abroad, as forced labor. Customs is reviewing the report and considering enforcement measures including prohibiting goods from entering the U.S. In addition, if Customs finds evidence of forced labor, the matter will be turned over to Immigration and Customs Enforcement (ICE) - Homeland Security for a criminal investigation. Importers are encouraged to review their supply chains to ensure that their goods are not manufactured by slave or forced labor.

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Congress Weighs-In on New MTB Process In Advance of Final ITC Report https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/congress-weighs-in-on-new-mtb-process-in-advance-of-final-itc-report https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/congress-weighs-in-on-new-mtb-process-in-advance-of-final-itc-report Tue, 25 Jul 2017 17:09:35 -0400 Congressional trade committee leaders submitted comments for the ITC to consider in its final Miscellaneous Tariff Bill report due for release in August. House Ways and Means Chairman Kevin Brady and Raking Member Richard Neal, along with Senate Finance Chairman Orrin Hatch and Ranking Member Ron Wyden, offered comments based on a review of the ITC’s June-issued preliminary MTB report, which evaluated the eligibility of some 2,500 petitions submitted by U.S. companies seeking duty savings on imported products not made in the United States in accordance with a new process established by the American Manufacturing and Competitiveness Act of 2016.

Under the new process, the House Ways and Means and Senate Finance Committees may provide additional information to the ITC for purposes of moving petitions listed in Category VI of the preliminary report (petitions not recommended for inclusion) into another category in the final report, increasing chances of inclusion in final legislation. The trade committee Members did not comment on specific MTB petitions, but offered over-arching comments on how the ITC should address issues related to domestic availability – a key eligibility criterion. Take-away points included:

  • Domestic Production Claims. Specific evidence is necessary to support claims that domestic production exists. “Blanket assertions” without supporting evidence demonstrating domestic production should be “deemed insufficient.”
  • Imminent Production. Claims of “imminent production” must be based on more than a claim that “production is theoretically possible” and should include evidence that production is planned within three years of the petition filing.
  • Inconsistent “Identical, Like or Directly Competitive” Determinations. The ITC, and not the Department of Commerce, has the final say in rendering “identical, like, or directly competitive” article determinations in the preliminary and final reports. Where the Department of Commerce reaches an inconsistent determination, the ITC must consider Commerce’s findings, but the ITC must also conduct its own analysis and “should not automatically substitute another agency’s conclusions for its own.”
Trade committee Members also expressed appreciation of the ITC’s addressing concerns related to transparency and the opportunity for meaningful comment by re-opening the MTB portal for a period of time after releasing the preliminary report to allow petitioners to address domestic objections and provide additional information in advance of the final report.

The Congressional comments mark another important milestone in the first-go of the new MTB process. Once the ITC issues its final report next month, the new law provides that Congress should act within 90 days to consider a bill that would provide duty relief to qualifying petitions through 2019. This timing puts the MTB into the fall, where it appears Congress will be focused on much of its legislating for the year. Stay tuned for further developments.

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